Finding proper financing is an important part of the real estate investment process. If you lack financing or choose the wrong type of loan, then you’ll have trouble when trying to invest in a property. There are plenty of financing options out there, including hard money loans, cash financing, peer-to-peer lending, private money loans and more. You must choose the right type of financing for your needs, which is why plenty of research is necessary.
Table of Contents - Top Financing Mistakes Real Estate Investors Make
- Bringing the wrong documents
- Choosing the wrong type of mortgage
- Not taking care of personal debt
- Failing to research the property’s past expenses
- Investing in a property with too much leverage
- Not doing proper research on tenants
- Choosing the wrong lender
- Research and invest wisely
- How to get over your fears of Investing
Even when you do receive proper financing, there are mistakes that can be made. This could include bringing the wrong documents to an investment meeting or failing to research a property’s past expenses. Being aware of these potential financing mistakes is a great way to avoid them.
Bringing the wrong documents
When going to finalize your investment, it’s important that you have all the proper documents on hand. One of the most important documents to have is your real estate contract, which will outline all the legal terms between you and the seller.
There are a number of things that your real estate contract should include, like any closing costs, contingencies, warranty information as well as a proper timeline. Being sure to include all the right information in your real estate contract can help avoid any legal issues down the line.
Other documentation needed can include the agreement of sale, assignment of lease, last title policy, list of inspection reports and more. There are plenty of documents that you’ll need to finalize an investment, which is why it’s usually best to work with a real estate agent and attorney. They can help you gather and keep track of the documents so you don’t end up at a meeting without everything you need.
Choosing the wrong type of mortgage
Choosing the right type of mortgage ensures that you’ll have proper financing for your investment. There are, however, several types of mortgages from which to choose, including open mortgages, closed mortgages, assumable mortgages and portable mortgages.
There are a few things that you need to consider before deciding on a mortgage, including how frequently you’ll want to make payments and the potential interest rates. Open mortgages, for example, usually come with a higher interest rate but could be a great option for those wanting to pay their mortgage off quickly.
The length of your mortgage term should also be strongly considered. Short-term mortgages are under five years in length and usually come with higher monthly payments but lower interest rates. Long-term mortgages, on the other hand, might work better for someone wanting to charge less rent from their tenants.
It’s a good idea to discuss all your needs and wants with your mortgage broker and agent, who can usually help you make the right decision when it comes to mortgage terms. This is especially important if you’re new to the process.
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Not taking care of personal debt
One of the biggest financial mistakes a new investor could make is not taking care of most of their personal debts before investing. It’s important to have sufficient funds stored away in case of an emergency.
For example, you might be short on tenants for a month, making you unable to pay all the property’s bills based on rental income. In this situation, it would be necessary to have some funds set aside to cover these expenses. The bills on your property need to be paid no matter what, and with too much debt, this can be very hard to do.
Some loan companies won’t be willing to work with you if your debt amount is already excessive. High debt makes some loan companies view you as an unfavourable risk. Do your best to take care of any debt before starting the real estate investment process.
Failing to research the property’s past expenses
Before you finalize any documents, it’s important you know everything about the property in which you are investing. This can help you avoid a property that will need plenty of expensive repairs down the line. When interested in a property, request to see a report of all the past expenses. This will probably include information on past repairs, taxes paid, utilities and more.
A lot of the information about possible repairs can usually be seen in the property’s inspection report. You’ll want to be aware of all the problems your new property has had in the past, so you can either avoid them or come up with a plan to handle further expenses.
Investing in a property with too much leverage
Leveraging is when a buyer uses borrowed money to purchase a property, with the hopes of eventually making money from it. While leveraging can be a great way of financing your real estate investment, it’s important to not purchase a property with too much leverage. It’s usually best to put a 20 percent down payment—or more if you can afford it.
Trying to leverage the entire cost of the property could put you in a bad financial situation down the line, especially if you’re unable to pay for certain expenses. If you’re unable to pay the expenses on your property, then you risk foreclosure.
Not doing proper research on tenants
Tenants are essential to your income when purchasing a rental property. This is why it’s important that you do thorough background checks on any applicants. Proper research can help you avoid approving a tenant who never pays their rent on time, or is known for damaging past properties.
Once a tenant is approved, your relationship should always be firm, yet friendly. Your tenants should be happy so that they’ll want to keep renting from you. However, they should also be paying all their bills on time—otherwise, you won’t be able to meet your expenses.
Choosing the wrong lender
It's easy to walk into a bank, especially the one you have your accounts with. You will receive general information, but, the banks are not set up to give you specialized advice on investing in rental properties.
They have helped thousands of real estate investors grow their portfolios across Ontario and Canada.
Research and invest wisely
When it’s your first time investing, financial problems may arise. Avoiding these problems can be quite easy as long as you do the right research and have a good plan in place. It’s also a good idea to work with agents, brokers and attorneys, who can walk you through every step of the investment process and make sure your financing choices are appropriate.
How to get over your fears of Investing
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