Beyond examining the core filters, it is critical to understand common traps in the market. These simple mistakes can mean the difference between a great investor and an average one. Why not learn from others' mistakes?
1. Getting caught in the developer hype.
Remember, developers spend thousands of dollars on marketing and promoting the launch of a new product. So, it is incredibly easy to get lost in the vortex of developer greed. Take a step back and think about your next purchase. Don’t be fooled into overpaying for a product because you are getting the ‘friends and family’ discount.
2. Believing you can sell it before it registers (on assignment).
If you are not in a position where you can obtain a mortgage when the project registers, stay away from buying new construction. The market is being flooded with condo assignments and many are selling below their original purchase price. This trend is likely to continue as more projects near completion and the supply increases.
3. Buying without motive / not having a plan.
Are you a passive investor? Will you manage the property yourself? Do you know about capital gains taxes? Is residential real estate the best approach? Before investing in real estate assets, it is important to hash out a very specific plan; otherwise, you run the risk of losing your capital or worse.
4. Capital appreciation vs. income approach.
Everyone can tolerate risk differently, but what is your approach? This goes back to the last point about planning. Real estate is very similar to investing in the equity market. Every investment opportunity is different, and knowing your motives will help you to place your capital in the most appropriate way.
5. Over upgrading
Over upgrading is a very common mistake made by amateurs, and one that can be costly. Developers have tried to spearhead this problem by providing palettes , but owners still make this mistake. Over upgrading to your tastes may not be reflected in the market value of the property and likely, do not appeal to the masses. By default, this decreases your buyer pool and demand for the product.
Costly mistakes investors make
Next, we will take a look at some issues that are often overlooked by investors. Failing to consider these issues could be disastrous.
1. Not understanding the tax implications.
The whole point of investing is to make money, correct? Before you jump into any investment, you must understand the tax implications of buying, owning and selling that investment. Using an accountant that specializes in real estate will help you understand terms such as Recapture of Capital Cost Allowance.
2. Assuming that it will appreciate.
Over the past three years, Canada has seen some explosive growth, especially in the major cities. But appreciation is never guaranteed. Aggressive growth investors looking to buy and sell under three years of ownership could run into problems if they don’t consider this fact.
3. Not double checking surrounding real estate lots.
There is nothing worse than buying real estate only to find out that your view and building will be completely obstructed by a new building. Any sign of cranes or even a zoning amendment application can be detrimental to the value of the property. Even if you are surrounded by protected heritage properties, do some research with the city.
4. Not running the numbers.
Real estate is a game of numbers. The upside is that these numbers make real estate investments predictable and controllable. Running the numbers before taking the plunge puts you in control of the situation and ensures that you maximize your capital placement.
5. Ignoring the market signs and signals.
Ignoring the market signs and signals is an amateur move that can be devastating to your bottom line. Ignore the media, read industry reports and ask the right questions.
Danger! 5 warning signs to beware of
Even after an investment has gone through copious amounts of due diligence, it is still very possible that the project is going to be a dud. Here are some clear warning signs that you should consider: