The five common mistakes that real estate investors make

Real estate investing is a challenging and rewarding field. When done right, you acquire income-producing assets that help you build generational wealth. If done improperly, it’s a burden that drains your finances and makes life difficult.

Many things which may be a good idea for someone buying a non-investment property are bad for investors. This article sheds light on major mistakes to avoid with real estate investing and what to do instead.

Not factoring in ongoing costs
It’s been said that you will always make money when you buy real estate. There is some truth to this statement but it ignores many operational costs associated with a property. Most investors consider maintenance costs but tend to underestimate it. Maintenance is also only one of the ongoing costs with many others are hidden in plain sighProperty tax often catches new investors off guard because it can be difficult to calculate with readily available data. The assessed value of the property used to calculate tax is usually different from the market value of the property. Avoid this pitfall by using a property tax calculator that calculates property tax based on the market fair value of the property. This will help you  to understand your tax burden and plan accordingly.

Many other ongoing costs are specific to the type of investment property. For example, a condo apartment vs freeholds have a regular condo fee which varies based on building’s age, location, and amenities. A single-family detached property may have homeowner association fees which can vary widely as well.

Not shopping for the right mortgage
The largest ongoing costs of property investments are interest payments. A 4% interest rate on a $400,000 mortgage paid over 25 years equals just over $240,000 in interest payments. An interest rate just half a percentage point lower will yield tens of thousands of dollars in savings. You should check a mortgage payment calculator to figure out if you have the cash flow needed to make your monthly mortgage payments and how much you will have to pay in interest.

It’s important for new and old investors to first understand the range of interest rates they can expect and find the lowest mortgage rate. As a smart investor you should try all the possible channels to lower your mortgage payments.  The key is to shop around and find the best deal for your situation.

When looking at condos for sale in Las Vegas, for example, you should compare mortgage rates from different lenders to find the best one for your investment property. Start by getting quotes from traditional lenders such as banks and credit unions, then explore alternative options like online mortgage brokers.

Not asking for cashback
The relationship realtors have with a client is unique. They don’t cross paths often but when they do, large transactions are carried out. As a real estate investor, you’re in a special position because you perform property transactions more often and represent a consistent source of income for an agent. This is a powerful point of leverage to get favorable terms.

Agents sometimes offer cashback as an incentive to get or keep clients. Since as an investor you would be doing multiple large transactions, an agent may be more willing to give you cashback. Look for cash back realtors that use this as a selling point.

Falling in love with old properties
Older properties can have a certain magic about them. It may remind investors of their childhood or have a specific type of appeal that isn’t found with newer developments. They can also hide many problems that will drain your finances.

The older a property is, the more maintenance and care it needs. Expensive parts of the property may need to be repaired or replaced entirely. When it’s an option, avoid older properties and opt for the newest development you can afford. Your maintenance bill will be lower which means you can pocket more of the profits and have less headaches.

Paying off the mortgage too fast
This is a counter intuitive mistake many investors make. For an owner-occupier that doesn’t receive rental payments, it’s beneficial to pay down the mortgage as quickly as possible. For rental properties, it’s a different story as interest payments on a mortgage for a rental property are tax-deductible.

For example, if a property is purchased for $300,000 with a mortgage of $240,000, assuming a mortgage rate of 3%,  then interest payments in the first year would be around $7,000. If your rental income is $18,000, you would be able to deduct the $7,000 in interest payments, making your taxable income only $11,000. In this case, it makes sense for investors to make regular payments instead of paying off the mortgage early.

Owning investment property is a great way to add an extra income stream and increase your net worth. At the same time, there are common pitfalls that must be avoided if you want to enjoy the benefits. This article has outlined five of the most common ones. It’s by no means a comprehensive list so make sure you educate yourself thoroughly before you get started with property investments.