Buying investment properties can be a solid long-term investment for some investors. Real estate investments add an element of diversification to an investor’s portfolio while positioning them for the opportunity to generate passive income. But, when considering investing in real estate, it can be easy to overlook the risks associated with owning property.

Many property investors start with dreams of making it big, but after a few years, they wind down their investments and exit the market. Why?

“They don’t educate themselves about the potential pitfalls of the business,” warns MTD Property Management in Chicago, “but rush into it and invariably get burned.” You can help boost your chances of successful property investments by following these top financial tips for property investors.

There are many ways to invest in real estate. Without a clear-cut property investment strategy, an investor can waste time and money without making real progress. Examples of possible areas to focus on are:

• Rehabbing houses
• Live in and flip
• BRRRR (Buy-Remodel-Rent-Refinance-Repeat) investing
• Short-term or long-term buy-and-hold rental property

In addition to choosing your strategy, you should decide the type of properties you want to invest in. Are you more interested in owning single-family homes, small apartment buildings, condos and townhouses, commercial retail, or commercial office? While there is no “right” answer, defining and operating within a niche can help build a property investment strategy that targets your unique financial goals.

Conduct a thorough analysis of your particular real estate strategy, detailing how much capital you need to start, how you will finance the properties, a cash flow analysis, an estimate of how long you will keep a property, and how you will grow your portfolio.

Having these details on paper will help you see the big picture and can help reveal potential problems with your chosen investment strategy.

There are many intricacies to owning a property that may remain unknown until you are neck-deep in an investment, which is why one concept real estate investors tend to lean on is the idea of starting small. Starting small gives you the chance to learn without over-exposing yourself to risks.

With a smaller investment, you can become more familiar with the financing process, learn the ropes of managing a property, and come to a fair understanding of the property market in your area. Then, focusing on growth may be more achievable.

As a beginner to property investing, you need a mortgage broker with experience in your area of interest because there may be financing opportunities a beginner real estate investor may not be aware of.

A mortgage broker with experience will not only provide you with a list of financing options, but they may also recommend strategies that may better suit your long-term objectives as they relate to your investment properties. Additionally, they will help you keep up-to-speed with the constantly changing realities of the financial world.

The intelligent use of leverage can be a strong tool for growing and maintaining rental properties. It can help you buy and finance more properties than you would be able to pay for with your current capital. But, if overused, leverage may negatively affect your property investments.

Over-leveraging creates more debt on a property than its cash flow can handle. This results in a situation where the rental income from a property is insufficient for the monthly payments on the property.

The advantage of using a single lender versus multiple lenders, as your portfolio grows, is that a single lender can offer volume discounts. By staying with one lender, you may pay less in interest and fees.

On the other hand, using multiple lenders allows you to borrow more money than a single lender would typically loan you. Additionally, using multiple lenders allow you to diversify some of your risks, rather than concentrate them with one entity.

Without a seasoned investment property accountant to guide you, you may be surprised by the tax consequences from your rental properties. Unless you are a certified accountant or financial expert, we recommend contracting a CPA or other tax professional to help you manage the income and tax consequences that may come from your rental properties.

Sometimes, having a good accountant can make a significant difference in an investment that is relatively more profitable and one that is less profitable (or even unprofitable). An accountant will help you learn about which types of properties to buy or which corporate structure you may consider forming in order to reduce tax payments.

Regardless of how it is marketed, a shared mortgage does not give you ownership of the property. It is a more expensive (and often uncertain) way to buy properties. Cross-collateralization or a cross-collateral mortgage, on the other hand, allows you to secure one or more mortgages using one or more properties.

The problem with cross-collateralization is that you give the bank greater control over your investments and expose yourself to unnecessary risk. Given that a successful investment strategy takes risks into account and uses various strategies to mitigate or minimize any potential risks, a cross-collateral or shared mortgage may not be optimal for your current investment situation.

Let the experts at Chicago Partners take care of the financial planning and tax management side of your business. We'll free up your valuable time, so you can get back to the important stuff! Visit our FAQ page to learn more about Chicago Partners, or contact us today to set up an initial consultation.