5 Real Estate Financial Mistakes That Investors Should Avoid
Real estate, like all other forms of investment, must be managed carefully — any misstep can be costly for the investor. This might intimidate first-time investors, but with proper planning and analysis, you can avoid the major financial pitfalls. This article will detail the most common real estate financial mistakes and explain how rental property owners can avoid them.
The importance of real estate financial planning
Financial decisions have long-lasting effects
Buying real estate always has long-term implications for investors. The surrounding area of a property, the financing choice, and a thorough inspection at purchase can all affect whether the investment is profitable. Buyers who fail to evaluate these factors early on may end up spending more to fix their mistakes — whether that means refinancing a loan or having to sell the property at a loss to buy an alternate property. Rental property owners must understand the impact each decision will have on their bottom line by conducting due diligence before the deal is closed.
Each market has pros and cons
The United States has an extremely diverse real estate investment landscape. Investors can find properties for short-term vacation rentals in destination areas, or long-term rentals in residential neighborhoods in the same area code. This makes it critical for prospective buyers to understand the benefits and drawbacks of buying a property in a specific region. For instance, those looking for low property tax rates might consider Colorado, where the average rate is about 0.52% — but the high home prices might scare some investors away. Meanwhile, buyers who are attracted to Florida’s rising rents and property values should also be aware of the state’s higher landlord insurance premiums.
5 real estate financial mistakes and how to avoid them
1. Overpaying for properties
Buyers are always looking for the best deals on properties but must be careful not to jump the gun. Investors sometimes get caught up in fears of rising real estate prices or interest rates, which can cause them to pull the trigger too quickly without conducting the necessary due diligence. This behavior can lead to overpaying for properties.
To avoid this real estate financial mistake, prospective investors should always conduct research on the local market before evaluating properties. Simple steps such as reviewing historical sales data and rent rates can give buyers a better understanding of the local investment landscape. It’s also crucial that investors take the time to research instead of rushing to complete a deal.
2. Failing to conduct due diligence on properties
Another area that property buyers can ignore in a bid for expediency is due diligence. Deals that seem too good to be true usually are — so carefully reviewing disclosures and inspection reports can help investors avoid nasty and expensive surprises down the road. These surprises can come in the form of termites, broken fixtures and fittings, and poor neighborhood facilities.
Buyers should always evaluate the site for necessary repairs or maintenance. While disclosures can make this easier for buyers, you should not rely on them without also getting your own inspection. Investors should also conduct careful due diligence on the administrative side to understand and discuss financing requirements, legal documentation, and rental agreements — and avoid errors and misunderstandings.
3. Building an inaccurate financial plan
Like any business, owning and managing rental properties requires significant financial planning. Landlords must properly budget for rental property expenses for repairs, maintenance, and property insurance. You should also consider the potential for lost income during periods of vacancy when planning a long-term budget. Smart real estate investors create a budget for each property they own as well as their overall portfolio.
An accurate financial plan includes expected income and expenses. In addition to projected rental income, landlords should list all recurring and one-time expenses in their budgets, such as utilities, plumbing issues, or planned upgrades like installing air conditioning. Rental property owners can financially protect themselves by saving at least three months of income to cover unexpected expenses such as emergency repairs or tenants breaking a lease early.
4. Securing unfavorable financing
There are many financing options available to real estate investors, and jump at the first offer they receive from a lender. Accepting an unfavorable offer can lock you into a high interest rate or unfair terms, undermining your ability to maximize profit.
Waiting to invest until you can make a sizeable down payment helps buyers secure good mortgage terms with their lenders. Buyers should also consider fixed rate mortgages, which don’t adjust to the market. Interest rates on 30-year fixed mortgages are down significantly compared to a few years ago, even as they’ve begun to rise this year, so it might be a good time to get a mortgage or refinance your existing one in case rates continue to climb.
5. Paying unnecessarily for landlord tools
Landlords can use a variety of online tools to help them manage their rental properties. Rent collection tools, property management software, accounting programs, and tenant screening services can each come with a monthly subscription fee — and these costs add up quickly. But why pay for multiple tools when you can get them all for free in one platform? Azibo offers an all-in-one solution to easily manage rent collection, banking, insurance, and loans at no cost to landlords.
Minimize real estate financial mistakes to maximize profit
Rental properties can be a solid long-term investment for many Americans, but inexperienced investors can make financial mistakes with long-lasting effects. Avoiding these errors throughout the investment process ensures landlords maximize profits and achieve their financial goals.
To find out how Azibo’s free platform helps landlords manage their real estate investments and avoid costly mistakes, visit our website.