Buying Your First Income Property? 15 Mistakes to Avoid

There are different ways to make money as a real estate investor, and buying income properties is one avenue worth exploring. But if you're new to the process, it's important to know what pitfalls to avoid. Here are a bunch to steer clear of.

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Home prices are up across the board these days, so you might struggle to find a property that fits into your price range. But try to resist the urge to stretch your budget. If you overspend on an income property, you'll have less money left over for other investments.

Borrowing rates have risen sharply this year, so it's important to compare your choices when seeking out a home loan. Be sure to ask a number of mortgage lenders for quotes before accepting an offer.

ALSO READ: Best Mortgage Lenders of May 2022

Since mortgage rates are up, you may be tempted to purchase an income property with cash. Doing so might save you money on mortgage interest, but it could also mean tying up capital in an illiquid investment. The result? You might lose out on other lucrative opportunities, from house flips to real estate investment trusts (REITs).

ALSO READ: 3 Reasons to Load Your Portfolio With REITs

Property taxes can be a huge expense. Before you purchase an income property, check out not just its current property tax bill but also its tax history. That might clue you in on how likely your taxes are to rise over time.

Some cities or neighborhoods prohibit short-term rentals, while others have their own rules that property owners have to follow. Before you buy an income property, do your research to make sure your plans to rent out that space are viable.

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If you're in the market for an income property, there's really nothing to lose by enlisting the help of a buyer's agent. You won't pay a fee, but you might discover listings when they first hit -- and beat competing buyers with your offer.

ALSO READ: 4 Questions to Ask a Real Estate Agent Before Hiring One

When you own a property, you're required to maintain it. And that could get expensive. As you run the numbers to come up with a budget for your first income property, make sure to take upkeep into account.

The market in which you buy your income property could dictate how well you fare as an investor. It's important to research your local market before moving forward. You'll want to make sure the rental market isn't too oversaturated, for example, before making an offer on a home.

ALSO READ: 7 Real Estate Trends to Megawatch Over the Next Decade and How to Profit From Them

It's important to make sure your income property is adequately insured. You may end up needing flood insurance or coverage for earthquakes, depending on your home's location, so do that research ahead of time.

ALSO READ: Homeowners Insurance Overview

If you purchase a home in disarray, you might snag a lower purchase price than you'd pay for a home in better shape. But be careful: If you buy an income property that needs a lot of work, it could be months until that property is in decent enough condition to welcome tenants -- and that means going months without collecting any rental income.

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Managing an income property can be time-consuming. If you have a separate full-time job, it pays to consider hiring a property manager to do some of that work for you, whether dealing with tenant issues or overseeing repairs.

ALSO READ: Real Estate Investing: Is Hiring a Property Manager a Huge Waste of Money?

Buying an income property can be a smart move. But it's important to think your strategy through. Do you want to hold that property for decades? Get out in a few years? Answering those questions could help you determine how much to spend on that home.

Renting to the wrong tenants could turn an otherwise lucrative venture into a costly disaster. Before you sign a lease, you should, at the very least, run a credit check on prospective tenants and ask for references from former landlords.

ALSO READ: 5 Most Common Issues Landlords Run Into During Tenant Screenings

You might buy an income property in an area where rentals are high in demand. But things could change if home prices start to drop and more people are able to buy places of their own. Make sure you can afford to have that property sit tenant-free for a period of time before diving in.

Owning income properties has tax implications. You'll have to report and pay taxes on the income you collect, but you'll also have a host of expenses you can write off as a landlord. It's important to hire an accountant who can talk you through your options and help ensure you're making wise financial decisions.

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Owning an income property could make you wealthy over time. Just try to avoid these potentially costly mistakes as you purchase your first one.

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