The economy can certainly become very volatile from time to time. However, there are opportunities in every market, and for some, now is a good time to buy an investment property. Unfortunately, it can be easy to forget to watch for investment pitfalls. If you are thinking of purchasing more rental property, avoid making the following mistakes.
Purchasing a property without educated research
Consult the professionals - a knowledgeable real estate agent, your property manager, a reliable mortgage banker, and any other party that can give you realistic values. However, you need to do your own research so you can ask intelligent questions and to know when you are receiving bad information.
For example, consulting a real estate agent who is unfamiliar with the current rental market is a disaster waiting to happen. It’s easy to project a positive return on paper when using inflated figures! Ask us, your property management company, to investigate rents and expenses before you purchase the property.
Continuing to wait for the market to bottom
You can miss opportunities if you’re in a perpetual holding pattern, and you can make intelligent investments in any market. Unless you have a crystal ball, there is rarely a way to know when the market is going to bottom out or rebound. Even when market prices start moving up, you can still purchase a good investment – you just need to research every potential investment.
Not planning on holding a rental property as a long-term investment
This just isn’t a realistic investment strategy. It is possible to buy a property and flip it in a short amount of time, but it often takes holding the property at least ten years or longer to realize the full benefits. One long-term benefit is the yearly tax benefits you have while owning the property. One short-term penalty is that unless you reinvest profits from a short-term rental, there may be heavy tax consequences.
Investing with the wrong financing
Beware of balloon payments or bad financing that can easily turn a solid investment into a nightmare. Consult a mortgage professional who has experience with investment financing and can counsel you on the different programs available. As asset managers, we are well-equipped to help you understand and navigate these issues.
Underestimating the cost of maintenance and capital improvements
Every property needs maintenance! Consider how much maintenance goes into your own residence and remember that rental property goes through the same wear and tear. You may have the best tenant on the planet, but unless you maintain the property, your investment will suffer.
Remember this is normally a long-term project and many items such as roofs, fences, paint, and carpet have their own projected life. When planning an investment budget, consider how you will cover maintenance and necessary replacement costs.
Working without good insurance, reserves, or a contingency financing plan
Between possible vacancies, maintenance, emergencies, or disasters, there are plenty of troubles lurking that can sink your investment, so foregoing emergency planning is like walking a high wire without a net.
There are landlord policies available that will assist with vandalism or an emergency/disaster, so talk with an insurance agent who knows what policies will help you in times of distress. In addition, build your savings for unknown factors, such as a long vacancy or major repair, and contact financial institutions in advance about emergency funding.
Not treating investment property as a business
This is the biggest mistake of all. This is a business; you must approach it as a business. Like all businesses, there are ups and downs; accepting this does make a difference in your relationship to your investment.
As your property management company, we are here to help you with any questions you may have on potential rental property. The real estate market has proven itself time and time again. In any housing market, there are opportunities for investors as long as you apply sound practices for buying.