Real estate investing can be quite lucrative, but it’s not always easy. It’s a myth that all real estate investors are wildly successful. Many new real estate investors end up failing within 18 months, and those who do succeed have experienced plenty of failures themselves. The primary reason that new investors end up failing so fast is that they simply aren’t prepared.
There are many things that first-time real estate investors don’t know they’re doing wrong, and these mistakes can sink their efforts before they even get started. I’ve put together a guide to help you avoid some of the common mistakes made by new real estate investors.
Mistakes During The Initial Stages
When you think about real estate investors’ mistakes, odds are you think about the investment itself. However, some of the most common mistakes come in the initial stages of the investment process before the investor even spends a dime. The two significant mistakes that first-timers often make during these initial stages are first searching for a real estate opportunity without a plan, and then neglecting to do their research.
1. Neglecting To Put Together A Plan
The real estate industry is very competitive. If you’re going to invest, you must plan out your next steps in advance to avoid wasting time and resources. Your plan should include:
- Your real estate investment goals: What are you looking to get out of this real estate opportunity? Are you looking to make large sums of money on short-term investments, or are you looking for long-term passive income from your investments? Set a time frame for both your short-term and long-term financial goals so that you can keep track of and measure your success.
- Your real estate exit strategy: Will you be selling your real estate investment, or will you keep it for the long term? If you’re investing in fix-and-flip properties, how long do you want to hold on to them for? If you’re investing in rental properties, do you plan to hold on to them forever? What will you do if you need to cash out quickly and suddenly?
2. Not Doing Your Research
Buying real estate is neither cheap nor straightforward. Before you sign on the dotted line, explore every aspect of the deal so that you know what you’re getting into. As a first-time investor, do as much research as possible before you even begin seeking investment opportunities. For example, delve deeply into each of these areas:
- The Local Real Estate Market: It will be impossible to identify good deals if you don’t understand the local real estate market. Determine whether the local market is in a seller’s or a buyer’s market to gauge what kind of demand there is among buyers. Look at the different properties that were sold in the area in the past few months to figure out what type of value they’re getting. If you’re interested in rental properties, look at the rental costs in the area as well as the number of vacant rental properties available (and how long they’ve been vacant).
- Local Rules And Regulations: It’s essential to know how properties are taxed, the rules for selling and buying property, and whether there are any zoning restrictions. There may also be rules and regulations in place governing what renovations you can make to a property. The last thing you want to do is buy a fix-and-flip property only to find that you’re severely restricted with the type of remodeling work you can do.
- The Numbers: Always crunch the numbers when you find an investment property that piques your interest. Determine what kind of revenue you can expect and what the expenses will likely be (from the purchase and closing costs to the renovation costs and more). Calculate all potential profits and losses to determine whether a property is worth investing in or not.
Financing Mistakes For Beginners
Successful real estate investing requires an understanding of financing. However, real estate investing for beginners often neglects to understand the fundamentals of financing and real estate. There are many mistakes you can make when it comes to real estate finance, including not having your finances in order beforehand, or assuming you have enough money for an investment without considering renovation costs or real estate taxes. The following are the most common financing mistakes that beginner real estate investors make:
3. Investing Without A Grasp Of Personal Finances
Investing without understanding your personal finances can lead to mistakes such as overestimating how much money will come from an investment or underestimating real-estate taxes. First, accurately estimate what your cash flow will be to determine if you can afford certain real estate investments, whether in the short-term or over the long term.
Cash flow is the amount of money you receive from your investments as a monthly income, minus any expenses such as real-estate taxes or mortgage payments. Generally, if there’s enough cash coming in each month but not going out, it’s considered positive cash flow and is a good sign. If you’re spending more each month than what’s coming in, then you have a negative cash flow.
Not understanding cash flow can be a real issue for real estate investors. You must know how much money is coming in and going out every month so that when it comes time to make a real estate investment, you know that it won’t put your personal finances in jeopardy.
4. Securing Poor Loan Terms
As a new investor, you’ll likely need to take out a loan to cover the costs of the property you’re looking to invest in. One of the biggest financial mistakes you can make is agreeing to a loan with poor loan terms.
When applying for a loan to pay for a real estate investment, don’t just accept the first loan that’s offered. Speak to multiple lenders and compare their loan terms. You may even be able to improve your terms by showing a lender that you’ve received a better offer.
5. Underestimating The Costs Of Real Estate Investing
If you’re a real estate investor and are just starting out, it’s easy to underestimate the costs of investing in real estate. Underestimating the costs can crush you financially, forcing you out of your investment before you can even begin to reap the profits (if there are any to be had). The sticker price on a property is not the only cost you need to worry about. There are both short-term and long-term costs when it comes to real estate investing. Some of the typical costs you’ll need to account for when determining how much you need and whether the investment is feasible include the following:
- Property Cost – The property cost refers to the actual amount you’re paying for the property itself.
- Closing Costs – Costs at closing can be expensive such as the real estate commission, loan fees, fees for the home inspection, title search, attorney’s fees, and more.
- Property Taxes – You’ll need to pay real estate taxes every year, which can be determined by searching the county records. Real estate taxes will vary based on the location of the property.
- Homeowner’s Insurance – If you’re taking out a loan, then you don’t have an option: you’ll need to pay homeowner’s insurance every month. This will protect your investment from losses such as damage from a fire.
- Utilities – tilities such as electricity, water, and heating will need to be paid for. If you’re buying a rental property, you may be able to pass some or all of that to your tenant but ultimately you will be responsible for paying these utilities.
- Maintenance And Repair Costs – Fixer-uppers require a lot of renovations. Even if you’re not buying a fixer-upper, you may need to pay for certain repairs. If you’re buying a rental property, expect to pay for both maintenance and repairs over the long term. Outside of your loan payment, maintenance will be your largest expense.
- Marketing Costs – Whether you’re flipping your real estate investment or renting it out, you’ll need to pay to market your property effectively.
6. Becoming Too Attached To The Property
Once you purchase a real estate investment, be sure not to become too emotionally invested in it. That can make decisions tougher and lead to more costly real estate investing mistakes, such as overpaying for repairs or renovations. You may also have a tough time pricing the property correctly based on the market due to the money and time you put into it. An emotional attachment to a property can also make it difficult for you to compromise when negotiating with buyers or sellers.
Many investors who have been through this before recommend hiring a real estate broker to represent your interests. A real estate broker will help you find the best property possible and work out all of the details so that you can just focus on being an investor, not someone who is too attached to their properties.
7. Trying To Do Everything Yourself
Hiring people to work for you or to work with you can be an expensive proposition. It’s why many beginners will try to do everything themselves. However, this is a bad idea, especially if this is your first time around. It would be best if you had a team of professionals around you who specialize in different aspects of real estate investing, including attorneys, real estate agents, and contractors (for renovations and repairs). If you’re buying a rental property, you may even want to consider hiring a rental property management agency.
Not only is it unlikely that you have the experience to handle absolutely everything, but the sheer time and effort required to manage all the responsibilities of buying, selling, or renting properties on your own will overwhelm you and you may begin making costly mistakes. In the end, you’ll save money relying on more experienced professionals for help rather than trying to do everything yourself.
8. Wasting Money On The Wrong Improvements For Fix-and-Flips
Fixer-uppers tend to have a lot of issues. You’ll need to invest additional money into repairs, updates, and upgrades to make a profit. However, knowing what to spend your money on is essential to maximizing your potential profit. For example, you should address all necessary repairs, first and foremost. Then anything that’s incredibly out of date should be upgraded. If the appliances are decades old, upgrading them is probably a good idea.
However, if something is in good condition and not out-of-date, then don’t waste money upgrading it just for the sake of upgrading everything. If the house you bought has a modern kitchen with lots of counter space, then do you really need to put more money into building a kitchen island as well?
Being cost-efficient with your money when fixing up your fix-and-flip investments is vital to your success. Putting way too much money into repairs and updates could reduce your potential profits.
Don’t Fall Into The Same Pit As The Other Newbies Might
As a first-time investor, you may not know all of the potential pitfalls that come with real estate investing. However, being aware of them and avoiding these costly mistakes will help you to reach your real estate goals successfully. Learn from others’ experiences so that you don’t fall into the same pit as other real estate newbies.