Owning an investment property can be a great way to create financial security for you and your family. Buying a condo, townhome, house or small multi-unit building has lots of advantages, including monthly rental income, property value appreciation, tax deductions and the ability to use the bank’s money to make more money for yourself.
However, you have to invest in an investment property with your eyes wide open. Here are some potentially expensive mistakes to avoid:
- Treating the property purely as an investment and not as a business. Owning an investment property is like owning a business. People think the only thing they have to do is buy it, rent it and forget it. Decisions will need to be made from time to time regarding maintenance and upgrades, rent reviews, new leases, etc. Even if you hire a property manager that will do the work, they can only do what is instructed.
- Unwittingly breaking a law. Before you buy, do some research. Make sure you understand landlord laws, your responsibilities and liabilities, and the ins and outs of leases.
- Not getting pre-approved first. Talk to a mortgage expert before you start your search so you know how much you can qualify for and you know what you are going to require.
- Not factoring in running costs. The price of the home is only the first of a series of home ownership expenses. Before you rush off at buying consider some of the costs such as property taxes and strata fees if applicable.
- Working with a buyer’s agent. Work with a trusted real estate agent that has experience and knowledge on buying investment properties. Buying an investment property is about numbers while buying your own home is about an emotional purchase.
- Buying a property sight unseen. This could be a recipe for disaster. Unless you do a site inspection yourself or have your real estate agent who knows exactly what you want. This is a big investment surely you can take the time to inspect it.
- Not checking out the property adequately. Having the property professionally inspected can help avoid unexpected expenses. There are many potential problems with any home that you are not likely to pick up yourself.
- Not having enough funds to cover unexpected expenses. What if your property sits vacant for a few months? Will you have enough to cover your mortgage payments? What if you suddenly need a new roof or furnace? It’s wise, if possible, to keep an emergency fund of about 10% of the value of the property to carry you through the tough times.
- Not having a proper and efficient maintenance schedule in place. All properties, their fixtures and fittings wear out! Damage does occur. It is important to keep maintenance up and have it done on time.
- Expecting too much. If you expect to get rich quick, you may be tempted to set the rent too high and lose your tenants. Research comparable and be reasonable.
- Becoming a slave to the property. Decide how much your time means to you. If your investment property becomes a second full time job, is it really worth it? Factor in the cost of a property management company, if necessary.
- Not checking out tenants adequately. Ask for references (especially their past landlords) and follow them up. Run credit checks. If applicable, drive by the prospect’s current property and see how well it’s cared for.
- Not doing regular (at least annually) financial analysis. Remember, this is a business. All business owners regularly review their financials. Your property manager should provide you with monthly and annual statements of receipts and expenditures. Consider doing an annual market appraisal to see how the value of the property is going. Sometimes it is strategic to sell of some assets and purchase new ones.
One way to help make things go more smoothly is to join your local landlord association. These groups can update you on laws, supplysample lease agreements, recommend suppliers, etc.
These mistakes to avoid are not intended to discourage you from buy an investment property but to assist you to proceed with open eyes and know what you are getting into. Buying an investment property means work but it is a great way to create wealth and financial security for you and your family.
If you would like some help to analyze your financial ability to invest in an investment property, talk to a professional mortgage expert.