Buy and hold real estate investment has its benefits, but in the wake of the financial crisis there are pitfalls that you should avoid to make sure your investment goes smoothly. These five tips will help you avoid mistakes through the whole process, from buying property to holding and owning it for the long term in Temecula, CA.
1. Paying too Much
There’s a lot of emphasis around real estate investments on getting great deals in the Temecula, CA area — and rightly so. Paying too much for a home can reduce potential profits. If you have a mortgage that is too high, you’ll have payments that are high, which will hurt your cash flow. In return of spending more cash, you’ll have less to use for home renovations and maintenance. In general, it’s a cycle you want to avoid. That’s why getting an appropriate home appraisal is key and making sure you buy at the right time (in the right market) is also vital.
2. Adjustable Rate Mortgages
Adjustable Rate Mortgages (ARMs) are loans where the interest rate changes with the fortunes of the economy. While it’s tempting to take advantage of the lower initial monthly payments, 3 to 5 years down the line, that can change if the interest rates rise. If interest rates rise on an ARM, your monthly payments increase too. This can decrease cash flow and cause you to start losing your money. Staying with a fixed rate mortgage avoids this issue.
3. Not Learning the Landlord Business
Make no mistake, land lording is a business, with all that it entails. There is a wealth of information online available, so make sure you educate yourself about the ins and outs of the business. Here are some quick tips to get you started:
- Know the law
- Conduct thorough background checks
- Remember your financial obligations. The mortgage must be paid even if the tenant misses a payment.
- Have someone be available 24/7 to deal with emergencies.
4. Not Doing the Math Correctly
One of the most fatal flaws that buy and hold investors make is the assumption that the amount of money that comes in, minus the mortgage payment is the monthly cash flow.
This is wrong.
There are many other things that need to be taken into account to get the monthly cash flow, such as vacancy, maintenance, management, and capital expenditures. Take all the numbers into account when deciding to buy the property or not.
5. Not Buying with Property Management in Mind
You may be thinking “I’ll be doing this myself.” But the future is hard to predict. How many properties will you have in the future? It can change quickly, so factoring in that someone else may do the property management (at least 12%) and maintenance (10%) in the future could reduce cash flow and put you in the negative. Keep potential costs in the equation when buying real estate in Temecula, CA.
Real Estate Investing in Temecula, CA
Buy and hold investing is about managing risks while building wealth. These aren’t all the mistakes investors have ever made. But avoiding these mistakes will save yourself many headaches in the future.