Real estate investing is one of the four pillars of enrichment used by millions of investors around the world. It offers a leverage effect that uses the money from the bank to build your real estate assets. However, there are errors that can prove fatal to your real estate project. In this article, I will address 7 fatal mistakes that must absolutely be avoided to make a fortune and become an annuitant with real estate.
I. Investing in Real Estate: Buying Cash (Error 1)
You enjoy an excellent financial situation and want to buy real estate. The usual mode of operation is to pay cash the monetary value of the property object of your purchase, do not do it especially in a real estate project. This sounds counterintuitive, but that is the leverage that has helped build so many real estate empires.
Indeed, it is better to use a mortgage loan from your bank and pay a bill financed by your rental income . To illustrate this leverage, I will use two examples of real estate transactions.
Buying a real estate asset at 100.000 Euros
You pay cash the price of the apartment by financing it at 100%. Considering an ideal situation with an annual return of 10%, you can recover your investment after 10 years. It is an immobilized capital that could have contributed to other profitable investments . This represents a shortfall for your investment portfolio. The resale solution of real estate to recover your investment in case of need is possible. This operation will however depend on the location of this apartment. An apartment in Paris will sell quickly because the demand is strong. This is not quite the case of an apartment located in a less popular area.
Real Estate: purchase at 100.000 Euros
You succeed in the feat of financing 100% the purchase of this apartment by your bank. Considering an ideal situation with an annual return of 10%, you earn 100,000 Euros after 10 years without having touched your own bottom. Money that is not spent is saved and can be mobilized immediately for other investment operations. In addition, an excess bank account is a pledge of confidence with your banker who will not hesitate to support you in your next real estate transactions without input . It may seem unbelievable, but it is this leverage that makes the rich get richer.
Bank loan rate
Borrowing rates are very low (<2%) today, unlike what was done some thirty years ago (> 15%). Knowing that this is a situation that could well reoccur in the current economy, now is the ideal time to borrow the maximum amount of money from your bank to make profitable investments.
Making a rental investment by paying cash is a mistake. It is better to use the money from the bank to invest in real estate and take advantage of this leverage .
II. Real Estate Investment: Buying Deficit (Error 2)
You buy a deficit when the real estate developer at the time of the sale offers you a saving effort to agree monthly on the property. You have just bought a debt, a deficit. It’s a bad real estate operation that makes you lose money and your cash flow is low or negative. Such an operation also makes you lose credibility with your bank that will be reluctant to accompany you in another real estate transaction.
It is important to remember that a real estate transaction with a gross yield of less than 6% remains a bad deal. After deduction of taxes and fixed charges, the deficit appears obvious. That’s why I do not recommend buying real estate below 10% yield. Transactions of this type will not help you become a real estate annuitant .
III. Invest in real estate: Buy your main home first (Error 3)
The frequent mistake of the beginner in real estate is to borrow money from the bank to finance the purchase of his principal residence . Such an operation significantly reduces your borrowing capacity. I recommend buying first real estate assets: one or more apartments that generate rental income. Once you have settled these real estate assets that are self-financing and generate cashflow, you can invest in a principal residence. Buying a principal residence can be tempting but keep in mind that this is a liability.
You are not going to create your financial independence with the purchase of a principal residence. Taking into consideration the possibility that your property will appreciate over time, you will always need to stay. Unless you become a tenant or rent a portion of your property to a tenant, you will not earn money from your principal residence.
Principal Residence: Control your real estate borrowing capacity
A final option to buy your primary home anyway is not to use all of your borrowing capacity (usually 33% of your annual income). You will be able to use the rest of your borrowing capacity to make a rental loan . If your rental income is higher than your monthly loan, you increase your borrowing capacity with the prospect of realizing new real estate transactions.
IV. Get your home loan: Overestimate your financial capacity (Error 4)
Your banker is primarily an employee and he must also report to his superiors. It is based on the parts you provide, your financial situation at a given moment. To increase your chances of getting your bank loan, you have to have regular income, what is called in the banking language a “green” account. You must also have a good debt capacity , that is to say do not have a consumer credit, do not spend more than you earn, do not be exposed.
If this is not your case today, I kindly suggest that you first create a regular income. In order to better prepare your loan application with the bank, check with a credit broker . Do not hesitate to file your file with several banks to increase the probability of obtaining a loan.
To maximize your chances of getting a home loan, it is important to keep in mind that the bank also wants to make a profit. We must therefore establish a win-win relationship for both parties. You will therefore accept to make some concessions such as:
- A slightly higher loan rate compared to the competition
- Insurance with the bank’s insurance deposit organization
Eliminate tenant risk
In addition, a rental investment involves a risk that is the tenant. To eliminate this risk, have a rental certificate issued by a real estate agency with the amount of the rent free of charge. Then make an appointment with an unpaid rent guarantee company to give you a contract including the guarantee in case of:
- Unpaid rent
- Rental deficiency
- Degradation of the property by the tenant upon departure.
By offering all these guarantees and showing flexibility, the bank will be more open to granting you the mortgage.
V. Renovation work: Do not choose a craftsman to make them (Error 5)
This is a fairly common mistake as renovations can be expensive. The beginner investor in real estate who has these skills realizes himself the work. This is understandable and it is an economy always good to achieve. However, the limit of this strategy lies in the psychology of this type of investor. To become financially independent, you will learn how to use the money, skills and time of others.
The savings you make in terms of money are at the expense of your time. If you estimate that your hourly rate is less than or equal to what the building contractor would have perceived, then do the work yourself. If not, I strongly recommend that you delegate the work to use this time by creating new assets. It must be borne in mind, however, that you must control the work and demand quality. Your time is the most valuable resource you have. What you use them determines your financial future.
VI. Become an owner: Do not pay attention to details (Error 6)
Real estate is a very competitive market and everyone wants to realize a gain on its real estate operations. Some people are unfortunately mischievous and there are often omissions that could affect your real estate transaction. These omissions could be of several kinds:
- A problem related to the apartment
- A highway whose construction is planned in the vicinity
- A bank rate higher than that of competition
Do not trust blindly the interlocutors engaged in the financial operation. There is a conflict of interest that could hinder their good faith. As an investor, you should be aware that you should never sign a blank check regardless of the link you share with the partner and the investment industry.
Invest in Real Estate: Beginner’s Errors
I will tell you the story of Paul who had a bad experience with his first investment in stone . I will highlight the mistakes he made to help you avoid them too.
In 2007, taking advantage of falling prices in real estate, Paul decides to buy a studio of 20 m2 to 70,000 euros on the advice of David, a real estate agent. After a guided tour in the studio organized by David, Paul is satisfied with the state of the property. The tenants, a young couple with a child were already there. The rent was fixed at 600 euros. The bank grants him a loan over 15 years with a monthly payment of 500 euros. A few months later, unpaid rent problems arise. The tenants complained to the town hall by questioning the state of insalubrity of the property. The town hall sends a letter to Paul urging him to perform work in the studio as soon as possible.
Becoming a Real Estate Investor: Paul’s Case Study
In the absence of rent, under pressure from the town hall, Paul finds himself obliged to make a new loan from his bank to cover the costs. On the recommendation of a colleague at work, he uses a contractor to do the work. Without any other estimate, he makes the payment of the totality to the contractor who obviously botch the work and then becomes unreachable.
Paul is then asked to contribute to the renovation of the building where his studio is located. Overwhelmed by all these expenses, Paul resales his property. It realizes a capital gain on the real estate transaction which proves insufficient to cover all the expenses incurred. This experience rich in lessons could be very useful to you to avoid the errors of the beginner in real estate .
Buying property: Visit real estate
Paul did not conduct a neighborhood survey to solicit the views of the residents of the building where this studio is located. You must always make several visits of real estate before thinking about making a purchase.
Rental Real Estate: Choosing Tenants
The marital and financial situation of the tenants of your property should concern you. A couple (with a child) in good financial situation could not reside in a studio of 20 m2. This presages a notorious insolvency that Paul should have noticed.
Buying real estate: How to make a good offer
Paul resorts to a contractor on the recommendation of a friend. Whatever the good intention behind a recommendation, you must make up your personal opinion before deciding. In this case, Paul had to make several quotes and choose the best offer in terms of quality / price.
Rental real estate: Evaluating the profitability of its investment
The return on the property was clearly not calculated by Paul. The gross margin (100 euros) is insufficient to cover the current expenses of a property (Tax, Works, Trustee …).
In short, it is essential to train before you get into real estate. If you think that training is expensive, you may spend more to correct your mistakes.
VII. Rental real estate: Do not test the rental demand (Error 7)
Many people buy real estate haphazardly without any prior market research. However, just test the application by making an announcement to validate the rental price of this property. Without this basic precaution, you may not find tenants for your property.
Rent your home
To test the rental demand for real estate, there are advertising sites that you can use (Leboncoin, LocService, etc …). First, you announce the price you want to adopt for renting your property. Then, in the case of positive feedback, you can always answer that the property is already occupied. By the way, you just validate the interest of tenants for your property and rent.
Finally, in the opposite case, it is necessary to review the rental offer or to understand that the property does not have any attraction for renting. Another clue that could alert you to the lack of appeal of real estate is the number of vacant dwellings in the area. If it is high compared to the average of the region, you certainly do not want to swell the lot.
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