Whether you’ve noticed or not, it’s likely that you come into contact with “real estate investing” every day. Watch one of the many shows on house flipping on HGTV? Drive past those yellow signs on stop lights that say “We pay cash for houses?” Talk to your neighbor, who owns the duplex down the street and rents one side to tenants. It’s all real estate investing.
But what really goes into it? Have you ever thought about exploring your options as a real estate investor? It can be a profitable and a worthwhile financial venture if done wisely. It can help you earn a nice return on your investment and build cash flow. That being said, there are a few mistakes that derail many potential investors. Read on to learn how to avoid them!
Mistake #1: Not Doing Your Research
From start to finish, doing your research—and acknowledging what you don’t know—is key to the process of real estate investing. First, take time to learn the basics. There are plenty of resources online. No need to participate in any pyramid schemes or spend thousands of dollars on seminar, books, or DVDs.
In addition to investment basics, be sure to ALWAYS do your due diligence on the properties you are considering. This includes asking the seller questions about the home, such as: what’s new in the house and what needs to be replaced (appliances, furnace, air conditioning, etc.)? Is the home in a flood zone? Does it have any permit issues? What is the neighborhood like?
On top of asking questions, you should be doing your own research on the home and the neighborhood: what have other similar homes sold for? Are many homes for sale currently in the neighborhood? How many times has this particular home sold in the past few years?
Coming into a possible transaction armed with knowledge is the best first step you can take.
Mistake #2: Underestimating Expenses
Purchasing the property is only the beginning. When you become the owner, you are responsible for any one-time repair expenses that come up during your ownership, any remodeling expenses (that could uncover deeper issues requiring attention), and for any ongoing expenses beyond the mortgage payment, like mowing the lawn, keeping appliances running, any homeowner’s association fees, and property taxes. Be sure to factor all of these into your potential costs in order to get the best idea of whether or not this particular property will be a good investment.
On top of the ongoing and more predictable expenses, if you are purchasing a property to flip, build in extra cost associated with remodeling. Almost all remodel projects hit bumps in the road that result in higher costs. Many times these come in the form of unknown or obscure factors like mold tucked behind walls, hidden deterioration of an older structure, unexpected natural disasters, or changes in the housing market when you’re looking to resell.
Collect and utilize as much data about the property as you can. Build in expenses for as many contingencies as you think are appropriate. Then, be sure the numbers still work for you and the property has potential to earn you a great return before buying.
Mistake #3: Falling into a Finance Trap
The number one finance trap of real estate investing is believing you can get rich overnight. Real estate investment takes a large commitment of money, resources, and time. Be patient. You can join the millions of investors who generate sizable incomes by investing in real estate if you do your homework and are prudent with your decisions.
Another finance trap is the failure to effectively plan your financial goals. After analyzing your potential property and determining your projections, fit the property into your long-term investment goals. Will this project take a significant sum of cash, but little time to complete, resulting in a quick flip? Is that best for your portfolio right now, or will it unbalance your cash flow and restrict your ability to purchase other, more long-term but more stable projects? Looking at each investment with a critical eye against your overall portfolio and goals will help you stay on your path toward success.
Additionally, make sure you are familiar with your financing options. Can you handle an adjustable mortgage rate if the rates rise? Or does it make more sense to go the conventional loan route for a particular project, even though it may seem to cost more upfront? Know what makes the most sense for you financially at any given moment.
Mistake #4: Decision Extremes: Making Rash Decisions AND Taking Too Long to Make a Decision
Let’s look at both of these extremes separately. First, don’t make any rash decisions, like falling in love with the first property you look at and jumping on a contract. Echoing the above advice, always make sure you are armed with research and knowledge. If you realize you don’t have enough information to make a sound decision, don’t make the decision. Step back until you feel you do have adequate information.
Second, on the opposite end of the spectrum, don’t wait too long to make a decision if you have evaluated it and seems like a positive one. If you come across a property with potential at a good price, don’t be afraid to pull the trigger. Many prospective investors never get started because they are always hoping for a better deal or passing up opportunities to see if other properties in that neighborhood become available. They end up not investing—they just end up waiting.
While real estate investing can be lucrative, it is certainly not a “get rich quick” scheme, and it will require your time, your resources, and your money. Make sure that you know what you are getting into by doing your research, using sound and realistic estimates when analyzing properties, and being familiar with your finance options.