4 Common Investment Home Purchase Mistakes

An investment home purchase is different from any other type of investment, and it is particularly different from a primary residence purchase. When you are considering whether or not to buy residential property as a means of increasing your equity, avoid these common mistakes many novice investors commit.

#1 Getting Personal

When buying your own home, you made a list of desirable priorities for your personal situation. This list has no bearing over a proper investment property. Instead, you should be concerned with the needs of the demographic you are targeting. For example, if you would like to rent the property, consider the age, family size and income of potential renters in the area. Look at comparable rental properties for clues. If you are looking to "flip" the property for profit, you should be seeking a home with great room for improvement in a short period. Picking a property that would currently be considered undesirable can present you with this opportunity.

#2 Failure to Compare

You should compare the investment you are about to make not only to other homes but also to other forms of investment. Since this is not a property you intend to live in, you are selecting it based solely on its ability to generate revenue. If another investment could generate more revenue, then you will need to pick the alternative investment. To put this plan to action, maintain awareness of not only real estate trends but stock, bond and fund trends when you are preparing to buy. One tip is to set up a mock investment portfolio of mixed risk options. Watch the performance of this mock portfolio. If the returns are greater than you could expect in a mixed risk property market, opt for traditional investments instead.

#3 Absent Management

Once you purchase your property, you are an owner whether you live there or not. This means you must manage the property to the same degree you manage your own home. Making necessary repairs is just part of the picture. If you rent the property, it will also be up to you to make sure the property is constantly occupied. This means updating listings, searching for tenants and responding to inquiries. If you are anticipating turning the property over with a sale, you should be supervising the project or should employ a trusted manager. 

#4 Missed Tax Benefits

Property investments present tax benefits that other investments cannot provide for you. Among these benefits is the ability to write off expenses associated with the property. This means maintenance, repairs and management fees can be deducted from the income you earn on the property. In addition, capital gains on the investment property can be managed through deferral or use of a corporation as the owner of the property. If you do plan on using the home part time, capital gains can be legally avoided. You must reside in the home for 24 months out of a five-year period to qualify for this exemption. Speak to your accountant about reducing tax burdens through these methods.