What It Is:

Why it's important:

Grid often sees the same combination of missteps in early investors: Paying Too Much and Misjudging Cash Flow. The Grid Team would like to add “Falling In Love With a Property”! We frequently talk to investors who have painted themselves into the following corner: They’ve searched for and selected a property for emotional reasons, using the filter of “Would I Live Here?” instead of “Will This Property Cash Flow?”. As a result, they rationalize the purchase price to themselves, without doing the proper homework to determine if it cash flows or not. They purchase the property, then come to find that because of their love for the property, they overpaid, and as a result, have a high mortgage that is too close to market rent to allow the property to reliably cover its costs. In some cases, they may actually be losing money each month – writing a check to keep things balanced. Because of their love for the property, they also often over-renovate (making more improvements to the property than will be reflected in increased rent), which compounds the issue…especially if they used a construction loan. Overall, they end up with a property that they’ve sunk too much money into that does not cash flow…preventing them from having the cash to do additional projects in the near future. These mistakes can definitely be avoided by first having a plan, testing potential properties against that plan (including calculating cash flow/appreciation), not choosing an investment property for purely emotional reasons, renovating only to the extent that it will fetch additional rent, and then putting money aside each month to fund future repairs. With these tips in mind, you can avoid the most common pitfalls when purchasing your first or next investment property and hit the ground running!