5 Deadly Mistakes to Avoid When Buying an Investment Property

Posted on: March 29, 2012

Categories: Buy

Author: lbuen

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Image by Archie Goodwin via Flickr

The “Buying an Investment Property Gold Rush”

With rock bottom real estate prices and so many properties sitting empty waiting for their next owners to claim them, quite a number of people are lured to buying an investment property, not to mention the simplistic business proposition that many real estate “gurus” portray it to be: you borrow other people’s money to buy a property that will rake in a tidy rental income each month, and after 10 or so years, you can opt to sell the property for profit. Not bad, right? But before jumping the gun, you must also be aware that just as it is a gold mine of income, if you do not move with caution, it can also be a minefield of trouble waiting to happen. Keep your distance from these pitfalls to keep your money from getting burned and your face from burning red with embarrassment.

5 Pitfalls to Avoid When Buying an Investment Property 

1. Buying an investment property without substantial knowledge in real estate investing

The emphasis here is on the importance of learning the ins and outs of real estate investing before taking the plunge. It is not as easy as they say it is especially for beginners. Yes, the prospect of earning handsome profit is there, so is the risk of losing money. Better do your homework first by talking to seasoned real estate investors and learn from their experience. Ask them for some reliable rules of thumb when buying an investment property.

2. Making a low down payment

One of the things that may have drawn you into buying an investment property is those sales pitches on making money in real estate with no money down. Yes, it is possible, but this is accompanied with a greater risk than if you use some of your money. A no-money-down mortgage loan equals high interest rates, so this eats up a large chunk of your rental income. If worse comes to worse especially in this volatile real estate backdrop, you may end up not able to afford to pay for it and you can lose your rental property. For this reason, clever real estate investors would rather save up for down payment to obtain a cheaper loan rate.

3. Paying for more than what a property is worth

This again points to the importance of due diligence in gathering enough information to help you make an intelligent buying decision. If you fail to do your research about the property and calculate the numbers in detail, then you will end up overpaying for a property. Obviously, this has a great impact on your bottom line. Just because a property was worth $300,000 before, and now only sells for $200,000 does not necessarily mean it is a great deal. Forget about how much it was worth before, and find out its current market value. This should be your basis to declare whether or not a property is a good buy.

4. Overspending on fixing the property

Due diligence does not stop at just looking at the numbers. Also take time to look at the property itself. Inspect its condition and find out how many repairs are needed. Keep away from properties that require a great deal of fixing. When doing the repairs, keep in mind that you are renovating a rental property and NOT your place of residence, so do away with those fancy chandeliers. Just ensure that the property is habitable for humans and passes the local health and safety laws.

5. Getting emotionally attached to the property

Do not fall in love with your rental property, or you will end up spending more for its rehab as discussed in point #4. Additionally, you will also have a hard time letting it go and turning the keys over to your tenant. This translates to more expenses and no rental income. This is not what you signed up for, right? So keep it strictly business.

The world of real estate investing is full of surprises; some will delight you, while others will tick you off, or worse, could put you out of business. So make sure that before buying an investment property, you already know what you are getting into to help you avoid mistakes that some beginners have unwittingly committed.

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