Property investors typically make a lot of mistakes when financing their portfolios, according to lending adviser Dalia Barsoum, who points out four critical errors that investors make:
1: Not getting pre-approved
Being pre-approved gives you a general idea of how much you can afford to borrow. It means that the lender has verified your information and credit rating and agreed to provide you with a specific amount of money. Investors are in a much better position to go house hunting when knowing how much they can afford and have financing for.
2: Too much emphasis on interest rates
While lowering the costs associated with financing is crucial, a lower interest rate alone does not always equate to the best loan. For example: a lender offering you 6% interest and 35 years amortisation will put in your pocket thousands in annual cash flow relative to another lender offering you a lower interest rate of 5% and shorter amortisation of 20 years.
Investors should also consider other aspects of the loan such as additional fees associated with commissions and penalties as well as the attractiveness of the loan terms.
3: Not analysing the property enough
Investors who purchase property without factoring in proper reserves for maintenance, capital improvements and vacancies are usually setting themselves up for trouble down the line. The same is true for investors who purchase after overestimating the rental income.
4: Lack of planning
Why you are investing in real estate? How much cash flow do you expect on a monthly basis? How many properties do you need to get you where you want to be?
If you fail to think such questions through you could be tempted to buy anything and everything, only to realise at the end that you are somewhere where you did not intend to be.
Upfront planning and an ongoing review of your plan will help you stay focused, save you money and increase your chances of success.
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