Seasoned investors and first-time flippers alike should have one thing in common: Clearly defined deal breakers. In order to succeed in the investment property business, you simply must think in terms of “if this, then that” or you will eventually fall into a pitfall – likely a money pit.
Where to Draw the Line
Take a good hard look at your financial situation before you move forward on any investment property deal. This is especially true if you’re new to investing, as the risk you put yourself in by tying up your funds in something that is still new to you is rightfully terrifying. By setting up your walk away points well in advance – and sticking to them – you can keep your funds from getting locked into a crumbling investment that can threaten to wreck everything you’ve achieved.
Put Aside Emotion
Buying a house, whether it is your family’s home or an investment, it is an incredibly emotional experience. Just like any large purchase, we want to believe that we’re always getting a great deal. The unfortunate reality is that not everyone can or will get a great deal every time, and you simply cannot afford to lull yourself into a fantasy about a property. Whenever you’re touring a property, it is crucial that you take as much time as possible; in fact, you should always attempt to visit numerous times after taking time to think and sleep on the thought of even moving forward on the property. Whether you have to take your most pessimistic friend with you to the viewings or ask for advice on a particular question or observation on an online forum, it is crucial that you do everything you possibly can to remove the emotions that can so easily cause you to see the property through rose-colored lenses.
Check Your Finances
One of the largest mistakes that investors new and old make is not properly accounting for their financial situation when making a decision. This may seem like a no-brainer, and it really is, but it’s often the simplest mistakes that trip us up the most. If you roll your funds into a property, only to lose your job or have another investment go south, then what will be your contingency? You need to always manage your current level of risk, know your break-even point, and manage the investment property loans you’re carrying. The ability to do these things well, not just initially, will be what separates someone that was “once an investor” and someone that owns a sizeable chunk of Chicago.
Re-Run the Numbers
While the previous point was all about calculating your risk and managing your investment property loans, it is crucial that an entirely different point is noted: Always re-run the numbers; in fact, run them multiple times throughout the entire process to make sure you’re accurately gauging what is happening, could happen, and should happen. If you lay out the investment on paper at the time of purchase, re-run the numbers in a best and worst case scenario to double check your work. After all, if you’ve prepared for a contingency, then it’s never a shock as much as it is an unfortunate happenstance; this type of mindset is important to continue on in this industry through good and bad times.
Talk to the Neighbors
If you’re buying an apartment building, then you should literally be talking to the tenants before you even come close to signing. The same thought process applies to an investment home, commercial property, and any other structure: Do the research necessary on the ground to get as much of the total picture as possible. To put it simply: Nobody will ever know or tell you as much helpful, useful information as someone that has lived and worked in or near your investment property. Hone your questions for the specifics of what you need to know about the property but always throw in some questions to confirm what you think you know or find out what you’d never even dreamed of. Even something as simple as finding out that the city plans to tear up the street in front of the property in the next year can save you from a huge hit to your future value. Just remember that doing your homework isn’t relegated to paperwork; it should always include a little legwork.
No matter how great you are or think you are at analyzing a property, you aren’t perfect. Whether you’re a certified plumber or never picked up a wrench in your life, it is crucial that you have professional inspectors walk the property to alert you to any risks prior to purchasing. These inspections almost always pay for themselves in avoided dangers and the negotiating power needed to get a reduced purchase price, so don’t sweat the cost too much. The inspections you should look for should include the following:
- Mechanical (HVAC)
- Radon/asbestos/radiation (especially in older buildings)
- A private appraisal
- General contractor estimate for repairs
Close with an Agent
Even if you have your real estate license, it may be worthwhile to work with a licensed real estate agent that has experience in that particular area or industry. Granted, if you are familiar with the area, then closing yourself can save you a huge amount in agent fees (especially when selling). Just remember that any great agent will want your return business, therefore they will do whatever they can to get your property sold for as much as possible and as quickly as possible. Think carefully before taking on the task of buying, selling, scouting, and pricing your own properties, as sometimes the payoff isn’t worth the return.
Once you start to see some cash flow cresting over the top of your current projects, you’ll likely want to stretch just a little farther. Remember that nothing can stretch forever; you need to manage your level of commitment to each project or you’ll risk making costly, avoidable mistakes that will make you learn this lesson the hard way. Calculate out how much an employee or two would cost you, then imagine the other projects you’d be free to take on if you just had a bit more time to work with; often, the expense is more than worth the cost. Even if you don’t want a full-time employee, you can easily contract out help online through freelancing websites and outsourced department work.
Nail Down Funding
The right funding for your investment property needs is likely not found in a bank, but from the private investors at Private Lending Group. We’re proud to offer Chicago’s self-starters the investment property funding they need to turn residential and commercial properties into profits. Plus, our private investors can get you the funding you need in a matter of days, giving you the buying power necessary to close the best deals.
Remember, above all else, the properties you are able to grab up determine your profit margins; can you really afford to let Chicago’s best investment properties pass you by while you wait on loan approvals from the bank?
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