Real estate investing is an exciting yet hard endeavor whether you pursue it as a career or investment to build wealth. Investing in real estate is continuously considered as one of the best forms of investment and preferred over bonds or shares, and for good reasons. Although investments, such as bonds, are seen as less risky compared to real estate, the opportunity for the return on your real estate investment will make up for it.
There has been a tremendous amount of investment strategies and the demand for it continues, and that is simply because investors have been able to create true wealth with real estate. It is definitely achieveable, however, proper planning and calculated steps will be essential to help you set yourself up and avoid serious setbacks later for yourself or your clients.
It is said, “Prevention is better than cure” and real estate investing is no different. Avoiding mistakes is necessary for the greater good of your investment portfolio. We have narrowed it down to the top 7 most common investment mistakes investors make, to help you stay on track with your investment goals and help you produce the highest returns with the least amount of stress.
1. Lack of Prior Planning
Planning is key to real estate investment success. The worst mistake you would make is buying a property just because it seemed like a good deal to you and then thinking what to do about it, later. Your vision should be long term including the benefits, the process, and the actions needed to help you achieve your goals.
To generate a successful outcome, there are 2 things to keep in mind:
- Setting SMART investment goals
- Having an investment strategy
Looking for properties comes after that. Most investors think of real estate as a transaction instead of an investment strategy. Falling in love with the property and making a purchase rashly without calculating the numbers would turn into one of the most expensive mistakes you will ever make. Visit a lot of properties but choose the one whose numbers are in your favor. For a long term vision, you need to do your diligence on price, location, renovation expenses, Cap Rate, ROI, ongoing expenses and exit strategy for every property you consider buying for you or a client.
2- Getting Rich Quick Mindset
There are no shortcuts to getting rich and although real estate can help you build wealth, time will play an important factor. Well, making hasty decisions based on your gut feelings may cost you money. On the other hand, making calculated decisions and being patient will help you make money. Noticed that fine line right there? You ought to be cautious about that one. There is a common misconception that luck has a part to play in making you rich by investing.
But, this is not true.
You need to be smart when investing in real estate, work hard on due diligence. Real estate is not a get rich scheme so you need to have patience as an investor. Generally, how long does it take to see some sort of income or gain?
This again will be based on the exit strategy and market condition. Your strategy can be to renovate and flip the home and put it back on the market or to have it as a long term investment and rent out the property. In this case, you need to calculate your “Net Operating Income or NOI” and see what your monthly “Cash Flow” would be and what the potential is for the home to appreciate in value.
Appreciation may be worth more than the cash flow an investor receives on a monthly basis.
3- Being a Lone Hand
Real estate investors have a whole lot of tasks they need to take care of. Some of them include knowing the area, knowing the competition, carrying out market analysis, building a network, managing properties, and the list go on and on. You cannot expect yourself to take care of all these tasks alone and a worthwhile option to consider is having a team working alongside you.
A good team that works for the mutual interest of your business will help it grow. This will also help you finish your day to day tasks more conveniently instead of you doing all the labour work alone and pulling the tasks off till next day.
Investing in a good team is an investment in your business.
Depending on the degree of your investment strategy, there are some essential team members you may want to have. Like, have contacts with a property manager if the agent or a landlord is not managing the property. Also, you will need more team effort if you are renovating. You may need contractors, handyman etc. So, it all depends on what you are doing and trying to achieve and it is always a good idea to have a scope of work.
4- Not Doing Due Diligence
No doubt, real estate is a fast-paced industry and sometimes it requires you to move quickly for a deal. But, due diligence is important and doing your homework and research is more than just necessary. Market conditions, property zoning, area knowledge, property issues, and legal agreements are all the things that you need to know and consider before closing a deal.
Another aspect of due diligence is your personal training and knowledge. This will not only help you become an expert but also help you in building a strong investment portfolio over time. Better decisions in less time is another benefit you get. Always check with your local law and jurisdictions to shed more light on areas that you will need more info for. This includes renting out the property, making changes to the interior/ exterior etc.
5- Overpaying for Properties
Another major mistake is getting fooled by the property owners. This only happens when you skip on the analysis and go about buying a property without finding it’s worth. Every purchase you make should justify the price of it. Finding the right property, pricing it right, and negotiating the best deal will always result in favorable outcomes. Take care of your investment decision in present to gain desired return in coming tomorrows. Overpaying is tied to your due diligence and research. Carrying out a thorough research will help you do a proper analysis to choose your dream investment in right price.
6- Thinking Small
They say that you get what you think you’ll get. You will achieve small if you will think small. But, increasing your sales volume is important.
If you only think of getting one deal then you are not running a business but a transaction.
You need a business plan with the proper milestones which clearly defines what you want to achieve with your business and how you will achieve it. Your goals can be the amount of money you want to make or the number of properties you want to own or the type of properties you want to own. It all depends on what you want to achieve.
7- Single Exit Strategy
Many individuals purchase a property and stall out with it since they just have one exit strategy. The most common approach is to either sell it for profit or lease it out. Imagine a scenario where it doesn’t sell or the rental market slows down.
You need to be prepared for that.
This is why having multiple exit strategies is important based on different possible scenarios.
Scenarios that you could consider are rehabbing a property for resale, offering a lease-purchase, or hold and sell. Ideally, despite everything, you’ll make a benefit, yet in any event, you’ll cut the misfortunes you’re taking each month in carrying costs.
You just need to know what will work best for you because if you are not making a profit, you at least have to save yourself from the loss.
THE BOTTOM LINE
The bottom line is proper planning and thoughtful analysis based on due diligence before closing a deal is important to reduce any challenges that most real estate investors face. Educating yourself about these mistakes is very important and avoiding them will save you from making regretful investment decisions in the future.