There are a few markets that are as reliable for investing than the property market. However, no matter how reliable the market may be, there is always a level of risk to contend with. Without the proper mindset, knowledge, and partners, it can be easy for that risk to become a major issue down the line.
Here, we’re going to look at some of the most common mistakes made when investing in property, and steps you can take to avoid them and mitigate the associated risks.
Delaying for Too Long
Thinking carefully about whether it’s a good idea or not to invest in property is always a wise decision. However, you don’t want to spend too much time thinking about and researching your investment options without acting on them. Perhaps you’re worried you don’t have the knowledge, or you’re worried about losing money. However, while you’re busy worrying, you’re going to see potential investments come and go. The opportunity cost of failing to start isn’t just that you’re not going to be acting on the property investments that you see. It’s also that you’re missing the time you could be investing in other assets. The sooner you get investing, the sooner you start to see some returns.
Not Knowing What Kind of Investment Goals You Have
You may be jumping the gun if you’re looking at purchasing a property before you have an idea on what your investment objectives for that property are. For instance, what kind of money do you want to make from an investment and what timescale do you want to make it in? Depending on how you answer that question, it might be that you want to buy, improve, and then sell a property some time down the line. For long-term investment potential, you might want to buy it and start renting the property out instead to create an income or a long-term return.
Neglecting the Difference Between Yield and Growth
Although there are all kinds of property investments, they largely fall into two categories: those that offer you rental yield and those that offer capital growth. Rental yield is how much you can make from a property by renting it out to tenants. Capital growth is how much the value of the property is going to rise by. How you use an investment property will largely depend on whether it offers a better growth than yield or vice versa. You can still rent out a property that largely derives its investment value from growth, and you can still plan to eventually sell a high-yielding property. However, it’s best to know which of the two strategies works best for your investment goals and to decide which property to buy based on that.
Making Decisions Based on Your Gut
Sometimes, a property is going to appeal to you on an emotional level, even if you’re not planning to live in it, yourself. However, it’s important to make sure that you don’t let your emotions drive all of your decision-making. Property is the most expensive asset you are ever likely to buy, so it can’t be an impulse buy by any stretch of the imagination. Don’t make any sudden decisions unless you have had the time to consider it properly. When you do get the time, then what you need to think about, first and foremost, is whether or not the property is going to help you meet the aforementioned investment goals that you decided.
Not Getting Your Research Done
Just as you would take the time to inspect a home if you were moving into it, you should make sure that you’re doing your research on any property you’re buying for investment purposes, as well. If you’re looking at a new build investment, this means inspecting the soil type, water table, and so on. For all properties, you want to look at how much properties of equivalent quality and size have sold for in the area in the recent past. You also want to research the investment potential of a property, such as finding out whether local development can help improve its value over time or if it can get the kind of rental yields you need in order to make it a worthwhile investment.
Not Inspecting the Property
It’s a very common mistake in property auctions, especially. Someone will buy a property on auction, only for that same property to appear on the auction block again a couple of months down the line. Doing your due diligence is essential when it comes to buying a property and, in most cases, this means having a property inspector and surveyor take a close look over the property before you sign any contracts. Otherwise, you could end up paying more than you should or even end up with a property that doesn’t fit your investment goals as well as you think it does. Getting the property inspected before you buy it crucial to getting accurate estimates on how much you can expect for a return.
Not Having a Legal Expert
Purchasing a property is, above all else, a legal contract. It’s a transaction and an expensive one at that, but the process of conveyancing the ownership of a property from one person to another is an extensive legal process. As such, trying to buy a property without having a real estate lawyer on board can leave you open to all kinds of disasters. First of all, it can delay the transfer for a long time. But it can also help you avoid legal snafus such as contract disputes, zoning issues with the property, and other hiccups that would otherwise delay the process. Ensure that you have a lawyer on your side who is experienced in dealing with the specific kind of property you’re trying to invest in, be it residential or commercial.
Failing to Manage Your Cash Flow
Whether you plan on investing in one property or in building a portfolio of multiple properties, having a good handle on your cash, when to get it together, and what it’s being spent on will be crucial. Real estate budget software can help you better balance your different assets and the costs associated with them. This includes not just the cost of the property itself, but the costs associated with services such as lawyers and surveyors, interest rates, financing fees, and more. It is essential that you have a good handle of your cash flow. Otherwise, how can you expect to manage your real estate assets any better?
Opting for High-Risk Properties Without Anticipating the Risk
There is a risk inherent with investing in any property, of course. However, some properties are undeniably riskier than others. For instance, under-developed properties are riskier because they’re going to require you to pump more money into renovating them and getting them ready for the market, which can make it harder to get a return on your investment. As such, they’re not a good idea if you plan to depend on the property to help you get a steady income immediately. Understand what level of risk you’re able to tolerate and invest in properties accordingly. If you do your research and find you’re ready to take the risk then, by all means, do so. Just don’t take on risk without knowing that it’s there.
Self-Managing Without Any Experience
A lot of people decide to self-manage the property investment in order to save the money that they would pay someone else to do the same. However, the reason that most property investors are willing to pay someone else to manage a property is that they know it takes experience and expertise to do it properly. Managing a single property can be tough work. Trying to manage a whole portfolio of different properties can be more than a full-time job. If you’re willing to make property investment your job, then the right research can help you get ready for it. Otherwise, it’s best to leave it to someone who gets paid to make it their business.
Failing to Diversify
If you’re investing in a single property, then there isn’t much room to diversify and, as such, this point isn’t entirely relevant. However, if you’re planning to create a portfolio of different properties, then it’s a good idea to diversify the types of properties and the areas those properties are in. You want to make sure that all of them fit into your plans. However, you also need to ensure that, if one of them is affected by a turn in the market, then the others are able to still support the overall value of your portfolio. If all of your investments lose value due to the same changes, then it’s a very risky portfolio.
The tips above cannot entirely eliminate the risk inherent in investing in the property market. However, they can make sure that you’re not causing some of the common mistakes that can end in disaster, at the very least. Keep these tips in mind.