The Top 10 Most Lethal Real Estate Investment Mistakes
Here you are, years after the housing crisis. The markets are surging higher than ever before and there’s never been a better time to invest in real estate. But it’s still just as easy to make a mistake now as it was ten years ago.
Most of my clients invest in real estate. Heck, I even invest in real estate! I’ve seen it all as far as mistakes go. In order to help my clients and the general public out I decided to make this list. I hope you enjoy it!
The 10 Most Lethal Investor Mistakes:
- Expecting easy money.
- Working alone.
- Planning as you go.
- Skipping homework.
- Being inconsiderate.
- Misjudging cash flow.
- Not building your business.
- Limiting your options.
- Miscalculating your estimates.
Most real estate investors don’t make as much money as they can because they overpay for properties. The amount of profit you can make is pre-determined by how much you pay to acquire a property.
2. Expecting easy money.
It’s not easy to get rich in real estate, and it isn’t easy to make a profit. Real estate is a great long term investment. But so is putting your money in a mutual fund, which is a lot easier, and has far less risk.
Don’t believe everything you see in an infomercial. In order to profit in real estate you have to be smart. You have to be willing to work. You have to take risk knowingly.
Even Walker Texas Ranger didn’t work alone, and he could’ve easily been a lone ranger.
The key to success in real estate and in many other fields is building a team of people you can count on. You need connections with at least one real estate agent, an appraiser, a home inspector, a closing attorney and a lender, both for your own deals and to assist with financing for prospective buyers.
Also, in the remodeling and maintenance side of real estate, your ideal connections will include a plumber, an electrician, a roofer, a painter, an HVAC, contractor, a flooring installer, a lawn maintenance service, a cleaning service, and an all-around handyman.
You can’t build a business as an investor if you’re spending all day watching DIY plumbing videos and fixing lights.
4. Planning as you go.
Lack of a plan is the biggest mistake new investors make. You buy a house because you think you got a good deal and then try to figure out what to do with it. That’s doing things backwards!
First you should make a plan and then find a property that fits your plan. Don’t form a plan after you find the home!
5. Not doing your homework.
Many wannabe real estate investors don’t think twice about taking their financial lives in their hands without even cracking a book. Sure, you can go invest in anything you want with your money.
But will you make money if you don’t know the ins and outs? Probably not.
Educate yourself before you put your money on the line. Read articles (good articles, mind you), read real estate investment books and try joining some sort of local real estate organization.
If all else fails, research who owns a lot of property in your area. Study everything they do or have been doing. You might even try working with them or paying them for some advice.
6. Miscalculating your estimates.
This mistake is common mostly for all you rehabbers out there. Rehabbers buy homes that need fixing, fix them up, and sell them.
After you’ve done all your research and come to a reasonable cost of how much money it’ll cost you to make a property profitable, double it. If you can still make a profit, then it’s a good deal.
7. Misjudging cash flow.
If your strategy is to buy, hold, and rent out properties, you need sufficient cash flow to cover maintenance. That’s where a property manager comes in. Property managers prefer to manage large complexes, not just 1 or 2 homes. And on top of that they aren’t cheap.
Most managers charge fees of 7-10% of the monthly rent. That can seriously cut in to your bottom line. But just think, you could’ve invested your money in a mutual fund and only had to pay someone 0.50%.
It’s not uncommon for a property to sit on the housing market for 90 to 120 days before it’s leased. While it’s sitting there, unoccupied and decaying, you have to pay the mortgage, taxes, insurance, and more.
If you don’t have the money to pay for those things, you’re screwed.
8. Not building your business.
If you’re working on one deal at a time, you’re doing transactions, not building a business. You need a steady pipeline of prospective deals. The more deals you have, the more profit you can make.
Best of all, you’ll be able to turn down crappy deals and focus on properties that will make you the most money or be the easiest to work with.
9. Limiting your options.
Don’t buy a property with one exit strategy in mind. Always have two or three ways to get out of any deal. For example, if plan A is to rehab the house, put it on the market and resell it, then plan B could be to offer a lease-purchase to a buyer. Plan C could be to rent the house out.
Finally for the dreaded plan D (your “option of last resort”) there is the wholesale option, which would involve selling your property at a below market value. You might still be able to make a profit this way. But at least you’ll cut your losses sooner rather than later.
10. Being inconsiderate.
No, I’m not talking about relationship problems here.
Most real estate investors have to move quickly on deals. Yet that doesn’t mean they sign a contract and write a check without doing plenty of research. That’s where a lot of new real estate investors crash and burn.
If you don’t consider everything there is to consider about a deal, such as the costs or the market conditions, you’ll most likely (we’re talking nearly 99% of the time) lose your money.
That’s it for our list of deadly real estate mistakes. Did we miss something? Did you learn something new? Sound off in the comments below, and as always, we’re here to answer any questions you may have.