Avoid Hidden Costs when Buying Your First Investment Property

You've purchased your first investment property in hopes of selling it for a profit. You should be applauded for taking those first steps to becoming the real estate tycoon you've always dreamed of. Most people do not even make it that far. If you're like most new real estate investors, you don't have a lot of capital to work with. There are pitfalls to avoid when renovating your investment property that can save you money on the long run.

You have your property and made your renovation plans, you've even set a budget on how much you can spend on these improvements. One costly mistake people make when setting up their plan is underestimating the cost involved. Always err on the side of caution when it comes to a budget, unless you are extremely lucky, at some point unexpected costs and time delays will happen. Allow some leeway in your budget and round up. Always round up.

Hopefully, you already knew about major repairs that needed to be done by a contractor before you purchased the home. Have the contractor go through the house with you and quote you a price. Get it in writing. Also, when choosing a contractor, talk to several before you settle on one. Cheap is good, but not always the most cost effective. If you have a contractor in high demand because of his low prices, will he be able to do the work for you in a timely manner? With real estate, time truly is money. The faster you can get the house on the market, the less you will be losing via interest on any loans you may have taken out. I can't stress enough how important it is to get a contract stating when the work will be finished and how much it will cost.

If you can avoid taking out unnecessary loans to help fix up the property, do so. Most new investors do take out a mortgage on the property itself to buy it. And many use equity on the investment property to fix up the house. This can work if you are able to sell the house quickly so you don't incur much interest on the loan. Be aware many banks have a policy of adding a fee when you close out the loan early. The time frame and fees vary from bank to bank. Do your homework and read the fine print to avoid hidden costs.

The best solution would of course is having enough liquid capital saved to pay for repairs outright, unfortunately this is often not the case. If you planned to use credit cards to pay for expenses, be sure to add the interest in your budget. I caution against this as you may not sell the property in the time frame you planned and this can add up to a lot of interest payments. Another alternative is to get a credit card with a 0% introductory fee for 6 months to a year. This will give you some breathing room, and plenty of credit card companies are more than willing to give deals like this.

Buying an investment property can be thrilling and frightening at the same time. It can also be your stepping stone to financial freedom. As with any business venture though, go in with your eyes open and do your homework.