Common Mistakes When Purchasing an Investment Property (Part 2)
1. Not Making the Mortgage Re-Advanceable
This tip stems from tip #3 from the first part of this series where we discuss putting your attention towards the type of financing that leaves room for cash flow and avoiding the common pitfall of thinking the lowest possible interest rate should be the primary focus of your financing.
By having this shift in perspective, we can consider products like the re-advanceable mortgage product.
This type of financing allows for you to setup your mortgage through different types of products such as home equity lines of credit (HELOC) which avoids the requirement that you amortize the entire loan, obligating you to a mandatory principal + interest payment every month.
By incorporating a HELOC into your mortgage, you will create the ability to make interest-only payments.
By having this option available to you, instead of being forced to pay principal down with each payment, you can choose to put that money in better places like to create a slush fund for when repairs or vacancies happen or better yet in your own pocket if you already have a slush fund setup.
HELOC’s only have variable rates and they typically offer a premium to the prime lending rate, instead of a discount which is what you will see with an amortized variable rate. So be prepared to give up some interest to get the flexibility of managing your mortgage loan on your terms.
2. Not Knowing Your Numbers Well Enough
Do you have a spreadsheet or notepad where you can enter the rental income and all the expenses related to every potential property you may purchase to calculate if it’s a good investment?
If you’re going to invest in real estate, you need treat it like what it is. An investment. So take it seriously and do your research before putting in any offers so you know what you can afford to pay.
That means you need to know how to calculate your net operating income or simply put, if you’ll be putting money in or pulling money out based on each property you come across.
If you need help learning and understanding how to do this, speak to your mortgage advisor or schedule a call with us and we’ll be happy to walk you through it.
3. Not Having Your Real Estate Team Dialed In.
Here is a list of the primary professionals you will be relying on before, during and after the purchase process:
Real Estate Advisor
Real Estate Lawyer
Do you know with confidence who you will be helping you in each of these positions?
If not, you could be leaving yourself open to liability and mistakes by not having your real estate team put together.
These professionals are paid to understand the steps involved and ensure success in their respective roles of the process, so you’re not stuck being the only one thinking about it.
Preferably, you will want to work with professionals who have experience in real estate investing.