Avoid These Five Mistakes When Investing In Luxury Real Estate
/If you are a high net-worth investor, or aspiring to be one, you may want to consider expanding your investment portfolio to include luxury real estate.
Before you do, here are five common mistakes to avoid when investing in luxury real estate.
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Trying to do it alone.
The process of purchasing a property and managing real estate is very time and capital-intensive. The amount of focus and commitment it takes to juggle real estate investments is hard to handle solo. And it can lead to a lot of mistakes.
The main reason is that it is impossible to know everything. A simple way to avoid mistakes is to surround yourself with experts who can help you navigate the intricacies of real estate. This may involve investing with a partner or group. It includes working with an experienced real estate agent, a property law attorney, and potentially, a property management company.
Other potential experts include a competent home inspector, a handyman, and an insurance representative. Start building your team now, even before you begin looking for a luxury real estate property.
Settling for poor financing.
Althought the real estate bubble in 2007 led to the elimination of several predatory loan products, it is still advised to review your loan terms thoroughly and be on the lookout for more favorable options.
Adjustable loans (ARMS), hard money loans, and interest-only loans can be used to one’s advantage. But, they can also turn into your worst nightmare if not executed in a timely fashion. Ideally, you’ll have a fixed-rate mortgage or pay cash for your investment to avoid the potential nightmares, but if you have to use more exotic mortgage options be sure to review the terms thoroughly with your attorney.
Please note: Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
Not balancing intuition with data.
I firmly believe any financial decision needs a healthy blend of intuitive guidance balanced with data. Buying a luxury real estate property simply based on your gut feeling is not advised. However, when it comes to property investment going strictly based on numbers is also not advised. As you nurture your relationship with money you will learn how to blend the two in order to make the best decision for you.
Here are some questions to ask yourself and research before purchasing the property:
Why do I want to purchase this property?
How will owning this property make me feel?
If no one knew that I owned this property - would it make me feel financially whole or is it a way for me to show off to others?
Is the property near a commercial site, or will long-term construction be occurring in the near future?
Is the property located in a flood zone or in a problematic area, such as ones known for radon or termite problems?
Does the house have a foundation or permit "issues" that will need to be addressed?
What is new in the house and what must be replaced?
Why is the homeowner selling?
How much did the previous owners pay for the home and when?
If you want to sell the property: In case you can’t sell the property right away, what is the going rental prices in the area? What is the rental market like?
If you plan on renting the property: Can the local market sustain the rental price I will list the property at?
Underestimating expenses.
Running the numbers on a real estate investment is necessary to ensure you receive proper financing. It is also necessary so that you make sure you have enough cash on hand to pay for anticipated and surprise expenses.
Plan on setting aside money for vacancies, repairs, upgrades, and random unanticipated expenses. There isn’t a hard and fast rule that dictates how much you should save, but some landlords suggest saving 10- 30% of the annual rent. For example, if you plan on renting the property at $3,000 per month, then plan on setting aside $3,600 - $10,800.
Not having a plan or exit strategy.
The goal for most luxury real estate investments is to receive a return on your money. In order to do this, you'll need to think about your exit strategy. Otherwise, you can fall into a forever buy-and-hold scenario where you are not generating any money from your investment.
Here are a few types of exit strategies:
Sell and walk away.
Seller financing.
Lease option.
1031 into another investment property.
Cash-out refinance.
Pass it on to heirs.
Whichever strategy you decide to choose, do your due diligence and create a plan with your team to make it happen.
Disclaimer: the content presented in this article is for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.
