Be Prepared And Avoid Common Real Estate Investment Mistakes
Investing in real estate is a great way to build wealth and earn income with cash flow. You can purchase property to rent out, and/or if you have extra space in your own home, you can rent out a room to get a little extra cash. However, it’s most likely not something you can study in one day and become an expert.
Successful real estate investors usually have experience under their belts. It takes trial and error and a lot of research, but once you understand how it works, you’ll be growing your wealth in no time.
If you’re just starting out with real estate investing, check out these five common financial mistakes newbie real estate investors make so you can be better prepared to avoid them.
1. Hiring A Property Manager Too Soon
While you don’t necessarily want to do everything on your own, you can skip a few of the steps in investing in real estate to save some money. The whole point of investing in real estate is making money, not losing money in the process.
If you want to rent out a property, you’ll have to be a landlord. However, you might not have the necessary skills or time. But if you practice those skills and better manage your time, you can skip hiring a property manager right out of the gate. Property managers often handle daily maintenance and operations, which is nothing you aren’t capable of.
Hiring a property manager can set you back 8-12% of your revenue, even before you pay everything else, like mortgage, taxes, and utilities. Learning how to manage your property before hiring a property manager will save you money so you can invest more rather than spend it, and better understand the process to later manage your property manager, which is often the case.
2. Lack Of Research
When you make a big purchase, do you research various makes and models to decide on the one that’s worth your money? The same goes for real estate investing, except it can be even more research-intensive.
To make sure your investment is worth it, you should do extensive research on the property, neighborhood, and price points within that neighborhood so you can purchase the property at the right price. Here are some questions to ask before choosing a property:
- What situation is the seller in, do they need to sell?
- How much is the house worth?
- Can I get it at a discount?
- How much will it cost to repair the property before renting it out?
- Can I cash flow after all expenses?
Researching all the financial aspects of a property will save you money later. Going in blindly can lead to you spending much more than you expected, and you could lose money rather than make it.
3. Understanding What Real Estate Investing Is
When you become a real estate investor, you have to treat it like a business, not just a side hustle. Ignoring that it is a business can be a huge mistake that many newbie investors make. You must treat your real estate investments as you would if you owned any other business.
From the moment you purchase your first property, have the mindset that it is a business venture. Sure, you will make an income from it, but you have to put effort into it as you would any other business venture.
Legally, make sure the business is properly set up, insured, and protected. Creating an LLC or Corporation may be beneficial. Consult your CPA to see if either option is right for you. As a landlord, know how to work with your tenants to ensure they stay at the property and are satisfied. Low turnover will secure your income and make sure you have cash flow.
4. Overpaying For The Property
When you find a property to make an offer on, you might get anxious as to whether the seller will accept the bid. This can cause you to overbid, and therefore pay too much. Stick to the numbers. Your objective is to make a profit, not get attached to the property and pay too much.
It’s exciting when you find the perfect property to invest in. But if the price is either over your budget or is over the property’s value, you can end up being out of pocket when all expenses are paid. This ties into the research aspect, but make sure that the price is right to ensure success.
If there’s a property you really want to invest in but aren’t sure if the price is too high, look at homes in that same area. Is the one you’re looking at thousands of dollars more? For even more insight, ask a real estate broker about the property’s value. Remember — you can always negotiate with the seller!
5. Neglecting To Look At All Expenses
You’re going to have more expenses than just the mortgage. As a property owner and landlord, you have to continue to maintain the home or complex for your tenants.
Think about your own home for a moment. You must cut the grass, update appliances, pay taxes, make minor or major repairs, and the list goes on. Each of these items needs to be accounted for when creating your budget, and they’re often not something tenants are expected to worry about.
Make a list of everything you will need to do to maintain the investment and figure out those expenses. This will help you understand if you can cash flow on the property long-term.
Being Aware Of These Mistakes For Newbie Investors
Knowing these common mistakes that newbie real estate investors make can help you avoid them, knowing is half the battle. Hopefully these tips will help you with your real estate investing goals, and have you on track to financial freedom.