Top Financial Tips For Property Investors
Investing in real estate can be a good way to protect and grow their capital, investment real estate is not without its risks. New property investors have plenty of opportunities to make catastrophic mistakes that can prematurely terminate their investment journey.
When investing in real estate, making money is not guaranteed, but losing money is a real and ever-present possibility. As a matter of fact, many new investors lose money on their first property, and do not go past that initial failure to eventually become successful.
Some of the issues property investors have to deal with include maintenance, problem tenants and keeping vacancies to a minimum. But the biggest dangers exist in the area of a property's finances; property investors need above-average financial intelligence.
There are many apparently inconsequential financial decisions that successful real estate investors make daily which newbie investors don't understand. These small financial choices define the strategies that separate the successful property investor from the struggling ones.
Savvy investors realize that profit in real estate deal is made well before the property is bought. They know that getting sound financial advice is more than 75% of the work, and the key to sound investment. This is why they use many of the financial tips explained below.
Use an LLC
The legal framework or vehicle an investor uses when buying properties matters a lot to their ability to manage those investments profitably. Purchasing investment properties under a personal name, particularly when they have more than one property, exposes an investor to avoidable risks. But using an LLC or limited liability company can help the investor evade personal liability if the investment goes wrong.
The LLC separates the business from the owner's personal finances and retirement funds. It allows them to impose a more efficient risk management framework on their investment.
Use multiple lenders
Misplaced loyalty and ease (or laziness) are two reasons why property investor often concentrates their entire portfolio with one lender. This is a high-risk strategy, even if it offers a few advantages.
The main benefits of using a single lender, for commercial loans, are that the investor gets volume discounts and lower interest rates. But these come at the price of smaller loan amounts, and the investments are also more vulnerable.
Furthermore, staying with a single lender gives the bank excessive control over the investor's business. And the investor is denied the freedom of shopping for better rates elsewhere, accessing higher loan amounts and spreading their risks.
Never use cross-collateralization
Lenders often promote cross-collateralization as an easier way for investors to access more financing without the need to put up additional collateral. One form of cross-collateralization is when a borrower uses a single asset that was used to secure an initial loan as collateral for a second loan.
The other type is where an investor uses more than one property as security for a single loan. Lenders will allow investors to do this because it makes the loans easier to manage and gives them more control. But this arrangement increases an investor's risk and significantly reduces their bargaining power.
Use an experienced mortgage broker
Use an experienced mortgage broker
The intricacies of financing an investment property are vastly different from those of getting a primary mortgage. As a rule, people who apply for a second mortgage are forced to cross multiple hurdles to access financing.
And there is always a chance that they may overlook terms that make it impossible to make profits on the property. A mortgage broker who has experience with investment property financing can help an investor avoid the pitfalls. They understand the industry, know how to get the rates that are not advertised and can help the investor obtain the best loan terms.
Location is everything
Before anything else, investing in real estate is about understanding the advantages of one location versus the disadvantages of another. Knowing the fundamentals of a good site and how to apply that knowledge to find viable properties is the crux of investment property success.
Savvy investors know they can make money from a rundown home in a good location, but are likely to lose money on a great house if it is in the wrong area. Before they begin their search for the right property, investors must first pinpoint the best locations to look in.
A competent tax accountant is critical
Profit or losses on an investment property is often determined by how the taxes on the property are handled. That's because property owners can use tax loopholes as a means of shielding their business from paying excessive taxes.
The law allows investment property owners to make tax-deductions on many of the costs associated with owning and managing an investment property. Property owners may deploy these as legitimate avenues for making a profit without paying excessive taxes. But this knowledge is usually only accessible via a competent tax expert.