Biggest financing mistakes for investors
In real estate investing, much is at stake. While securing finance for an investment eases your tension, choosing the wrong type of loan could prove to be disastrous. And this is just one example of common mistakes that real estate investors make.
Read on to uncover other lending misstepsand how to avoid them.
- Choosing the wrong type of loan
Ever heard of decision fatigue? You might encounter it here. There are many mortgage products available in the market to help people achieve the dream of homeownership, which some can’t afford with conventional 30-year mortgages. An example is interest-only loans, which is as it sounds: you make only interest payments for a few years, and in the meanwhile, your debt burden increases.
Choosing such loans can wreak havoc. So it pays to be more prudent in choosing a mortgage based on your personal income-to-debt ratio, ROI, mortgage process expenses, and property expenses (more on that later).
Even for experienced real estate investors, choosing a mortgage is a challenge. While some loans come with higher interest rates, others have shorter payment terms. The choice eventually comes down to your long-term plans for your property investment and your repayment ability.
The best thing to do if you feel stuck? Create a dream team of your own: secure the help of an experienced mortgage broker along with your real estate agent.
- Investing with too much leverage
Borrowing to buy a property in the hopes of making money from either a sale or rental payments is a form of leveraging. Manyreal estate investors leverage the entire cost of the property.
However, this choice is riddled with risk. And because of that, it’s widely considered to be one of the biggest mortgage mistakes.
What if your plan fails? The sale might be delayed, or the tenants might fall through monthly rent payments. You might end up staring at a burdensome monthly payment. There are many variables at play that none of us can predict. It’s advisable, then, not to bet too big on assumptions and always try to put a 20% down payment (or more) while taking a mortgage out for an investment property.
- Not researching a property’s prior expenses
You might’ve seen Tom Hanks’ early hit, The Money Pit. It sort of followed Murphy’s Law: “what can go wrong, will.” (And then some!) This is sort of like that. Some real estate investorsfinalize an investment without knowing enough about expenses related to the property. Uh oh. Eventually, they have to spend more on costly repairs post-purchase.
Even though you may have gotten the property inspected by a licensed professional, it’s still possible that your home inspector missed a costly repair. By requesting past expenses, including prior repairs, taxes, and utility bills, you can factor them into your financing plan and avoid burning a hole in your pocket in the future.
- Underestimating expenses
You’ve secured a suitable mortgage and are set to add a property to your investment portfolio. Yes! But, what about tax expenditures? Or any other expense that you may have underestimated? Did you factor those into your financing plan?
Ongoing, unavoidable expenses could throw a wrench into your financing plans. Avoid the mistakes by being diligent and knowing about the property taxes, HOA fees, cost of regular maintenance such as yard upkeep and systems inspections, property insurance, etc. Factor these into your financing plan and you won’t have heart palpitations from any should-have-known ‘surprises’.
Moreover, this knowledge will help you to determine whether you can comfortably invest in the property. And this definitely helps if you’re a house flipper, as your profits are directly associated with the expenses for property improvement.
Property investment isn’t for the faint of heart!
If it were, as they say, everybody would be doing it. Fortunately, you can avoid many pitfalls by being diligent and educating yourself. Research, plan wisely, and work with the best agents as well as brokers to make the a financing decision that aligns with your dreams—and your checkbook.