Acquiring your first investment property entails a learning process. No matter what happens, you’ll probably commit an error or two, but you can avoid some of the worst results by doing your research and learning from others.
If you avoid the money mistakes in real estate investing listed below, you’re much more likely to rake in cash after gaining some experience. And, when you avoid expensive errors, you’ll have the resources to hire a successful property management company that can make you further money with less hassle and stress.
Landing a lousy financing deal on your first investment property can hobble your real estate career in the cradle. If you look around online, you’ll see that more new investors’ careers have gone down the tubes from subpar financing than anything else.
When we talk about ‘bad financing,’ what do we mean?
- Sky-high interest rates
- Adjustable mortgages that reset at too high a rate to turn a profit
- A monthly payment that’s too high
- Balloon payment at the end of the loan term
- Personal liability or recourse
Most regular bank loans can save you from the first four problems because they usually offer low 30-year rates and fixed payments that amortize, so you don’t incur balloon payments. But you usually need to put yourself on the hook for these loans, which puts your other assets at risk.
It’s your call whether you want to do that. Some investors think it’s a fair trade-off.
But most private and hard money lenders have different terms. If you get a hard money loan at 12% interest and a balloon payment is due in 36 months, this could be too much risk and insufficient income.
We aren’t saying you should never resort to private lenders or hard money deals. However, remember that everything with these lenders is negotiable. Get the lowest rates and fees you can if you must use this type of loan to complete your first deal.
When you do proper due diligence on an investment property, make sure you have an expert contractor supply a realistic number on what the rehab will cost. Too many new real estate investors get too excited to do their first deal, unfortunately, and don’t devote the time they should to understanding what the repairs will total.
Before you consider even making an offer on that 3-bedroom, 1-bath investment property, get a solid handle on what your repair costs are apt to look like. That number will largely determine your offer; if the seller doesn’t negotiate enough to make the house profitable, move on.
Hiring the Wrong Contractors
Most real estate investors are in the game to fund their retirement; most don’t fix up the properties themselves. Keep in mind that if you invest from your IRA, it’s against the law for you to perform work on the site anyway; this is known as self-dealing, and you could lose the asset if law enforcement officials find out.
You also can lose a lot of cash by hiring the wrong contractors to repair or manage the house. Unless you do the research, you may overpay mediocre contractors who take too long to do the work, which means vacancies.
So go the extra mile in your research and make sure you find the contractors who can get your property fixed and at the right price.
Overpaying at the Closing Table
This lethal mistake goes back to getting too excited about closing your first deal. When you are acquiring your first house, you want to have the best buyer-side negotiator working for you to ensure a solid deal.
If that happens to be you, great, but if you need a buyer’s agent to negotiate for you, hire one to represent you. Look for an agent with a lot of investment property experience in your neighborhood. And don’t worry about the commission; the seller pays it.
Your goal is to get the lowest possible price on that house. If the agent says she cannot hit your number, you may want to keep looking at other properties.
Paying too much and ending up with too high a monthly payment can torpedo your investment career, so please be careful before you sign the contract.
Investing in real estate is an exciting activity, but avoidable mistakes often derail the plans of new rental property landlords. We hope you can use the above list to avoid some of the worst errors so you enjoy years of positive cash flow from your properties.