Buying an investment property is a huge risk. Once you make the decision to invest, not only are you taking a huge leap of faith, but your bank account is about to take quite a hit. The trick is to play it smart. Do as much research as you can before making an offer and you might just acquire a goldmine. The challenge is that many investors try to sidestep all the dirty work just to get the ball rolling. Unfortunately, this is what leads to a busted investment. However, by avoiding these four most common investment property fails, you will have the best chance of making your money back and ensuring a profitable future.
Choosing the Wrong Location
Location is always key. It should be the top priority on your list when it comes to finding the right property. The worst thing you can do is choose a property based on cost alone. A good deal does not always mean a good investment. Do research on the area that you are interested in. Begin with questioning the larger area as a whole. For example, what is the unemployment rate? If it is a high number, then you probably will not find many people flocking to that city. Look at crime rate numbers; this is another factor that will influence the desirability of a home. Once you decide on a general area, then you can decide on a specific neighborhood. Make sure the vacancy rate is low; if everyone is moving out of the area, there is likely a reason.
Other factors to consider:
- Good school district
- Proximity to grocery stores and shopping centers
- Easy access to public transportation or major freeways
Foregoing the Home Inspection
Do not forego a home inspection just to win a bidding war! In some cases, a seller will accept a lower bid over others if the buyer chooses to skip the home inspection. This is a bad idea. You might end up with a home that needs more work than you bargained for. When you opt for an expert to come and look at the house, you have a better idea of what you are dealing with. For example, if he finds foundation issues or plumbing problems, you might be able to have leverage over the seller to negotiate a better price. If you buy the property without a more thorough look, all that work will be on you and your wallet. Additionally, an expert will be able to let you know if the property is up to code and meets all current compliance and regulation standards.
Using Up Your Entire Budget
Even if you do have a home inspection before purchasing the property, it is likely that unforeseen issues will come up. They could be an easy and inexpensive fix, or they can be a huge bank account drainer. Therefore, you should always plan to have a decent cushion in your budget. Do not use up all your budget on buying the home itself. If you have an all-in budget of $500K and buy a home for $499K, there is only $1,000 left to put toward unplanned construction work. In addition, it is a good idea to buy a home as low as possible so that you have a substantial amount to put into upgrades and renovations. Putting money into the property will increase its value, making it more profitable for you eventually.
Not Completely Running the Numbers
Going back to the big picture, it is really important for you to run the numbers for your investment. Find out what the tax rate is in the property’s area. Even though property taxes might be deductible, they might be too high to justify using the property as a rental. In some cases, a property might have a temporary tax credit for a certain period of time, which would increase suddenly afterwards. It is also a good idea to look at the going rate for rentals in the same neighborhood. What is the monthly amount your home could bring in? Will it offset the mortgage enough to be worth it? If all checks out, then you are on the right track. Otherwise, you will want to consider a different location.
Choosing the Wrong Tenant
You have a lot at stake in your investment property, but you put that at risk if you rent to the wrong person. Renters who don’t pay their rent will wreck your balance sheet (and eviction is a costly and time-consuming process). Even worse, renters can damage your property, either by careless living or by deliberate acts of revenge. To guard against that, it’s critical to hire a company offering tenant screening services to check your renter’s background. These services can check the applicant’s credit history, employment record, and even their criminal record.
If you avoid these common pitfalls for investment properties, then you have a solid opportunity to make back your investment and create a steady flow of income.
Choosing the right property is not any easy thing to do. Research will help; the more investigating you can do, the better. However, it also has to do with timing and luck. The right property will have to hit the market at just the right time. If you do your due diligence, you can always negotiate price and keep a nice little cushion in case any sudden issues come up.