Buy-and-Hold Blunders (3 Mistakes to Avoid While Investing in Long-Term Real Estate)
Everyone makes mistakes. Even the most savvy investors out there have occasionally stumbled into problems they could have easily avoided with their buy-and-hold investments. After all, one of the best ways to improve is to learn from your own mistakes. However, there are some slip-ups people fall victim to time and time again and the sooner you learn to avoid them, the better.
Now, you may have not made these mistakes yet, whether it is because you have been careful as an investor or are simply new to the market, but that does not mean you should let these problems pass you by. So, let us take a look at three common mistakes people make while investing in buy-and-hold real estate.
However, before we start looking at the logistics of buy-and-hold real estate, click the link below for a free strategy call to discuss securing the best long-term financing options to help you build a sustainable buy-and-hold portfolio.
Not Treating Their Investments as a Business
Real estate investing and landlording is a business for buy-and-hold investors. Whether you think of it as such or not. Plenty of investors overlook this fact when they are getting started and risk losing thousands of dollars by letting things slip through the cracks. Real estate is a lot more complicated than simply buying a property and letting the rent roll in until you decide to sell. You have to manage aspects such as property maintenance, cashflow, tenant relations, and marketing for your properties, as well as many others, and it only gets harder when you decide to buy more properties.
If you want to make a sustainable income from real estate investing, you need to start thinking about it seriously early on. If you rely too heavily on trust and good faith you leave yourself open to be taken advantage of by a potential bad tenant who comes along or could end up losing great tenants who do not take you seriously enough. Or worse, by forgetting to be serious enough you run the risk of your properties losing their value due to leaks and wear that build up over time if left ignored.
Overpaying
Everyone is looking for the best deals they can in real estate. For flippers and wholesalers there is an obvious incentive to find the lowest prices available because they often will yield the most immediate profit. However, even if you are investing long-term with buy-and-hold real estate, you never want to find yourself paying extra for a property and requiring a larger mortgage loan.
That is because if you take out a larger loan, you will find yourself paying more each month to cover it, and that is an easy way to cut into your cashflow and lose money in the long run.
In theory, your renter’s monthly payments should cover these expenses, but you can only set the rent so high before people refuse to rent from you. If you significantly overpay for a property you are left in the position to either set your rent higher and risk losing great tenants or cut into your own cashflow and either, make less or lose money on a property.
That is why it is increasingly important to listen to the age-old advice to ‘buy low.’ If you are trying to secure the lowest price possible and avoid overpaying, you can try to use the tactics employed by flippers and wholesalers for your buy-and-hold investments.
For example, by using direct mail or talking to your realtor, you might be able to find some properties that are not publicly available for sale yet, thus avoiding a bidding war that would have driven prices up. Or you can buy a property that has updates and repairs that need to be made at a lower price, so it appreciates quickly, and you can set your rental rate off the improved value of the home.
Discover How To Analyze a Properties Cash Flow With This Step By Step Guide
Relying too Heavily on Appreciation
One of the most dangerous mistakes investors can make with a buy-and-hold is relying too much on a property’s potential to appreciate over time. Hopeful investors will frequently try to justify overpaying on properties because they predict the value is going to skyrocket in the next few years and make their money back for them. However, this often comes with the burden of holding a property that makes very little cashflow or has a negative cashflow in hopes that it will pay off later.
Markets shift all the time and while people try to predict exactly what is going to happen, there will always be room for these predictions to fail due to outside factors such as an increase in unemployment or new properties being introduced to the market and lowering the average sale price. If you are buying with the intent to use a property as a buy-and-hold investment and let it appreciate, you need to be sure you can make money during that holding period or else you are setting yourself up for failure.
Most of the time, it is highly discouraged that long-term investors do not buy homes with their only expected profit to be the property’s appreciation. That strategy usually works for flippers because they are not holding a property long enough to worry about the market most of the time, they aim to quickly add new value to the home and capitalize on that new value they have created. With buy-and-hold investments, you cannot risk losing money each year waiting for a significant enough increase because once you have lost enough money you may be forced to sell early and lose even more money by selling at the wrong time.
Before You Invest in Buy-And-Hold Real Estate
Before investing in any buy-and-hold property, it is highly recommended that you seek a pre-approval from an experienced lender who understands your investing strategy. That way you can enter the market with a clear idea of exactly how much you can afford and plan your purchases accordingly. A pre-approval also gives you the ability to lock down the best available interest rates early so that you can save money in the long run.
If you are looking for more information or are ready to get started today. Contact us at LendCity by visiting LendCity.ca or give us a call at 519-960-0370 and our team will be more than glad to help you out. Alternatively, click the link below for a free strategy call today.