Has there ever been a better time to invest in real estate? That’s debatable. As property values skyrocket all across the country, many are wondering if we’ll see another bubble burst. Others are more optimistic. What’s true is that there are more people entering the housing market than there are houses to purchase. This is likely because Americans are living longer and millions of millennials are getting ready to settle down and start families. It’s good that property values are increasing, but there are still too many homes going into foreclosure, and a lot of folks are being priced out of the market.
Meanwhile, the cost of rent is increasing in several cities as well. If you’re an investor, you can cash in on this market, but you have to be careful. At Royal Legal, we have a lot of clients that are interested in real estate as an investment. It’s hard not to want to jump on that bandwagon and by extension, it’s easy to make mistakes. Some of them can be very serious, and potentially cost tens of thousands of dollars.
What are some of the worst?
#1. They Overpay for Property
It’s not uncommon right now to see single-family homes going for well over asking price. That’s because real estate agents are very savvy about pricing property. While it used to be that they could start bidding wars simply by pricing property under market value, today they’re starting bidding wars on properties that are overpriced for the market. Multiple buyer situations are the norm.
Nonetheless, if you’re buying a property, you need to gauge the value of the property in terms of rental payments. Here, multi-family homes have less competition among families looking to settle down and produce better results in terms of rent. The key is knowing what the math looks like beforehand.
#2. They Miscalculate Their Expenses
Many of the houses that are up for sale right now were put on the market by landlords that miscalculated the annual cost of property managers and maintenance. They purchased properties in areas that they believed to be “up and coming” but their projections show they won’t be breaking even any time in the next 30 years.
Property managers will eat up around 10% of your profits. Be prepared to consider that when you’re investing in real estate.
#3. They Don’t Have an Actionable Plan
Everyone wants to cash in on the real estate market, but very few will. Even those that are purchasing fixer-upper properties in areas where they expect property values to increase are not considering one thing: you’re still paying for the location. Don’t believe me? Check out this absolute gem of a house that’s going for $800,000 in San Jose. What’s the median cost of a house in that zip code? $1,228,000.
That means you have a budget of about $428,000 to build a house there from the ground up. Still think it’s easy?
We’re not saying you can’t turn something like that to your advantage. But you’d need the weight of a construction crew behind you that can build the house at cost. Make it modern. Make it beautiful. Pitch it as cozy and you could build a home there for an average of between $250,000 and $300,000.
That’s an easy $100,000. Right?
Wrong. While the average cost of building a house might be $275,000 everywhere else, in Silicon Valley, you’ll probably end up paying twice that. But if you have the resources at your disposal, you can make money on it. That property sold for the asking price.