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Posted about 4 years ago

These Are The Biggest Threats to Your Real Estate Investments

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When people think about threats to real estate investments, they often cite things like choosing a bad location or buying something with a weird floor plan. While those things are definitely not helpful, there are other, bigger threats that can completely wreck your bottom line.

Using Unlicensed Tradesmen

It doesn’t take a genius to expand a circuit box or to add heating to a room addition. Anyone with an understanding of schematics, thermal dynamics and currents could figure it out, theoretically. However, it does take someone who knows what they’re doing to accomplish it in a practical setting. Many people are amateur—and maybe even knowledgeable--electricians and plumbers who enjoy making some money on the side with their skills. But as a real estate investor, you should steer clear of this crowd. Using unlicensed tradesmen represents a serious threat to your investments.

Let’s say your good friend and next door neighbor happens to be an auto mechanic. He’s really amazing with everything mechanical, and you watched in awe as he converted his home garage into a fully heated outdoor workshop. So you hire him for cheap to redo the outdated wiring in the flip you just bought. You inspect the work as best you can, and it looks great.

Just when you’re getting ready to put the completed house up for sale, a fire breaks out and the place burns down. The fire department’s forensics expert determines that the fire started in one of the rooms where your good buddy redid the wiring. Your insurance company wants the name—and license number—of the company you hired to do the work. Except there is no license number, because you decided to save some money by hiring your neighbor.

Did you know that most insurance policies exempt coverage for damage caused by unlicensed tradesmen and contractors? Now you’re out all the money you put into the investment. Don’t take the risk. Always confirm that anyone you hire is properly licensed. Otherwise your investment could go up in smoke.

Skipping the Inspection

Most investors these days are open to the idea of finding potential real estate investments online. There are multiple sites that facilitate the process; some that even allow the investor to complete the whole purchase without ever leaving the keyboard. This doesn’t diminish your responsibility to conduct your due diligence, though. A property inspection is always necessary, no matter what. It doesn’t matter who pays for it; whether it’s a lender or a turnkey rental provider or you. What matters is that it’s done, and by an objective third party. If you ever saw a list of things that have been found in the walls of properties, you’d never even consider buying a property that’s not yet been inspected. If you skip the inspection, you could buy something that you can’t make money from, or worse, that actually costs you money.

Failing to Apply For Permits

Building permits are an investors’ headache, but if you don’t apply for them, they will be your nightmare. Although they seem unnecessary and trivial in certain circumstances, you’ll be making a big mistake if you try to get away without proper permitting. For instance, let’s say you just want to complete a broken fence around the perimeter of your investment property. Many towns would let you do it without pulling a permit since there’s already an old fence in place. But what if the previous owners never had a permit for that old fence? Now there’s no permit for your fence, either. Whenever you’re doing renovations in or around an investment property, someone on your team had better be making a trip to the town hall to see what permits need to be pulled. Otherwise, your project could start bleeding money in the form of penalties.

Not Evaluating the Market Rents

When you buy a property to hold for passive rental income, you need to evaluate market rents first. Market rents in the area are in integral part of the calculation for how much cash flow you might be able to expect. It’s all too easy to get heady with excitement over how much you’ll charge once you make all those cool renovations you have in mind. If you aren’t careful, you’ll spend too much on renovations that are out of touch with local expectations and have chronic vacancies because you’re charging too much for rent trying to get your reno money back. Ultimately, you’ll end up never recouping your costs or at least living through negative cash flow for the foreseeable future.

These are the biggest—and perhaps the most insidious—threats to your real estate investments. As always, proceed with caution and try to avoid making these preventable errors.



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