Mistakes to Avoid on Your First Investment

Mistake 1: Bad Financing

Bad financing can be one of the most lethal mistakes possible. More property investors lose money or go out of business from bad financing than from any other mistake.

What is bad financing? Usually, it includes a combination of the following:

  1. High-interest rates
  2. Compound interest
  3. High monthly payment
  4. Personal recourse

Let me keep it really simple, as a new investor If you borrow at 12 percent interest with a large monthly payment, a balloon payment due at the end, and full personal recourse for the loan, you are probably taking too much risk.

Why is that?

Let me explain. While there is a high-interest rate the property will likely have negative cash flow. A balloon payment at the end means you will have to refinance or sell in a very short period of time and under pressure.  In the 2008 credit crunch, many people learned this the hard way., Trying to refinance when credit dries up is very difficult even if you are fortunate enough to have a perfect credit and good income. For no tangible reason at all and no fault of your own, you may find it impossible to refinance. If you are subject to personal recourse like a personal guarantee it means that if anything goes bad and your lender loses money, they could chase you and even take your other assets.

The great thing about private financing is that everything is negotiable. However, regardless of what type of financing you use, be sure to negotiate hard and avoid the worst mistakes.

Mistake 2: Bad Location

Property investing value always begins with location. Because it’s so important, you should study and get to know the best and the worst locations in your area before investing. It’s true, there are investors who make money in bad locations, however, it’s a challenging game that beginners should probably avoid.

Mistake 3: Underestimating Repair Costs

It is inevitable that you will underestimate repair costs at some point, in lots of circumstances this will be when you first buy the property. It’s sometimes tempting to underestimate these costs to secure financing or convince yourself it is a deal. If you do this, I promise you will regret it. Underestimating the cost will simply cause you to run out of cash or face other problems.

To avoid this be sure to get help from other more knowledgeable investors or contractors. Don’t be afraid to pay these people for their time and knowledge.

 

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