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When buying your first investment property, there are many pitfalls you need to consider.
Blogger: Daniel McQuillan, executive director, Investwise
1. Falling in love with the property
You need to stop thinking like a home owner and start thinking like a business owner. However, you do need to like the property. If you feel you could live in it yourself, then it’s likely someone else could, and so the property is probably rentable.
2. Not checking the facts
Due diligence is more than just an inspection of the property, it’s also a thorough investigation of your area’s rental market – vacancy rates, average rents, average age of rental stock, zoning and government regulations.
3. Forgetting the home improvement rule
If you are buying an older property, it will always take three times the money and twice as long as you first estimate to get it ready to rent. Allow for additional funds to pay the mortgage while the property is vacant, and obtain a building inspection from a qualified building inspector.
4. No cash reserves
A lack of cash reserves puts unnecessary pressure on you to do sub-standard repairs, accept sub-standard tenants and make other poor decisions because of a fear of vacancy. When you have a sufficient cash reserve, you act rationally.
5. Doing it all yourself
New investors often attempt to manage the whole process themselves. This approach can end up costing more in the long run. Find an accountant you can talk to, a lender who will work with you and a reputable real estate professional to find a property in your price bracket.
6. Investing blind
Real estate investment risk is directly proportional to knowledge. The more knowledge you have of investing techniques, financing, acquisition and negotiating, the less risky your investments will be.
7. Being under-insured
Insurance on rental property goes beyond insuring the building against fire or natural disaster. You need to look at comprehensive landlord insurance. There are too many horror stories about destroyed rental properties to neglect taking out this type of insurance. Most major insurance companies now offer this product, which will not only cover you for damage to the property but also for loss of rent.