Real estate remains an excellent way to generate cash flow and protect your capital. However, there are many scammers who take advantage of new investors, and there are many mistakes that can truly cost you if you make them. Here are 4 mistakes to avoid when building a property portfolio. We’ll take the time to explain why these mistakes are so dangerous.
Only Looking at the Returns
A common mistake is when people look at the project with the highest return on the investment while ignoring other factors. For example, they look at the theoretical return on the investment while ignoring the return on equity, often a better factor for measuring the tax efficiency and speed at which wealth is built. Or they’ll ignore metrics like cash flow, though you can work to improve income and lower expenses for a property.
Another mistake is ignoring potential appreciation of the property despite the returns this can bring if the property is sold. While you cannot control the general market, you could increase the value of the property through development or increasing rental rates as tenants turn over. You should work with construction surveying and development firms like DTS for advice in these situations. For more information on their services, visit https://www.dtsqld.com.au/.
Looking at the Property as an Owner, Not a Landlord
Many investors look at the property as if they’re an owner, not a landlord. Your personal tastes and preference don’t matter; what matters is that the renters find it attractive. What would renters want out of the property? What are they looking for? If the neighbourhood is full of families, buy what families would want to rent. If the neighbourhood is attracting young professionals, don’t look at the property as if you were going to move your family in but try to see what young professionals would want.
Not Doing Your Homework
Buying property without doing your homework is a serious mistake. You must do the math to make sure you can earn a profit and generate the expected cash flow. Is there a big enough rental market paying the rental rates you’re projecting to see in order to earn a profit and clear enough money each month? Another mistake is not researching the costs associated with the project, though spending too much refurbishing or upgrading a property can wipe out your profits. Don’t rush to close on a deal without doing your homework.
Not Understanding the Local Market
Property value is in large part determined by the local market. When an investor is considering buying property, it is wise to not only visit that property but the market where it is located. Look at adjacent properties and the community. This gives the potential buyer a better understanding of the condition of the area and the ability to literally see why someone might be attracted to that property over an adjacent one.
This also allows you to learn what the competition is doing. Visiting the area lets the buyer understand the location, access issues, and potential problems. If the investor wouldn’t want to rent in that building, it probably isn’t a good investment.
Property investors also need to look at the hard data. Take a look at the existing population and demographics for the area, and where the trend is heading.
Avoid making these mistakes, and you’ve eliminated a number of the pitfalls that have taken down many real estate investors. You’ve improved the odds of maximizing your portfolio whilst minimizing your risk.