Investing in property can set you on a path to financial independence, but there are times when investments do not succeed. It’s not always the market’s fault or a bad deal. Instead, it’s often simple, avoidable money mistakes that were overlooked.
If you stay on top of your finances and have a mindset of financial responsibility, you have a better chance at long-term success. Here are some tips to help you avoid those mistakes:
1. Get real about your costs
New or inexperienced investors often prioritize purchase price and mortgage payments, overlooking ownership costs like appraisal, titling, taxes, insurance, and renovations. These add up fast.
Assess your acquisition and upfront cost, and include your operating cost. They are crucial elements to consider when preparing your budget.
2. Do not overestimate your income
Excessive optimism in financial projections, such as inflating potential rental income, often leads to significant financial errors. When enthusiasm replaces financial analysis, or when you rely solely on the highest recent comparable rent without adjusting for the property’s condition, your income estimates will be inaccurate and may pose future challenges.
Be honest with your estimates and adjust for reality.
3. Don’t overpay
Overpaying, regardless of its potential, is a financial misstep that can take years to rectify. Investors often make mistakes when they don’t conduct thorough market research or accurately calculate costs, expenses, and income.
Check comparable properties and the projected return properly. Make an offer price that fits your profit goals. Remember, this is a business decision, so don’t let your excitement cloud your judgment.
4. Only borrow what makes sense
Taking too much debt can strain your finances, as the property may not generate enough income to cover the borrowed funds. Unforeseen expenses or extended vacancies can also worsen the situation, turning a lucrative investment into a financial burden.
Know the risks, and borrow only what the numbers say you can handle.
5. Put everything in writing
If you are investing with friends and family, don’t rely on handshakes and verbal agreements. Money has a way of complicating relationships, so make sure to have a legal agreement outlining your capital contributions and responsibilities, how profits and losses are to be distributed, and what happens if one wants out.
Without that, disagreements may escalate into costly legal battles that can eat up your profits.
Bottom line: treat property investing like a business and pay attention to the details.
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Henry L. Yap is an Architect, Fellow of both Environmental Planning and Real Estate Management, and one of the Undersecretaries of the Department of Human Settlements and Urban Development.
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