Investing in the real estate business is not that simple. Otherwise, everyone in the real estate business would be a millionaire. There are lots of mistakes that first-time real estate investors make that you should be aware of. Many of these are avoidable when you apply sound knowledge and common sense. Here is a list of common real estate investment mistakes that many first-timers make and how to avoid them.
Lack of research
Before many people buy a television or a car, they ask a lot of questions, compare many models, and try to determine if their purchase is worth the money. The effort that goes into buying a home should even be greater. There are also research considerations for different types of investors, whether you are a land developer, flipper, personal homeowner, or a landlord. Not only must you ask a lot of questions about the property, but you must also ask about the neighborhood that the property is located. Here are some questions to ask:
- Is the property built near a commercial site, or are there prospects for long-term construction in the vicinity?
- What is the motivation for selling?
- What is new in the property and what must be replaced?
- What did the owner pay for it and when?
- Is the property placed in a flood zone or a problematic area such as are prone to termite or radon problems?
Knowing this information will prepare you for any eventualities and help you know what to expect in future.
Doing everything alone
Many investors think they know a lot and that they can close a real estate deal on their own. You may have completed several deals on your own in the past, but remember, things may not go very well in a down market. And if this happens, there is no one you can turn to for help to fix a real estate deal that went sour. Thus, you should make friends with experts and tap every resource that will help you make the right purchase. Your list of experts should at least contain an insurance representative, an excellent attorney, a competent home inspector, a savvy real estate agent, and a handyman. These people should be capable enough to inform you of any flaws in the home or neighborhood. And the attorney should be able to alert you in the case of defects in the title or easements that may come back to haunt you in future.
In the real estate business, location is key since it determines the property prices, market, types of properties, the tenants’ pool, the rent, availability of other rental properties, laws, and regulations, etc. Although it may be easier for you as a first-time investor to go to your local market because of the knowledge you already have, don’t exclude the option of an out-of-state investment if your local market is not suitable for investments at the moment. So, study your local market thoroughly to determine if it is amiable to buy and manage an investment there. If it isn’t, consider markets beyond a 25-mile radius where it is more profitable.
Heart over head
When buying a home, 90 percent of your purchasing decisions are based on your emotions, and only 10 percent relies on logic. Since this is your home where you will raise your family, this is understandable. However, when it comes to investing, making your heart determine your purchasing decision is a mistake to avoid at all costs. If you let your sentiments cloud your judgment, you are more likely to over-capitalize on your purchase instead of negotiating for the best price and outcome for your investment plans. Thus, always buy an investment property based on research analytics. Ask yourself whether it is the best location that will attract high-quality tenants and whether it will provide the returns and gains you require.
Buying too big
As a real estate investor, you will usually learn by doing. So, as a first-time real estate investor, don’t jump in with a large investment property. Purchasing a large-income property such as multi-family home costs more and is more expensive to manage. Thus, experts advise you to start with smaller, less luxurious properties such as a single-family home or apartment which you can afford to purchase without going bankrupt and which will teach you the skills you need for managing a property and being a landlord. After mastering these skills, you can raise your game by purchasing a new property every two to three years.
Underestimating the costs
As a first-time real estate investor, opt for positive cash flow rental properties. The factors that determine cash flow are rental income and costs. Thus, it is crucial to get the most accurate estimates of the expenses. As a new investor, you may undervalue the costs involved in finding the right tenant or forget about the repair costs, and these will lower your profits. The best solution is to get realistic, research-based estimates for purchasing, running, and managing your investment property.
Choosing bad contractors
It is an expensive mistake to use multiple contractors to do your job. Flipping houses is quickly becoming a popular trend in real estate investing. Thus, it is vital to find contractors who will do a professional job, clean up the site, and finish the job on time. The means of finding the right contractor for your rental or fix-flip project will determine your success.
Choosing wrong partners
Real estate investment partnerships can prove to be very beneficial for you as a new investor especially if you have limited knowledge or financial resources. However, they may also be deadly traps. Thus, as a new investor, don’t be ready to enter into any partnership just for the sake of having someone to share the risks with or buying a bigger property. Instead, choose your partners carefully among proven experts and professionals, and they must be people you can trust.
Real estate investing is a profitable business, but is not as simple as it looks. There are many things to learn, and you will need to work with many experts and professionals with a good reputation to gain prowess and attain your financial goals. So, tread carefully and follow this expert advice and you will be on your way to the top.