What’s the mind-blowing reality in a real estate business? Real estate is a big word and its every investor’s goal to purchase property and take-home huge earnings from it. However, this business is not for everyone else.
You should have well-defined plans and marketing strategies to generate income. Even if it is popular in the market, you cannot find tenants regularly. There is also a wide competition, and some are even entering in predatory pricing.
So, what should be your expectations and mistakes to avoid in this business? In this article, you will know the real-life scenarios and common mistakes among the property owners. To begin with, here are the main key points to check:
1. Expectations vs. Reality in Real Estate
As a common societal belief, people think that investing in real estate can help you earn a lucrative income. Period. This mindset could only be true if you utilized the best resources and apply effective marketing strategies.
Buying the property alone cannot bring the money in your pocket. You still need to offer it to the crowd and lure them to avail your property. However, there’s no assurance that you can get tenants or guests daily. It highly depends on the economic status quo, business strategies, and tenant’s preferences.
Even if you had already paid it in full, there are still succeeding lifetime costs that you’ll need to pay as well. For example, you must pay the taxes, HOA dues, and insurance. If you decided to keep your property ready for rental purposes, you also need to be ready with the extra costs. For instance, you must pay for an HVAC maintenance, furnish the property with furniture and fixtures, and so forth.
2. Insufficient Cash Flows and Reserves
Check your financial standing first whether you can pay. Assess your cash flows whether you can able to pay off short-term and long-term liabilities. Consider your variable and fixed expenses as well. Do you have the capacity to pay? Do you have some cash reserves? If you can meet all these criteria, then you can start investing in the property.
In reality, mortgage loans attract investors to buy properties. This is a common mentality among investors. Well, no matter how long you pay for the loan. It is still a liability. It never became a convenience to your cash flow. Moreover, a liability usually comes with an interest. You’re not only paying off the principal debt itself but also pays for the interest on a long-term basis.
Did you try calculating the loan with interest versus the purchase price of the property? You might be surprised by the big difference. Perhaps, some investors can pay off the debt and look for a tenant to somehow reduce the monthly burden. Let me tell you one thing, are you going to do this technique until you finally pay off all your outstanding debt? If this is the case, how can you be so sure that you have even earned any profit?
3. Lack of Research and Discussion with Brokers
Research first before you invest! Gaining knowledge in real estate is the first step in understanding this industry. It’s difficult to invest in something that you barely even know. It is not enough that you only know the basics, but you must understand the overview, consequences, and benefits of having a real estate property.
Schedule an appointment with the brokers and assess which agent can provide you the best deal. You may also do crowdsourcing, visit the forums, and ask the community regarding the best real estate agent and locations. Try checking on these resources to obtain information such as Pumped on property, Zillow, realtor, social media, and web blogs.
4. Fail to Estimate the Related Costs
In deciding whether to take the risk of acquiring a property, you should also ready yourself with the costs. Spending thousands of dollars in a property could be risky for an investor. You will not know when you will recover these investments through rental or sale activities. It takes time to get back all the money.
Sometimes, some investors aren’t satisfied with the premise’ structure and they have to renovate the building. In this case, they will incur additional costs due to renovations, restorations, or installations.
Aside from these expenses, some investors are also planning to put up a fully furnished building. They set aside some dollars to purchase fixtures, furniture, and appliances for the building.
Whereas in reality, the tenants are not favorable in this kind of set up. Why? The reason is that fully furnish homes may entail a high rental expense for them. In this case, the tenants prefer to carry their personal belongings and pay a reasonable rate.
As the bottom line, make sure to at least have a 60% to 70% available cash to acquire a property. You may also use your SMSF to help you pay off the property.
5. Engaging in Short-Term Selling
When an investor finds himself incurring losses from his rental properties, he may come to the point of selling his property. Some owners want to get back their investments as soon as possible. This situation happens when they don’t have enough cash reserves to pay for the variable and fixed expenses of the rental properties.
Short term selling might be tempting because you can sell off the property and earn a profit share. However, selling it after you acquired it five years ago, may still not be reasonable. Remember that any capital gain will be taxed to a corresponding rate. It might be taxed like your salary or a different rate.
You don’t want your capital gain to be consumed by taxes, right? If this is the case, you should value your property and hold it for a long-term basis. In this way, you can sell it at a higher price and earn a net profit without thinking about the taxes.