If you’re new to the property market, there are many things to look out for to reduce the risks involved. Check out our list of common property investment mistakes that you should be sure to consider:
The first mistake is not buying below market value
You’re in the business of locating motivated or desperate sellers who need to sell fast and at a low price, and you can assist them with their issues. Where pricing isn’t the most important factor.
Purchasing UMV will provide you with immediate equity as well as a safety net in the event that property values continue to decline. It also enables you to refinance and withdraw your initial deposit as soon as circumstances allow, substantially lowering the danger of losing money in the near term since you won’t have put any of your own money into the loan. There’s no risk on discoveries, and there’s no limit to how much money you may make.
You don’t need property prices to rise in value with this strategy (which works in any market) since you’re earning money right away from the discount and have a guaranteed profit.
Isn’t it lovely?
Mistake number two is underestimating the value of cash flow
It’s a formula for catastrophe if you don’t approach your property purchases like a business. We’ve all heard the cliché that cash flow is king, and that without it, your property company would collapse.
Now, we’re not just talking about having good cash flow properties, which is crucial, but also about having a buffer of mortgage payments and an extra for expenses to protect against interest rate hikes, which can eat into your monthly profits, or if a tenant leaves and you have to cover the void periods.
What if an unforeseen expense arises, such as the need to repair a boiler?
We understand that starting off may be difficult. Building a profitable property company without financial reserves, on the other hand, may be very challenging.
But it’s not all doom and gloom. If you don’t have any cash reserves, you may be able to locate a JV partner with funds sitting in the bank [earning no income] who would be willing to split an ownership stake in the property.
By using and reinvesting other people’s money [OPM], you may become very rich. Remember that the “number of properties you possess is vanity,” “cash flow is sanity,” and “cash in the bank is reality.”
Mistake #3: Purchasing for Capital Appreciation (Growth) rather than Yield
Many investors focus their whole business strategy on capital appreciation and underfund their property portfolio’s operating costs. This is a huge blunder and a high-risk approach that should be avoided at all costs.
Many people’s finances were destroyed as a result of this approach from 2001 until 2007. So this is an one of the most crucial property investment mistakes to avoid.
We purchase our shares on the assumption that property values would never increase, which means our strategy is focused on immediate profitability: revenue from rent rather than growth. This mindset enables us to make rational choices based on the fact that the numbers and the investment will generate a profit. Capital growth is seen as a benefit.
Sure, we all know that property values almost double every ten years, but if portfolios are purchased only for growth, deficits may quickly spiral out of hand.
Never, ever, buy due to an emotional attachment to a property. Remember that an asset is anything that gives you money, while a liability is something that takes money away from you. You should be turning down more offers than you purchase, ensuring a healthy return and accounting for all of your expenses.
Mistake #4: Not doing sufficient research
It is critical that you do sufficient research and due diligence before to making a purchase in order to limit and minimise the risk you are about to take.
The majority of inexperienced investors generate supply without demand. There’s no sense in purchasing a home you can’t rent out if your goal is to purchase and keep.
Your mining area’s local post code district must be well studied in terms of the rental market and the quantity of existing stock. The gap between supply and demand has to be bridged.
Buying just for the sake of a large discount is a bad idea, since you’ll be stuck paying the mortgage and all of the other costs that come with owning a home.
Purchasing a property with apparent discounts without first learning about comparables may lead to inflated estimates of true worth.
You should also do the following research along the way:
- – Is it possible to get a mortgage on the property?
- – Is there any damage to the structure?
Obtaining recent sales and letting demand confirmation from agents, checking both the Land Registry and current value prices, checking LHA rates, having a schedule of any refurbishment costs that will require works, a summary of the locality of the area, transportation links, demographics from government and council stats, crime rates, proximity to a school
Mistake #5: Not Having a Strategic Investment Plan
Investing in real estate is a personal approach depending on your financial position, risk tolerance, and the amount of money you have to invest, among other factors.
Preparing and understanding your personal motivation, goals, and objectives can aid you in taking the initial step and provide structure to your approach.
For example, if you only have £50,000 to begin with, investing in HMOs will be difficult since you will need more upfront cash, but it does not imply you cannot invest in single-let homes using our strategy of purchasing, renovating, and remortgaging your fees back out.
Purchasing a home is simple. It’s simple to accomplish, but it’s also simple to overlook.
Buying a home that will fulfil and deliver on your personal strategy and financial goals, on the other hand, is more of a science that you should get acquainted with.
Another factor to consider is how much time you can devote to your property company.
Many individuals have false expectations about how much time they can afford: they believe they have more or less time than they really have. If you are short on time, you may need assistance. If you have a lot of time on your hands, you may not need the same amount of seed/start-up money.
Mistake #6: Going Overkill on Refurbishment
If the property has to be renovated, do the absolute least. Don’t be fooled by magical makeover TV shows like Property Ladder or Homes Under The Hammer, where the selling price is greatly overstated and the project’s duration and expense are both drastically understated.
Always overestimate the expected selling price by 90%, which is an excellent figure to practise with.
Consider your profit and loss as well as your account to determine whether the endeavour is really worthwhile. Remember, that’s just an estimate; it may be more or less!
A Few Other Property Investment Mistakes
– Putting down a deposit of more than 10% on a home that hasn’t yet been constructed
— Purchasing on the open market without a solid compensation, termination, or return clause
– Having faith in all lawyers. Do your homework on them. We’ve heard of lawyers giving developers large amounts of money for apartments that didn’t exist.
— Check and double-check that a seller has the legal right to sell the property.
This is the ONLY way to know if the item you’re buying belongs to the person selling it to you.
Keep in mind these property investment mistakes, while some may seem obvious these are common issues that rookie investors face time after time. Contact F&M Finance and get expert funding & support on your next project.