The average property value in the United States is $298,349.
So, property investing can be a great way to build wealth. But while it’s a lucrative business, it also has its risks.
Navigating property investing successfully requires understanding what can hinder your progress and how to avoid those obstacles.
Property investing errors are common for property investors of all levels of experience. The following list outlines seven of them and how you can avoid them.
1. Using Your Home as an ATM
This property investing error is when investors use their home equity to fund deals.
While you will need some of your own cash, it’s best not to tap into home equity. Using all your available capital could result in foreclosure. Plus, if you do end up foreclosing, that negates any benefit you had earned.
Instead, always keep enough liquid assets in case there are unexpected expenses. This is crucial even with positive rental income coming in each month. Also, speak with a qualified financial advisor before using home equity.
2. Not Checking Property History
Doing property research is a great way to catch errors and incorrect information. This error can happen when investors fail to check previous ownership of a property.
For example, you may find later that several other people have owned the property over time. This could be due to foreclosure, bankruptcy, divorce settlements, and various tax liens. None of which were disclosed by the current owner.
Property buyers usually think that the property history is set in stone once they’ve closed on a deal. That’s not true. You can always check property records to verify property ownership. Sort out any hidden truths about the property before making an offer.
3. Thinking Property Is a Short Term Investment
Many property investors think property investments are short-term. This property investing error can make them neglect to properly maintain their property, which costs more in the long run.
If you’re expecting property prices to always go up or at least stay stable, this is a dangerous mindset for any investor.
Home values do fluctuate with market conditions. That’s why property owners must keep their property maintained so they can maximize its value when selling.
The last thing anyone wants is a vacant property waiting for home values to rise.
4. Not Understanding Your Market
Another property investing error is thinking that you know your market better than experts who study it for a living.
This mindset stems from inexperience in the property investment business. There are always factors out of any property investor’s control that can lead to property price depreciation.
For example, property values might decrease if a neighboring property sustains storm damage. Or property prices could drop due to more supply because of new construction projects.
Hire a real estate agent specializing in your neighborhood’s market conditions is one way to avoid making this error. Other ways include attending real estate seminars on topics such as microeconomics or talking with other experienced investors about what they’ve seen happen firsthand within their community over time.
5. Not Understanding Your Tax Situation
Return on investment isn’t the only thing investors need to consider when deciding whether or not they’ll make money on property investment. Taxes are another important factor you should always keep in mind.
For example, selling one rental property and buying another can lead to capital gains taxes. So landlords who do this must know what their tax burden will be before making any moves.
In other cases, some people end up paying more than necessary in taxes by neglecting to claim deductions. Most of these are available through depreciation of the building and other expenses related to their property.
Keeping up with tax laws and making sure you’re claiming all your deductions might require hiring a professional to check over any required paperwork before filing it. This is because the US tax code has become so complicated. Most people don’t have time or patience to learn about every single deduction available.
6. Not Knowing When To Sell
Sometimes, property owners sell their investment properties too soon or at the wrong time. This is another common mistake that can cost investors thousands of dollars in gains they could have made.
For example, selling a property that’s losing money because of upkeep costs and other property investment expenses could end up costing investors more than they would have made if they had stuck it out for another year.
On the flip side, holding on to investment property when its value has significantly depreciated due to market conditions or other factors can also cost you thousands of dollars in lost gains.
To avoid this property investing error, it’s important to consider whether your investment is generating positive cash flow or if you’re essentially paying rent for the privilege of owning that investment. If you are losing money every month, maybe it’s time to sell it off while there’s still some remaining resale value.
7. Types of Property: Ignoring Historical Properties
Another common investing error is overlooking older properties that are not as flashy or modern-looking as newer ones.
For example, some people automatically pass on buying a property with features they don’t like without considering whether those same features could increase the home’s resale value in years to come. This can lead them to miss out on purchasing real estate at bargain prices because it doesn’t have granite countertops or stainless steel appliances.
Historical properties, especially those located in areas that are transitioning into trendy spots or have particular architectural features, might be some of the best deals out there for investors.
To avoid this mistake, keep an open mind about what you consider your dream property and try searching for it within various price ranges.
Some historical properties include homes built before World War II and older homes located in areas undergoing gentrification.
Property Investing Errors To Avoid
There are many different ways to make or lose money when it comes to property investing. However, avoiding these property investing errors will go a long way toward helping you build an effective property investment strategy.
Check out our other articles for more crucial tips.