7 common pitfalls in real estate investment

By Patricia Evans

With condo buildings rising left and right, it’s tempting to think that investing in real estate is a no-fail affair. The real estate industry is certainly profitable but just like any other market, investment conditions can become fickle. There is no exact science to figure out the behaviour of the real estate market and factors such as supply and demand and interest rates play a big role in tipping the scales of the market.

The unpredictability of the property market is something beyond your control but there are still actions you can do to make the most out of your real estate investment. This means you have to avoid the classic mistakes that novice investors commit. Here are the common lethal mistakes that you have to avoid in condo living and real estate property ventures.

1) Not doing your homework

If you’re like most people, you will do a lot of research and comparison before you buy your HDTV or automobile. The more expensive the item is, the more research you will probably exert in comparing different models and coming up with the best deal. If such meticulous screening can be applied to a car or gadget, why not apply the same effort in purchasing a home?

The type of research you have to do will depend on the type of investor that you are. There are different considerations for a personal owner, a landlord, or a land developer. Your concern should cover not only the physical property in question but also the area surrounding it. The worth of your property can be seriously affected if it’s located in an undesirable neighbourhood. Other issues you need to address are the possibilities of flooding, the existence of pests and termites, potential permit issues, reasons for selling the house, and replacements/repairs required.

2) Faulty financing

Are you one of the buyers who secured or are planning to secure interest only loans or adjustable/variable loans? If yes, then you should think about what will happen when interest rates increase. You should be financially capable enough to pay more when that occurs. You can ask your bank about options to convert existing loans to fixed-rate mortgage to lessen the effects on your finances.

3) Paying too much

This can happen as a result of lack of research but mostly this is a result of buyers falling for the sweet talk of real estate brokers. Overbidding on a property can lead to uncontrollable debt. Before agreeing to pay a certain amount, ask your broker about the prices of similar properties that have been sold recently. This is a reasonable request since brokers have access to databases for multiple listings.

If for some reason your broker is unable to provide you this information, you can take matters into your own hands and check local newspapers for rates. This should give you an idea on the amount that should be reasonable for the property you’re planning to buy. Keep in mind that there are many properties in the market that you can consider in case the one you’re currently negotiating for did not push through. Patience is the key to finding the best property deal.

Photo from Mark Moz via Flickr, Creative Commons

4) Not consulting experts

Unless you’re a broker yourself or at least have a background in real estate, it’s best to consult an expert before closing a deal. You also need to find a competent lawyer, an insurance representative, a home inspector, and a handyman. If you have these people on your team, your chances of success are much better. They can inform you of possible drawbacks in the property or in the neighbourhood that can affect your decision to purchase.

5) Underestimating your expenses

A lot of homebuyers seem to forget that the expenses in purchasing a home do not end in mortgage payments. Unlike renting a property, owning a house means shouldering all payments for house improvement and maintenance. Add the money you will spend on furniture, appliances, and future repairs and you’re looking at quite a hefty sum. Add the extras to the mortgage then decide if you can afford that. Additional expenses are something that investors should consider carefully because they have to improve the property before reselling and their cash will be tied up in that process until they can hand over the house to another buyer.

6) Falling for the easy money mentality

Don’t fall for the smooth, honey-laced words of “gurus” who tell you that investing in real estate is about getting rich in a short span of time. Buying property is a great long-term investment but it will never make you rich in just a few years. Think of it as putting your cash in a mutual fund; invest in it then wait for it to yield returns.

7) Not having other options

Having just one option is foolhardy when it comes to real estate. A lot of buyers invest in a property with plans to have it rented and earn money from it. So what will happen if the house didn’t do well in the rental market? You need to have other exit strategies in case the original one didn’t pan out. You can improve the house and resell it, or offer it for lease-purchase agreement. If things get desperate, you can probably offer the property at below-market price to another investor just to cut on monthly losses.

Real estate investment can be profitable but it’s not for everyone. Aside from stable cash flow, you need proper planning and due diligence to be able to make the most out of your property. If you are planning on investing, keep this list in mind to protect your investment in every way you can.

Feature image: Photo from shutterlust.de via Flickr, Creative Commons