Making mistakes throughout our lives is something natural, normal and should serve as learning. However, we can avoid many mistakes if we take note of the experience of others in order to try to make better decisions. This is a premise that works for life in general and for investment in particular. Therefore, today we are going to analyze the most common mistakes in real estate investment that you can avoid in order to deploy a better strategy.
Below, we at SPV mortgages list some of the mistakes that we should avoid when investing in real estate:
Invest more than we should
The amount to start investing depends entirely on each person, their aversion to risk, and their financial situation. In any case, the main premise whenever we make any type of investment is to use money that we are not going to need in the short term. That is, if we have saved £20,000 and our monthly income is fixed and the expenses we have are also fixed, we should calculate the amount that we have underutilized and is losing value in the bank due to inflation.
Ideally, it would be to leave a part of that amount in our bank account for short-term expenses and unforeseen events and another part to invest in so that our money can multiply.
The mistake, in this case, would be to invest a large amount of money that we will need to pay the mortgage, supplies, or for some unforeseen event such as a car breakdown. Therefore, it is important to know our financial status to know what amount we can allocate to investment. As they have years of experience in the mortgage market, I would advise consulting SPV Mortgages for help with these kinds of financial issues.
Borrowing multiplies the risk
Among the most common mistakes in real estate investment is getting into debt. Investments should be seen as a way to multiply our savings. If we contract a debt with the bank, we will be assuming a high risk since we will need the investment to go well in order to satisfy the debt. And, in case of opting for this option, we should know that our investment is going to work with a high probability.
In the event that we request a mortgage or loans to buy a home that we are going to use to rent or sell later, we must make sure that it will work out for us because, otherwise, we will be losing money and we will have to assume a debt that we did not have before. Therefore, it is always better to use your own resources or, in the case of opting for leverage, be very sure of the investment to be made.
Invest without doing a market or situation study
If we are going to buy a physical asset, such as a home or business premises, it is essential to know how the market is in that area. If it is a growing city if it is a place with a high turnover of tenants, such as coastal areas, etc. It is important to know what the rental prices are and the volume of sales of homes in the area to know the difficulty we will have in liquidating the investment.
In the case of buying a house in a city or town that is growing because they are opening nearby businesses or factories, the investment may become ideal if this growth is sustained over time because there will be more demand for housing.
If we are going to buy to reform and later sell, we have to make sure that we know the average sale price in the area to be able to buy at a good price and make the reform of the house profitable with the sale.
That is if the average sale price is £130,000 and we can buy a house for £100,000 to be able to reform it, and, in turn, the reform costs us £30,000, then we would find ourselves with an interesting investment.
On the contrary, launching into real estate investing without carrying out this prior analysis is a mistake and can have serious financial consequences.
Know our risk profile
Whenever we make an investment in a fund, the advisor on duty tests us to find out our risk profile and thus be able to offer us the products that best suit us. This is a job that we can also do on our own to know our risk profile.
Here we can ask ourselves how much money we have available to invest, the annual return that we would like to achieve, and the losses that we could bear to achieve that return.
If we have £20,000 saved and we want an annual return of close to 5%, probably what best suits us is buying for rent. It is understood as a safer and more stable investment, although it also has certain risks, such as non-payments that may be suffered or damage that the tenant may generate. To minimize these risks, however, you can always resort to renting non-payment insurance.
On the contrary, if we have £25,000 saved and we are looking for a return close to 6%, then we should look towards indirect investment through investment funds. In this case, the risk is greater because it would be investing in variable income, which is significantly more volatile.
Take unnecessary risks
Among the most common mistakes in real estate investment is taking unnecessary risks that can be avoided. For example, investing in a town or city that has just started to grow or is expected to do so. This can work out very well for us and lead to a great revaluation of our real estate assets. However, it can also go very wrong if this growth is cut short. For this reason, it is necessary to try to invest in places that are more or less safe in terms of the demand for housing.
On the other hand, if we invest in real estate through other indirect products, we should not be obsessed with looking for a great return, but we should set ourselves a realistic objective that can be achieved over the years. For example, if we invest with the intention of earning 20% per year, we will surely have entered the wrong market or we will be assuming too many risks.
Patience is a great ally in the world of investment, and lacking it is one of the most common mistakes in real estate investment. Whether we invest in funds, shares, or a physical asset, we have to be patient to achieve performance. If we have bought a house that has cost us £120,000 and we earn £8,000 for rent, it will take us many years to amortize the investment and obtain a profit.
Just like if we buy a house to reform it and then sell it, we will have to wait for an opportune moment to sell it at the best price and not at a time of economic crisis or falling prices.
Regarding the stock market or indirect investment, the best ally is always the long term. Since there are always negative years, the important thing is to set a broad time horizon. For example, if in 6 years we have earned 50%, it will be a good investment. But it is likely that in the first year, for whatever reason, we lost 10%. In the end, the person with the most patience usually wins.
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