Investing in real estate can be a lucrative investment strategy. There are some pitfalls that must be avoided, though. If you're thinking about investing in real estate, make sure you avoid these three common mistakes.
Planning on 12 Months of Rent Each Year
To accurately evaluate the value of an investment property, you'll need to project how much rent you think it'll bring in annually. When making rental income projections, however, don't plan on having each unit in a building rented every month. Plan on less than 12 months of rent each year, because you might not receive rent each month. For example, a tenant may not pay their rent, or you might not be able to fill an empty unit quickly.
Many new real estate investors budget for 12 months of rental income, which leaves them in a precarious financial position if they don't collect rent one month.
Not Networking with Local Real Estate Investors
Many real estate investors learn from well-known investors, reading books, attending seminars, and going to conferences. Investors who are new to real estate, however, often don't spend as much time networking with other local real estate investors.
Make sure you connect with other real estate investors in your area. Real estate is a very localized market, with houses in one area being valued differently from those in a different region. The people currently investing in real estate where you are will be experts on the local market and have a wealth of information you can learn from.
Not Improving Your Credit Score
Unless you have enough capital to pay cash for investment properties, you'll need to get a mortgage when you purchase a rental building. The interest rate on your mortgage will be directly influenced by your credit score. The better your credit score is, the lower your interest rates will be.
Many real estate investors spend hours pouring over investment decisions, but they don't necessarily focus as much on getting their personal finances in order. Make sure your personal finances are in good shape so that you have a high credit score. With mortgages lasting for years, even a small improvement in your credit score could save you a lot of money.
To increase your credit score as much as possible, MyFico says you can:
pay down debt
pay your bills on time
avoid taking out unnecessary loans and lines of credit
manage your credit cards well