#1 Real Estate Investing Mistake Of 2005
Over the past few years, real estate investors, hungry for
break-even or positive cash flow rental properties, purchased
income properties out of state. California investors bought
houses in Florida, Texas, and Oklahoma. Florida investors
purchased houses in Louisiana. Texas investors purchased in Las
Vegas. Many of these investors made millions of dollars because
of the appreciation in hot markets.
On the other hand, in 2005, some beginning investors lost their
hard-earned investment capital or only made a meager profit
because they failed to do their homework on the out-of-state
area's real estate market and customs.
If you 're thinking about buying investment properties in a
different state than you're accustomed to, beware of these five
surprises.
Surprise # 1 - 'These (extra) costs are the norm in this state!'
Besides extra closing costs like pricey surveys, common in
Florida but rare in California, other surprise costs included
higher transfer fees and taxes. Property taxes in Florida cost
much more for investors in Florida than in California. On the
other side of the country, out-of-state investors were shocked
by California's state tax held in escrow: 3.8% of the property's
SALES price, no matter the actual profit made. In other words,
an investor who made a quick profit of $20,000 on a fast flip
could have more than the profit held until the next year's
income tax filing.
Surprise # 2 - 'You can't lease this property!'
New home developers and many Homeowners' Associations (HOA)s
prohibit property owners from leasing their properties. Some of
these restrictions got passed, without the investor being
notified, during the property purchase phase. You must read the
fine print to see if any clauses prevent the rental of the
property. Home builders, to keep the value of the neighborhood
up, added restrictions requiring the purchaser to occupy the
home as a primary or secondary residence. Surprise # 3 - 'This
house will only rent for $750 per month, not $1200!'
This was one of the top mistakes made in 2005. Large real estate
investing groups, selling out-of-state properties to local
investors, inflated the rental income. Because so many houses
were purchased in a limited area by investors, a rental glut
lowered the expected income. This created hardships for
investors who suddenly had to pay out hundreds of dollars a
month instead of reaping promised profits.
Surprise # 4 - 'You can't sell this house, now!'
Some investors who couldn't rent the out-of-state property
decided to sell because the values did rise significantly while
the house was built or during the purchase time. However, many
investors were stunned when they were told they couldn't sell
the property within the first year after purchase. Restrictions
prohibiting real estate investors from quick-turning their
properties is a trend that is growing increasingly popular with
some developers.
Surprise # 5 - 'Houses don't appreciate 30% per year here!'
Perhaps you've attended or been invited to a high-power
investment seminar that promotes out-of-state real estate
investing. Some of these 'investor clubs' really are promoters
who receive kick-backs in real estate commissions, property
management fees, mortgage loan fees, and even fire insurance
premiums. They tell stories of huge appreciation gains, which
are probably true. However, not all areas enjoy significant
appreciation--year after year.
Don't make the costly mistake of not fully researching the
complete market customs and restrictions in the area where
you're thinking about investing. If you can't afford to go check
out the area in person, choose another area that you can visit.
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