10 Mistakes many Real Estate investors make when starting off
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Although this post is aimed at residential investors, it could apply to all real estate investor classes.
Once the real estate market starts to recover, investing in property becomes an appealing option — either as a career or a great side job. Like any other endeavour, though, there’s a right and wrong way to go about it.
Bankrate spoke with established, full-time real estate investors and professionals, such as bankers, to identify the traps into which real estate investors most often fall.
1. Planning as you go
Andy Heller, an Atlanta-based investor and co-author of “Buy Even Lower: The Regular People’s Guide to Real Estate Riches,” says lack of a plan is the biggest mistake he sees new investors make. They buy a house because they think they got a good deal and then figure out what to do with it. That’s working backwards, Heller says. “First, you find the plan,” he says. “Then you find the house to fit the plan. Pick your investment model, and then go find a property to match that. Don’t find the strategy after you find the home.”
The problem is that most people look at real estate as a transaction instead of an investment strategy, says Doug Crowe, a Chicago-based real estate investor and speaker. “People fall in love with a property,” says Crowe, managing director of Springboard Academy, the nation’s only real estate academy for investors. “I say, ‘Who cares about the property?’ I fall in love with a motivated seller.”
He says the number is the number, and you don’t go above that. The best way to solve the problem is to have lots of activity and make offers on multiple properties. Then you don’t care which one you get — as long as the numbers work out in your favour.
2. Thinking you’ll “get rich quick.”
That wrong-headed thinking is fueled by “these self-appointed gurus who have infomercials and make it sound so easy to get rich in real estate,” says Eric Tyson, co-author of “Real Estate Investing for Dummies.” It’s not easy. It’s an excellent long-term investment, but so is putting your money in a mutual fund, which is much easier. “These gurus don’t talk about all that hard work. You have to be smart, you have to be willing to work, and you have to understand your risk tolerance.”
3. Playing Lone Ranger
The key to success is building the right team of professionals. At the very least, you need good relationships 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 prospective buyers.
In the remodelling and maintenance segment of the business, the team includes a plumber, an electrician, a roofer, a painter, a heating and air conditioning or 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 your time fixing leaky faucets and installing ceiling fans.
4. Paying too much
Heller says the most significant reason investors don’t make money is simple: They pay too much for the properties. “The profit is locked in immediately once the investor buys the property,” he says. “Due to mistakes in the analysis, the investor pays too much and is surprised later when he doesn’t make any money.
5. Skipping your homework
You wouldn’t think you can perform open-heart surgery without years of education and training. Yet, many wannabe real estate investors don’t think twice about taking their financial lives in their hands without even cracking a book. Educate yourself before you put your family’s financial security on the line. Read articles, check out books from the library and look for a local chapter of the National Real Estate Investors Association. Speakers at monthly meetings cover everything from buying foreclosures to screening tenants.
If you can’t find a local chapter, find out who owns many rental properties in the area, call him up and offer to pay for an hour or two of his time to find out whether this is a good career for you.
6. Ducking due diligence
Investors often have to move very quickly on their deals. That doesn’t mean they sign a contract and write a check without plenty of research, though. That’s where many newbies trip up, says Houston-based real estate agent Laolu Davies-Yemitan. They don’t do their due diligence about the deal, the costs the market conditions, or the current mortgage rates, and they wind up draining their personal savings because the house needs extensive repairs or they can’t sell it. “Sometimes, new investors buy property based on the idea that the property is going to appreciate,” he says. “Usually, they don’t have any information to substantiate that.”
7. Misjudging cash flow
If your strategy is to buy, hold and rent out properties, you need sufficient cash flow to cover maintenance. “People think they can get a property manager,” Tyson says. But many have never interviewed a property manager and have little idea how they work.
Most managers, for example, are reluctant to take on one single-family home or a duplex, he says, preferring larger complexes, and fees of 7 per cent to 10 per cent of the monthly rent are common. “It’s a huge expense,” Tyson says. “I can put my money in a mutual fund, and it costs a half-percent a year.”
Davies-Yemitan agrees. It’s not uncommon for a property to sit on the Houston market for 90 to 120 days before it’s leased, he says. Meanwhile, he says the owner has to pay the mortgage, taxes, insurance, advertising costs, and homeowner or condo association dues. An asset can quickly become a liability if the owner hasn’t budgeted for it.
8. Lowering the volume
If you’re working on one deal at a time, Crowe says, you’re doing transactions, not running a business. You need a steady pipeline of prospective deals; sufficient volume will weed out the marginal deals and let the good ones rise to the top.
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