Due diligence is one of the key benefits of investing in real estate. When you combine this with the fact that most people already have a general understanding of property, it is easy to understand why it is an attractive investment option for many investors.
If you make a poor investment decision, you may end up in a position where the valuable asset you thought you were purchasing turns into an expensive liability.
Not having clear investment goals
What is your motivation for investing in property? Do you want to be able to earn a wage and leave your job? Would you like to build a retirement fund or invest for the future of your children? Your investment strategy is driven by your long-term goals. By identifying your goals, you can determine what you need to do to achieve them.
What is the minimum amount of money you need to invest in order to build up a pension fund? How might changing mortgage interest rates or running costs for your property affect your income? If you intend to keep your property for a long time, have you considered the cost of renovating it?
Have you sought the advice of a tax specialist if you are investing in property for your children? In this way, you can minimize your tax liabilities from the start. When you retire, will you be able to pay off the mortgage on your property?
Poor financial planning
In most cases, investors leverage their purchases in order to increase their yield. You can lose your ability to build a portfolio if you sign up for the wrong mortgage. Investing in properties requires consideration of the structure, the rate, the length of your commitment, and your lender’s attitude toward adding more properties to your portfolio.
If interest rates rise, will your rent cover your payments if you don’t fix your mortgage? Check your coverage by stress testing it.
Good mortgage brokers will offer a variety of products and explain what early repayment and up-front fees you are responsible for.
Over-spending on refurbishment
Refurbishing a property can result in a higher return on investment. It is possible to dent your profit margin if you overspend on expensive bathroom suites and high-end kitchen appliances.
Getting quotes and recommendations is important when purchasing a property that needs renovation. It is possible to get a cheap quote, but end up with a poor quality of work and a higher cost in the long run.
Generally, it is best to overestimate the cost of renovations.
Not purchasing under the market value
If property prices fall, buying property under the market value can offer some protection. If you remortgage later, you may be able to take out your initial deposit and increase your cash flow.
It does not necessarily mean that a property is a good investment if it is being sold for below its market value. You shouldn’t buy a bargain property if it is in a difficult-to-sell or weak rental market area.
What is the best way to find a property selling below market value? Social media advertising is one way to advertise locally. It is possible that somebody is desperate to sell quickly due to a change in their personal circumstances.
Emotion-led buying
Investing in real estate is a business decision. Buying a property for investment purposes is very different from purchasing a home for personal use. You may not achieve a high rental yield or make healthy capital gains on your property if your kitchen is beautiful.
Think logically, not emotionally.
Not Keeping Enough Equity in the Property
The goal of investors is to invest as little of their own money as possible. Why wouldn’t you use high leverage when interest rates are so low? Nevertheless, you should consider your occupancy rates and properly plan for void periods. When you have a void in your rental, will your rent cover your mortgage?
When you have reached your limit on borrowing, a high LTV mortgage may make refinancing impossible. Interest rates will be further tested if rents do not increase.
The best investors plan for the long term, considering both current and future living expenses. Stick to your plan if you have one for five, ten, fifteen, or even twenty years.
3. Not prioritising rental yield
Property investors struggled in 2007 when house prices fell due to the economic recession. Their businesses were heavily dependent on capital appreciation in order to survive. The lifeblood of successful property business is a healthy rental yield, even when prices rise over time.
A minimum of 5% rental yield is recommended for both residential and commercial properties. Divide the property’s income by its value and multiply the result by 100 to calculate the rental yield.
Failing to carry out due diligence
If you are buying a property from an investment firm that appears to have done the homework for you, you should still conduct thorough research.
In the area you’re targeting, look up sold prices of properties similar to the one you’re considering. HM Land Registry sold prices and property portals like Zoopla and Rightmove can be used as guides. You should also check rental rates so you can calculate your rental yield.
Consider the kinds of tenants you would like to attract. What type of property do you intend to purchase? Student accommodation, a family home or a commercial building? Identify the type of person or business you wish to rent your property to by looking at nearby facilities, schools, and transportation links.
Can you identify a gap in the market? If you are considering buying in a student area, is there a demand for accommodation or is the area well served already? Is it difficult for young families to find suitable homes near good schools?
Before you buy a property walk around the area, research the crime statistics and find out what developments are planned nearby. Is there anything that would put off or attract potential renters or future buyers?
