In real estate, many mistakes can be made. The danger is that a small mistake can quickly be costly and have tremendous consequences. To avoid them, here is the list of all the most common mistakes to avoid putting yourself in danger while investing in real estate.
Invest in new programs
The first question someone who wants to invest in real estate asks is, “Is the property new or old?”
At first glance, real estate investment might seem very interesting:
- You have a new home, and without the work
- You have no unpleasant surprises on the property itself
- The accommodation will appeal to future tenants
- You can benefit from a tax reduction
All these benefits are well-known as they are often promoted by groups or banks that sell investment programs. Unfortunately, this is not all you need to know about these tax exemption programs.
You need to realize that they will cost you money for the following reasons:
- You do not do any work and add no value to your property, causing you to buy at a high price.
- Negotiating the price of a new property will be difficult. Because everything is new, it does not leave you a lot of room to bargain.
- Promoters who sell property eligible for tax exemption programs know that you will benefit from a tax reduction. They take advantage of this to sell their goods at a higher price than the market value. What you save on your taxes you will pay when you purchase it.
- The rents you receive are capped. You will obtain rental income well below the market value.
- Your investment is not profitable: it is not self-financing. Often, you will not exceed gross returns of more than 4 or 5%. You are far from self-financing. The rent collected will not be enough to repay your loan to the bank, and you will have to add several hundred dollars from your pocket every month.
Making unprofitable investments (big danger in real estate)
This is THE basic rule: Your investments must be profitable, i.e., self-financing. It is necessary that the rents collected repay at least your loan, all charges, and taxes. If your purchase does not fulfill this condition, you will make a significant financial mistake.
The goal is to repay debts but to turn a profit every month. We want to make money right away, not in 20 years when the loan will be repaid.
Unfortunately, one single unprofitable transaction could result in your bank having a much harder time re-lending you money for your next investment. This is where the biggest danger lies. By only making self-financing investments at a minimum, you will be able to make purchase after purchase and turn a profit effectively.
Buy without borrowing
If you have enough money to buy your property, do you have to pay cash? The answer is no.
Keep this in mind: the bank loan is the leverage of real estate.
To illustrate this principle, here is a clear example or two cases. Imagine that you have a sum of $50,000 on your account ready to be invested in real estate.
In the first case, you buy an apartment paid cash, worth $ 50,000. Imagine that this one brings you $500 in rent per month, so you end up owning property and receive $500 monthly.
In a second case, imagine that instead of buying flat cash, you buy five (still worth $ 50,000) by borrowing and each time $10,000. So you still get $500 rent per apartment which adds up to $ 2,500 per month in all. By repaying your loans at a rate of $200 per month per apartment, you still have $1,500 per month while paying your loans.
This is called a leverage effect. You use other people’s money (i.e., bank and tenants) to enrich yourself. That is why, in general, you still need to take out a loan to buy your real estate.
Do not set an investment goal
This is the first step for any investor. Unfortunately, it is too often neglected or dismissed altogether. Not setting a goal for your investments is like flying without having a destination.
From the beginning, you must know where you are going. Your goal should be the guide for the actions you will take. It will also help you boost your motivation in your search for an effective investor.
Depending on the objective you set, you will look for different types of goods, and you will use different types of investment.
Buy your primary residence first
This is a common error made by most people since this is what most people want: to build the house of their dreams and settle there. I am not saying that we must not realize this dream, but we must realize it intelligently.
A principal residence is a big liability; that is, it costs you a lot, but it does not bring you any income. The problem is that when you have already taken out a loan for several tens or hundreds of thousands of dollars, and you have to repay yourself, the bank will have a hard time re-lending you money as your debt ratio will be too high. It is not always prudent to add another debt, even in the case of a real estate investment.
That is why I strongly advise you to start investing before you buy your main home, so you can create multiple assets and show your bank that you know how to manage your money effectively.
“To do and wish to do is two different things. “
(Benjamin Franklin)
You now know all the main dangers in real estate and the importance of avoiding them to have a profitable business.
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