How to Avoid the Pitfalls of Investment

Purchasing an investment property can be very rewarding. But the process of acquiring one is often fraught with pitfalls. Here are some useful tips to help you avoid investment property buying pitfalls.

1. Plan adequately. Buying an investment property is a huge undertaking that shouldn’t be taken lightly. You need to have predetermined goals based on your budget and risk profile. Most investors typically take on a big debt to fund their purchase. If you plan to take a loan to buy the property, visit your lender to find out how much money you can borrow. Once you determine your borrowing limits, consider other factors that have to come into play in the buying process, such as property management fees, general maintenance requirements, stamp duty, depreciation, inspection reports and the anticipated return on investment. This will give you a clear picture of what can realistically afford to pay for the prospective investment property. Remember to prepare yourself for the possibility that you will be footing the utility bills for the near future.

2. Arm yourself with knowledge. To succeed in this business, you need to get educated. Majority of the problems that occur during the investment property buying process are caused by lack of information. In order to avoid these problems, you need to learn all aspects of purchasing an investment property, from choosing the right location to determining the price you’ll pay. You should also research the property you plan to purchase.

Don’t rely on the information and figures provided by the real estate agent. Real estate agents are only interested in selling properties. They don’t care about your interests and they’ll typically exaggerate the figures. So make a point of personally verifying every operating figure of your potential property investment. If you’re assuming an existing loan, check how much is owed on the house. Ensure the sales agreement is subject to the actual balance of the existing loan.

Also, check the operating expenses of your potential investment. The reported figures might not be anywhere near the actual amounts. If you’re a newbie, you need to find accurate information about how much items should cost. This will help you to identify discrepancies in amounts between the reported figures and the real cost of various items. Unmanageable operating expenses are can be a major pitfall that can drive you into bankruptcy.

Another item you should check is the tenant records. If there are existing tenants, you must conduct a background check. Ensure you know their complaint history, their payment history and the amount of rent they’re paying (which can help you determine the exact amount of rent it fetches). You should also check if the seller has any side agreements with existing tenants or deposits on hand. Find out about how such agreements or arrangements may affect your interests as an investor. Additionally, check if the property has any liens attached to it.

3. Consult a lawyer or property manager. Lastly, never make a mistake of going it alone, even if you have experience in this business. It’s always beneficial to seek advice from professionals. An experienced property manager can help you determine the actual income you can potentially earn from a prospective investment property. The advice of a knowledgeable lawyer will help you protect your interests. Your property attorney will also come in handy when drafting a sales agreement.