Real Estate Investment Mistakes
Investing in real estate has always been a great way to build wealth and it’s even been said that all true wealth begins here. With this trend becoming more common, the number of new investors has increased. As with any investment, there are many pitfalls that can cost large amounts of money if you’re not educated and prepared. Let’s take a look at a few common mistakes.
Mistake #1: Starting with the wrong mentality.
Many people approach the real estate market with a short term, get-rich-quick mentality and this can be dangerous. While there are fantastic opportunities to make money, there are also many people who lose money due to the wrong mindset.
Understanding your timeline is one of the first steps. The real estate market is subject to the same type of fluctuations as the stock market. If you buy real estate for the long term (for fifteen years or more), chances are that you will come out on top. If you buy an under-priced property and sell it in within a year, it’s also possible to do well. Many stock brokers time the stock market; likewise, good real estate investors can often intelligently time the sudden increase of a local market and make a profit. All of these strategies require due diligence, however, and there is never a guarantee.
There are bargain-priced properties in every market. You can use creative financing that will increase your cash flow. It’s possible to use little or no money of your own as a down payment. There are many ways to make money in real estate but they all require the right attitude as well as thorough planning, just like any other investment. Avoid this mistake by taking the time to educate yourself rather than following bad advice.
Mistake #2: Investing blindly.
Many poor investors blindly buy real estate based on bad advice with little or no education. Real estate is one of the few investment fields in which risk correlates so directly with knowledge. The learning curve in real estate is steep, but the investor who spends time on education stands to make high profits, with less risk than in other forms of investing.
Finding the money for a deal is easy if you can find a good deal. Money is like any other commodity; you can always find it for the right price (return on investment in this case). You won’t know what a good deal is, however, until you’ve invested in your education! The more you know about investing strategies, financing, acquisition, negotiating and your local marketplace, the less risky your investments will be. A bargain real estate purchase will almost always be a safe investment so take the time to learn how to identify one when you see it!
Mistake #3: Negative cash flow and lack of cash reserves.
Ask any successful business owner what their two favorite words are and you’ll most likely hear cash flow. Property that eats cash every month will drain your capital. If you have positive cash flow on each new investment you can continue to purchase more, but you’ll run out of money quickly if each of your purchases drains cash. Find the positive cash flow opportunities and put the extra toward the mortgage or save it in reserves.
Cash reserves are also essential to long term success in any business. Buying real estate with nothing down is easy; managing periods of negative cash flow, repairs, and other expenses is often more difficult. Lack of cash reserves puts unnecessary pressure on you to do substandard repairs, accept less than qualified tenants, and give into tenants’ demands for fear of vacancy. When you have sufficient cash reserves, you’re able to act like a responsible business owner.
Approach real estate like a business and plan for good and bad times by looking for positive cash flow situations and maintaining cash reserves. Proper planning will allow you to avoid this common mistake.
Mistake #4: Not treating real estate like a business.
People are attracted to real estate because of the opportunities for large profits. Don’t hold your breath, however, because you probably won’t get rich quickly. It usually takes planning, effort and time to make large profits in real estate.
While the price you pay for a home is a significant factor in your return, it’s not the only aspect. Many investors mistakenly think that their work is done once they purchase a discounted property. Much like a business, an investment in real estate will require continuing attention in order for you to realize its maximize potential. Rigorous screening of tenants, investment in improvements, accounting and regular maintenance are just a few things to be considered. This should not be approached as a “hands off” business if you’re serious about making the best of your investment. Treat investing in real estate as your small business and you’ll go far!
As you can see, there are many mistakes which create problems for new investors. Spend the time doing your homework and talking with professionals to avoid these and many other pitfalls associated with investing in real estate.
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*Please bear in mind that the information supplied in our articles is not engaged in rendering legal, financial, or any other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.
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