As a first-time real estate investor, you’ve opted to take a risk. After a long night’s work, you’ve come across a four-plex that has picked your interest. There’s no doubt, this is a perfect choice. It’s got chemistry for sure: It’s located in a beautiful area and has recently undergone a renovation. That quaker wood floor and the high ceilings make you happy.
However, the price is a tad expensive. Of course, you can try to persuade the seller to lower their price. If you can’t get the cash-on-cash return you want, you’ll have to raise the rents over time. Still, it’s a no-brainer to buy this house!
Newbie real estate investors tend to make the same mistakes over and over again. In this article, we’ll be listing down six things that you have to avoid as a real estate investor.
Overpaying For A Property
The most common mistake new investors make is overpaying for a property because of its attractiveness. Ask yourself these questions:
Do you really want to give up your financial goals and make an emotional decision if you don’t have any intentions of living on the property?
Isn’t this something you’re meant to put money into?
Then you might wanna treat it as if it were a brand-new company in need of a slew of wise choices to keep it safe.
When purchasing investment real estate, there is no action more crucial than getting it at the best possible price.
Let’s go back to the four-plex scenario and see how this works out.
You believe that the $950 per month average rentals, which are in line with market rents, can be raised by $100 overtime to compensate for the $50,000 overpayment for the property. Those rent hikes will take over ten years to make up for the overpayment, which may come as a shock to some.
Taking Shortcuts
It’s simple to accept the marketing flyer’s claims without confirming if some of them are bogus. The property is described as being in exceptional physical condition with excellent renters and is being offered at a six cap. It is expensive, as evidenced by the financial statements, which indicate a 4.8 cap. A property condition study reveals that the roofs have just four years of useful life left, and after doing a rent collection report, you discover that some of the tenants are either late or non-payment.
If you complete your due diligence, you’ll notice stuff like this and be better prepared to bargain for a reduced sale price before the due diligence period expires; thus, it’s worth the time.
Buying Outside Your Area
It’s a major deal. The hands-on approach is critical when you are new to real estate investing, even if you have professional management.
Do you want to drive four hours or more or perhaps book a flight to check on your investment? How can you tell whether a brown lawn or unattractive rubbish on the patio is preventing tenants from renting a unit?
Buying near your home means that you can rely on local experts to help you buy and manage the property.
No Clear Objective
There are many first-time income property investors who don’t know exactly what they want to accomplish with their investments. There are dozens of options available when it comes to where you wish to buy a property.
What is the least rate of return you are willing to accept for your cash investment? Approximately how long do you intend to hold onto the property?
How much money do you have to work with when it comes to home improvements?
As if that wasn’t enough, you’ll also be responsible for maintaining and overseeing this property. It’s important to know the answer to these questions to clarify your goals.
No Accurate Cost Estimates
Let’s say you’ve spotted an apartment complex with rents that are significantly lower than the market rate because the interiors are old. You obtain an estimate in the ballpark of $5,500 per unit to replace the appliances, cabinets, fixtures, and floor coverings, and the offer that you submitted is accepted based on this estimate.
After the sale is complete, you will not be able to locate a contractor who can complete the work for less than $9,000 per unit. Because of this, your cash-on-cash return drops from 8 percent to 5.5 percent, and you are now kicking yourself for purchasing this property.
Doesn’t sound right, does it? This is how vital cost-estimating is when deciding which property to take.
Not Looking For The Right Loan
To ensure that both the borrower and the property qualify at the outset, know what prequalification questions to ask the loan officer before getting involved in the preapproval process.
In order to avoid something like this from occurring, it is up to you to take action. A 30-year fixed-rate loan at 4.5% and a 30-year amortization come up just before your bid is accepted — Apply for this loan. Because your net worth falls below the lender’s minimum criteria, your loan application is declined two weeks before the contract’s expiration date. Whoops! If they hadn’t done so before starting the loan, why didn’t the bank do so? Private money at an interest rate of 8 percent is now your only option if you want to close your loan on time.
Key Takeaway
Consider the property’s credentials, make sure it’s not too distant from home for unexpected visits, know what your investment goals are, precisely estimate the renovation costs, and ensure that you’ll qualify for the loan you apply for before making a purchase.
You’ll sleep better at night if you follow these tips!
