Investing in real property can be a career, or it can be a valuable sideline. Either way, it is not at all the same as buying a home for your family to live in. It’s a business. And if you don’t treat it that way you won’t make money. You could easily lose your investment, and more.
The purpose of any investment goal is to grow your capital. Avoiding these 10 real estate investor mistakes will keep your ROI trending in the right direction.
1. Expecting to get rich quick.
No realistic person goes into business believing they’ve just swallowed the financial magic bullet. You could make a very nice living from real estate investing, though, if you do it right. You may even get rich. But bear in mind that investing always carries risk.
Are you sure this is even the right career for you? Understand clearly what it means to be a real estate investor before you make any life-altering decisions. You’ll find plenty of information online and at the book store, and you can get some personal advice by connecting with your local chapter of the National Real Estate Investors Association.
2. “Planning” on the fly.
This is a poor practice for any business. You’re sure to miss out on opportunities because you’re not prepared to grab them in time, and you’re sure to run into problems that will cost you in time, money and headaches. The key to successful real estate investing is to determine your plan of action first, then adhere to it. Many of the mistakes listed below are the result of winging it instead of remaining true to your plan.
There’s a difference between an investor and a handyman. If your goal is to flip houses and you’re a contractor, that’s one thing. But if you’re trying to brighten your profit margin by fixing faucets, painting, etc. you’re spending your time unwisely.
Successful real estate investors build a team of relevant, reliable experts, so they can make decisions and complete projects faster, with better results. It’s no different than hiring top-notch employees and delegating work to them.
Who should be on your team? On the deal side, a real estate agent, attorney, accountant, appraiser, home inspector and lender. For fix-up and maintenance, a handyman, lawn care and home cleaning services, plumber, electrician, roofer, painter, carpenter, HVAC expert, etc.
4. Thinking with your emotions.
Shopping for a family home is a process of falling in love. When you’re investing, you don’t have to love the house, you have to make sure it matches your plan and fits your financial criteria. If it doesn’t, pass it up.
If you paid too much for the property, that’s probably due to one of the other mistakes listed here. Just say “no” when you reach your pre-set bidding limit.
6. “Saving time” by sidestepping due diligence.
Homework may be tedious, but it’s the only way to ensure you’re getting the deal you need. You must be a student of local market conditions and real estate trends as well as investigate in-depth details about your potential purchase and the surrounding area.
7. Underestimating the costs.
Make a list of every expense associated with purchasing, upgrading and/or maintaining the property you’re considering. Use your team of experts to ensure you’re not buying unseen problems and to accurately estimate repair/remodel costs. This is the only way to know if you’re paying too much or if you can actually make a profit renting the property.
Be very conservative. Include enough cash to carry the property while it’s on the resale market. And after you’ve run the numbers, double the expenses and run them again. If it still pencils out in your favor, that’s a good sign.
8. Doing one deal at a time.
You need several prospects in your pipeline. That way, if one falls through you’re still in business, with choices. When you only work projects one by one it’s all too easy to see yourself in an “all or nothing” situation. Multiple possibilities keeps your options open, so you can comfortably wait for the right one.
9. Getting stuck with a financial lemon.
Things can go wrong despite your efforts to do everything right. You need a back-up plan. If your goal is to sell the house but the market is too cool, how will you protect your investment until you can get a better price? You could rent the house instead, offer a lease with an option to buy, worst case, sell to an investor to recoup your costs.
10. Not considering financing and tax consequences.
Financing costs, pre-payment or utility and insurance cancellation penalties, capital gains can all decimate your profits, but some tax rules could be a boon. Once again, this is why you need a team of experts.