Investing in real estate isn’t for the faint of heart. There are risks associated with owning properties that it’s important to be aware of. If you’re savvy about building a portfolio, however, you can minimize those risks. But that generally means steering clear of the following blunders.
1. Paying too much for a house you’re going to flip
Flipping houses can be a quick way to make money — but only if you’re very careful. It’s easy to underestimate your renovation costs when embarking on a house flipping mission, so if you’re going to go the fix and flip route, make sure to run your numbers thoroughly.
At the same time, be sure to give yourself plenty of wiggle room to make a profit. In fact, one big mistake you might make if you’re new to flipping houses is overpaying for a home in disarray.
As a general rule, you’ll want to keep the cost of your house flip to 70% of that property’s projected sale price. And to be clear, that 70% includes both your purchase price and the cost of renovations.
So, let’s say you think you can flip a home and sell it for $400,000. If you’re anticipating $150,000 in renovations, you shouldn’t pay more than $130,000 for the property itself. Going above that limit could mean eating into your margins substantially.
2. Buying an income property in an oversaturated market
An income property could be a solid investment — especially these days, with rental demand being so high. Because homeownership has gotten expensive (thanks, sky-high prices and rising mortgage rates), many people have no choice but to rent.
But one mistake you don’t want to make is buying an income property in a market that’s already loaded with rentals. If you go that route, you might struggle with vacancies once homes become more affordable and rental demand wanes, so be sure to do plenty of research before choosing your target market.
3. Paying cash for an income property
Because mortgages have gotten expensive, you may be tempted to purchase an income property outright with cash. Doing so could also increase your chances of getting an offer you make on a home accepted.
Since housing inventory is so low right now, sellers can afford to be choosy. Often, that means giving cash buyers preference.
But while you may be tempted to purchase an investment property in cash to save on mortgage interest and give yourself an edge in a tight market, tying up large piles of cash in a home is a big risk. Homes are highly illiquid investments, and if you buy one outright without a mortgage, what happens if a need for money arises and your cash is tied up in a property you can’t easily sell?
Furthermore, by tying up your cash in a home, you might limit your opportunity to invest elsewhere, whether it’s getting in on a house flip or buying REITs. Those missed opportunities could translate into lots of lost money.
Investing in real estate can be a great way to grow wealth. Just do your best to avoid these mistakes if you’re just getting started.