Investing in real estate can be an appealing idea as either a career or a side job. There is a right way (and a wrong way) to go about this. Here are 10 of the top mistakes and tips to avoid them.
1. Planning as You Go
Real estate should be seen as an investment strategy not a transaction. First, you need to have a plan. Then, you find the house that fits with that plan. Don’t find the strategy after you find the home.
2. Thinking You’ll “Get Rich Quick”
It’s a good long term investment but it is not easy. You have to be smart, you have to be hard-working and you have to understand your risk tolerance.
3. Playing Lone Ranger
A key to success is building the right team of professionals. At the very least, you need a real estate agent, an appraiser, a home inspector, a closing attorney and a lender. For the remodeling phase, your team should include a plumber, electrician, a roofer, a painter, an HVAC contractor, a flooring expert, a landscaper, a cleaning service and a handyman.
4. Paying Too Much
The biggest reason that investors don’t make money: they pay too much for the property.
5. Skipping Homework
Educate yourself before you put your family’s financial security on the line. Read books, read articles, and look for a local chapter of the National Real Estate Investors Association. Or you can talk to local investors who own a lot of properties to see if it sounds like something you can do.
6. Ducking Due Diligence
Investors often have to move quickly but that doesn’t mean they aren’t doing their research. A lot of newbies don’t do their due diligence about the deal, the costs, the market conditions, or the mortgage rates. They end up putting too much money into the project because the house ends up needing extensive repairs or not selling.
7. Misjudging Cash Flow
If your strategy is to buy, hold and rent out properties, you need to have a cash flow for maintenance. A property manager will usually want to manage a larger complex with fees of 7 – 10% of the monthly rent. The owner will also have to cover the costs (mortgage, insurance, taxes) until the units are rented.
8. Lowering the Volume
You need a steady pipeline of prospective deals. If you are doing one deal at a time, you have transactions, you’re not running a business.
9. Painting Yourself into a Corner
Always have two, if not three, ways to get out of a deal. Many people buy a property and get stuck with it because they have only one exit strategy – selling or renting it out. What if it doesn’t sell or the rental market stalls?
10. Miscalculating Estimates
After getting your estimates, double the amount of time and money. If you will still make a profit and might be able to rent it out, it’s a good deal!