Buying Investing Property is one of the most commonly promoted ways of building wealth or receiving a passive income stream. It is sometimes advertised as a get-rich-quick scheme, too. However, given the price tag, any mistake can cost you dearly. Here are a number of things to consider before investing in property.
The Risk Involved
Real estate is lower risk than stock IPOs and penny stocks. This is why diversifying your assets with real estate could be a sound portfolio management decision. However, there is risk involved. The more you borrow to buy investment properties, the greater your risk. If you borrow against your primary residence to buy investment properties, you risk losing your home because your tenants aren’t paying the rent.
You can limit the risk by putting as much money down as possible, relying on cash instead of hard money loans to fund renovations, and not taking yourself to the financial edge. Take the time to get your own financial house in order, building up an emergency fund and paying down debts. This has the side benefit of making you look like a safer risk to financial institutions than someone with a mortgage, student loans, and a plan to buy houses with as little money down as possible
The Mistake of Getting Emotional
You shouldn’t buy a house because you love it. What you think of the décor, layout or location is almost irrelevant because it is going to be your investment, not your home.
Keep your emotions in check so you can properly evaluate the property. What is the asking price of the property? What would it be worth fixed up? How much does it cost to fix up? How much can you rent it for? Would rent cover the mortgage? If the math isn’t in your favor, it’s not worth it as an investment.
The Need to Protect Your Investment
There are a number of things you can do to protect the value of your investment. The first thing you should do is make sure that you get the proper insurance coverage on your property. If you’re trying to build up a real estate investment portfolio, research how much you could save by insuring all the properties with the same company or working with the same mortgage lender for multiple deals. You also have to deal with the threat of property damage, theft, and vandalism. So make sure that you consider adding things like home security cameras and security systems to monitor your property, especially as you won’t be there all the time.
The Importance of Information
It’s not wise to buy a lot of investment properties in the hope of earning a significant cash flow. Do your research. Understand the likely cash flow you’d receive after expenses like the mortgage, property taxes, and insurance are paid.
Have a good idea of how much work it takes to renovate properties and manage them so that you don’t get overloaded. This is where buying properties one at a time as you move up the learning curve can save you from disaster. The simplest solution here is to buy a low-cost, low maintenance property as your first investment property. After you’ve flipped it or managed tenants for a while, determine what you’ve learned from the experience.
Investing in real estate can be a profitable venture or a financial disaster. Take the time to learn what you’re doing before you get started to avoid the disasters.