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Six Pitfalls to Avoid when Getting a Mortgage for Your Investment Property

6 June 2013

Getting a mortgage can truly be an overwhelming, and sometimes terrifying, experience – especially if this is the first income property you’ve ever purchased. But if you keep your wits about you, and know which traps and pitfalls to avoid, you’ll be approved for your mortgage quickly, won’t end up paying too much for it in the long run, and will soon be reaping the benefits of all that income there is to be made that you’ve been hearing about for several years. Here are the six biggest mistakes made by investors, and how you can avoid them.

Not setting goals

If this is the first income property you’ve ever purchased, you might be tempted to buy the first one you see. Or anything you see. And even seasoned investors can sometimes fall into the trap of wandering out onto the market with no real goals or plans in mind – thinking that they’ll know what their next dream property is when they see it. Know what your short-term and long-term goals are, how much you want to make out of the property, and what kind of properties will best fit with your current and future portfolio.

If you plan on being a long-term investor or owning many different income properties it’s even more important that you not only make a plan, but that you share it with an investment advisor from the very beginning. They can help you set up your portfolio in a manner that will not interfere with future deals, and it’s best if that’s done from the get-go.

Not working with professionals

We’ve talked about working with a qualified and experienced investment advisor. But you also need to make sure you have a professional and qualified mortgage broker on your side, too; and you need to make sure that the mortgage broker you choose is also experienced working with investment properties. The financing for these properties, and the way your mortgage deal will be structured will all be based around this, so you want to ensure you’re working with someone who’s done it many times before; and that can foresee and deal with any potential issues or concerns.

Not having a pre-approval

In reality, pre-approvals don’t mean a whole lot. Holding one as you tour investment properties never guarantees that the deal is going to go through, as circumstances can always arise that can cause things to go askew. But, getting pre-approved is still an important step, as it will let you know how much you will be approved for on the deal. It also typically means that the lender has already verified your credit rating, and that the deal most likely will go through.

Relying too much on low interest rates

Of course you want to get the biggest profit from your investment property and in order to do that, you need to pay the least amount possible for it; meaning you’ll also probably want to find the lowest interest rates possible. But, that can also be your biggest undoing. If you choose a deal based solely on low interest rates alone, it could end up being the deal that’s most wrong for you. And you’ll end up paying for it in the long run. Ask your mortgage broker or your investment advisor about how to get the best deal with you. That does entail the best interest rate – but the best rate you can get based on the structure of the rest of the deal.

Relying on 100% financing

Leverage is a great thing when you’re a real estate investor, but it can also become very dangerous very quickly. It’s for this reason that investors shouldn’t get too excited about 100% financing – even if they’ve heard about seasoned investors that have made the majority of their returns this way. Firstly, no major lender will offer 100 per cent financing; and you’re going to also have trouble finding any private lenders that will offer such a deal. If you want to invest using 100 per cent financing, you may still be able to find a property with seller financing on it, or by drawing on equity in your existing properties. However, this is a tricky task today, and definitely one you should not be relying on for your investment success.

Failing to fully examine the property

This doesn’t just entail giving the building a thorough walk-through inside and out – although you should always be doing this before buying any property anyway. What it means is carefully considering the mortgage payments you’ll have to make, what kind of cash flow the investment will bring, how you’ll deal with negative cash flow should that issue arise, what capital improvements need to be made, all of your expenses, and what possible income you’ll make from it. Walking into the deal without knowing what exactly you’re going to get out of it, and what exactly you’re going to need to put into it, is how investors sometimes end up holding the bag on a property that is never going to see returns.

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