So, you want to invest in real estate? It seems like everyone wants to get in on the trend. HGTV shows and success real estate reality personalities make buying, fixing and flipping appear to be relatively easy way to a make extra cash.
Investing in real estate can be a great way to get good ROI (return on investment) and build a nest egg but it can also be a quick way to loose your shirt.
As a Mortgage Planning Specialist, I work with families to strategically invest in real estate. Here are some of the most common pitfalls new and experienced investors can make. Take a few notes because you'll want to avoid these at all costs:
Fluctuating Property Price
Evaluate mortgage, cash flow and debt strategies from the start so that you are prepared to keep the property cash and have it continually cash flow if prices fall. If using a mortgage is part of your acquisition strategy get pre-approved early, so that you can move quickly on properties once you begin shopping the market.
High Carrying Costs
Carrying Costs are the costs you incur as the home owner to hold and maintain the house while you are fixing to flip or looking for a tenant to occupy the property, i.e mortgage payment, taxes, utilities. If carrying costs come in higher than estimated this could throw of the success of the entire deal.
Underestimating the Sale Costs
Did you know that sales costs can be an estimated 8%-10% of the sale price? Included in these costs are the real estate agent fees and transfer costs. You'll want to be strategic about evaluating, planning and purchasing your investment property from the start. Remember, a good investor knows that you make your money when you buy, not when you sell.
Vacancy and Eviction Risk
Whether your strategy is to "fix and flip" or "buy and hold" you'll want to factor in the chance that the property may sit vacant for a longer period than expected. Alrernatively, any time a property is being rented out there is a risk that the tenant won't work out and may have to be evicted. The costs for eviction vary from state to state but it's worth figuring this risk into your plan should renting be a part of your long term investment strategy.
Lack of Liquidity
If you've invested all of your income into one or multiple properties and then suddenly you need capital to purchase another property? Well, if 100% of your funds are tied up in real estate that can be a problem. It's never a good idea to tie up all your funds into properties. Keeping a cushion will allow you to stay flexible and ready to take advantage of opportunities as they arise.
Nicole Rivers Moore
I am a Certified Mortgage Planning Specialist and Loan Officer with Jersey Mortgage. I educate and empower Home Buyers and Investors so that they can make decisions about home ownership that support their overall financial goals. Servicing NJ, PA, CT, FL, NY. NMLS: 1150526