To avoid getting in over your head financially and ending up with an over leveraged real estate investment, we’ve got a few useful tips.
1. Do thorough due diligence.
Due diligence should be done on both the property and the real estate market, before investing. For example, this includes analyzing a rental property’s potential rental income, expenses, and vacancy rates, as well as researching the local real estate market to ensure that property values are stable or increasing.
2. Figure out all expenses.
Putting together an accurate account of all the expenses associated with a property, before committing to the purchase, is a key aspect to avoiding becoming over leveraged. These include, but are not limited to, maintenance, repairs, property management fees, and loan payments.
Getting an accurate idea of the property’s expenses in entirety will allow you to budget accordingly and make sure that your income covers the expenses, and you can maintain a positive cash flow.
3. Debt-to-equity ratio of 70% or less.
To avoid over-extending yourself financially, maintaining a debt-to-equity ratio of 70% or less is key. An investor’s equity in the property needs to be such that they can deal with any fluctuations in the market, unexpected costs, and other unforeseen circ*mstances.
4. Don’t invest in too many properties at once.
One of the pitfalls of investing in too many properties at the same time is that it gets tough to manage them all and it’s easy to become over leveraged if you aren’t paying close attention. For new real estate investors particularly, it’s important to focus on a smaller number of properties that offer good quality deals, which can be given enough attention and won’t lead to an investor over committing financially.
5. Choose the right loan.
Loan terms are one of the most significant aspects of real estate investment, so picking the right loan is crucial to this. Loans that have favorable terms are less likely to result in an investor becoming over leveraged.
For example, low interest rates and reasonable payment schedules are two favorable loan terms that can help real estate investors keep up with their payments over the long term. On the other hand, loans with balloon payments can lead to investors being over leveraged if their real estate deal doesn’t go according to plan.
