Investing in property can be lucrative, but it can also require a lot of research to do it successfully. In addition to understanding local laws and regulations, you’ll have to factor in all of your costs and potential liabilities. This is an area that many property investors underestimate.
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If you buy a family home for $200,000 and sell it 20 years later for $400,000, for example, it may seem on the surface like you made an “easy” $200,000. But these price comparisons don’t factor in the mortgage interest you paid, your annual maintenance costs, the price of insurance, property taxes, your closing fees and so on. If you’re investing in rental properties, you have a whole slate of additional factors to consider when determining your potential profit.
But this isn’t to say that you should avoid investing in property, or that it’s necessarily more risky than other types of investments. On the contrary, if you know what to expect going in, you can avoid making the costly mistakes that can sink your whole investment and instead put yourself on the path to profitability.
To that end, here’s a list of money traps to avoid when investing in property, along with suggestions on things not to overlook and ways to maximize your profits.
Repairs on Fixer-Uppers
Before you blindly purchase a run-down property, it’s essential that you do your research and fully understand just how much it’s going to cost you. In many cases, perhaps even most cases, remodeling costs exceed the expectations of the buyers. Problems ranging from unseen water damage to roots in a plumbing system to a decaying foundation can all cost tens of thousands of dollars, and in many cases, this will eat up all of your potential profit.
If you’ve got the time and skill set, consider managing your repairs yourself rather than paying an expensive contractor.
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Insufficient Rental Income
If you’re looking to generate cash flow from your investment, you’ve got to be sure that the rental income you can realistically generate will cover the costs of your mortgage, insurance and taxes.
Never assume that you can rent out a property consistently at a high price with no gaps in income. Inevitably, there will be turnover at your rental unit, and every time that happens, you’ll have to deal with finding a new tenant, repairing any damage to the unit and at least temporarily losing your cash flow.
High Maintenance and/or Utility Costs
If you’re buying a rental property, always assume that your tenants won’t take as good care of the property as you would. Buy durable but reasonably priced improvements. Be wary of including utilities in your rental price, especially in particularly warm or cool climates. Try to avoid properties that will require extensive upkeep and maintenance, such as those with aging roofs, water heaters or windows.
Taxes, Fees and Closing Costs
If you’re selling a property, real estate commissions alone can chew up 6% of your profits. This is on top of any taxes and fees that are attached to your sale. On a $500,000 sale, your costs are likely to exceed $30,000.
Buying at the Wrong Price
Many real estate professionals will tell you that money is made at the time of purchase, not at the time of sale. Don’t chase properties in a hot market, assuming they will continue to go straight up in value. Rather, be patient and wait for the right opportunity.
Not Reading Seller Disclosures
Seller disclosures are much more than mandatory bits of paperwork. Disclosures will show you what repairs or problems a property has had and that may recur in the future.
Investing With the Wrong People
Always be careful who you invest with. Partnering up on a real estate investment can lead to misunderstandings and even potential legal issues if there are discrepancies in what people want or how a contract is written.
Neglecting an Inspection
Steer clear of “as-is” properties unless you are an expert in the field. Even well-maintained properties tend to turn up issues in a pre-sale inspection. Carefully review any significant repairs or deferred maintenance, especially for significant items like plumbing, electrical, foundations and roofs.
Picking the Wrong Loan
Be sure to completely understand the terms of any loan contract you sign. In the 2008 housing crisis, many investors didn’t fully appreciate how adjustable-rate loans worked, resulting in numerous delinquencies and the crash of the market as a whole. Never blindly sign paperwork that an agent or lender says is in your best interest.
Putting Too Little Down
Traditionally, investors would make a down payment of 20% when buying a property. However, some loans now allow buyers to put as little as 0% down. While this may seem like a more affordable way to buy a property, in reality, you’re putting yourself at risk. After factoring in taxes, fees and closing costs, you’ll immediately be underwater on your property.
Right off the bat, your property will be worth less than what you paid, and you’ll be making a much larger monthly mortgage payment along the way — likely at a higher interest rate, as well. Throw in the additional 0.5% to 1.5% you’d have to pay every month for private mortgage insurance, and you’ll be walking into a potential financial disaster.
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This article originally appeared on GOBankingRates.com: 10 Money Traps To Avoid When Investing in Property
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