Are you a newbie looking to get started in real estate investing? If you are new to real estate investing, you might have approached the wrong channels for a mentor or for investment strategies. With everything on the web nowadays, it’s easy to be misled.
But how do experts avoid common real estate investing mistakes? There are several mistakes that they don’t want to repeat. Look no further! You’ve come to the right place to learn the most common mistakes made by novices, and how they are usually avoided. Read on to learn more.
1. Get Educated
The first mistake that many people make is not doing enough research before investing in real estate. It’s important to know what you’re getting into and to understand the market you’re investing in.
When it comes to real estate investing, the two most important aspects of choosing a property are:
- There must be spread between the rent you can command and the mortgage you are about to take on. This will represent your cash flow for paying the property expenses, and hopefully, pocketing a bit of profit.
- You need to buy in a location where people want to live. When in doubt, buy in an area where there are more people are moving into the neighborhood than moving out.
When doing your research on real estate investing, property listings can be a great resource. You can search for properties in your desired location and get an idea of what’s available in your budget.
You should also research the location, the neighborhood, and the property itself. This will help you make an informed decision and avoid investing in a property that might not be a good fit for you.
2. Have a Buffer
Before you invest in real estate, you should have a clear plan in place and stick to it along the process. This plan should include your goals, your budget, and your timeline for closing on a property and getting tenants moved in.
You should also have a backup plan in case things don’t go as planned. What will you do if you can’t close on the property as fast as you had hoped? What will you do if it’s harder to source tenants than you expected?
Perhaps most importantly, no matter what you anticipate happening, you need to a buffer so that you’ll be ok if the unexpected happens. This means budgeting for unexpected expenses and planning for potential periods of unoccupancy.
As a recent example, I had a bee colony take up residence inside the exterior wall of one of my rental properties. I certainly hadn’t expected to call out a wildlife specialist to remove a bee colony from the premises, but this is what I had to do. Thankfully, I had a surplus budget for unexpected expenses and was able to address this issue quickly and swiftly.
3. Total It Up
Many people underestimate the costs involved in buying and maintaining a property. To avoid this, you should make sure you have enough money to cover all the costs, including:
- closing costs, including loan costs and property inspections
- property taxes
- insurance
- repairs
- maintenance
- property management (optional)
- advertising costs
- other and/or unexpected expenses
As mentioned above, you should also budget for potential periods of unoccupancy.
4. Crunch the Numbers
Some newbies to real estate investing will overpay for property. As a real estate investor, avoid this by doing your research and making sure you’re paying a fair price for the property you’re about to buy.
Don’t let your emotions get in the way and cause you to overpay. Remember, the goal of investing in real estate is to make money, not lose it.
As mentioned above, there must be spread between the rent you can command and the mortgage you are taking on or you can’t produce income from a rental property. Good rental real estate should cash flow from the very first day you own it.
5. Work as a Team
When it comes to real estate, there are a few areas where you should pay for expert advice. It’s important to have a team of professionals on your side to help you navigate the complicated process.
First, you’ll probably want to work with a skilled real estate agent to help you find and make competitive offers on properties that you want to acquire. Second, you’ll need to work with a mortgage broker to secure a loan.
Third, you’ll need to hire someone to do your property inspection. Finally, you’ll need to work with a title Company (meaning, a lawyer). Your title company will draft up the legal documents that you need to sign to “close” on the property.
The good news is that once you hire a real estate agent, they can connect you with all of the other professionals that you will need.
6. Invest for the Long-Term
Real estate investing can be a long-term investment. Many people make the mistake of being too impatient and expecting quick results. It’s important to have a realistic timeline and be patient with your investment.
Real estate values can fluctuate, and it may take time for your property to appreciate in value. Don’t make the mistake of selling too soon and missing out on potential profits.
Often, real estate markets will trend sideways (and sometimes even down) for few years, before jumping back up in value. The year-over-year value of your property will fluctuate, but over long periods of time like 10-15 years, real estate nearly always trends up.
The core reasons for this are twofold:
- Inflation, which is an economic force that drives up the cost of goods and services over time, also drives up the value of assets. Real estate is an asset, so it benefits from inflation.
- The global population is growing but there is a fixed amount of earth. Thus, the demand for places to live tends to go up over long periods of time.
7. Avoid Unnecessary Fees
Finally, when you sell a property, you usually have to pay realtor or broker fees. For residential real estate like single family rental, this can be as high as 6% of the purchase price.
If you sell a rental property for $300,000, you should anticipate paying up to $18,000 in realtor fees to facilitate this sale. If you were expecting to make $50,000 in profit from the sale of a rental property, giving away $18,000 in fees to a third-party can feel like a huge hit.
When it comes to commercial real estate, the commissions owed to brokers who help you sell an asset can be even higher. Their fees typically range from 4-8% on properties up to $1 million in value. Again, this is a huge expense to occur.
Plus, even if you roll your profits from the sale of an old rental property into a new rental property (and avoid paying taxes using a technique called a 1031 exchange), you’ll still have to pay closing costs to acquire a new property. This can easily cost you $5,000 to $10,000 or more.
In contrast, if you hold your real estate assets for the long-term, you won’t incur realtor or broker fees. You can also avoid any potential taxes you may owe, without having to utilize complex IRS techniques.
Don’t Make These Real Estate Investing Mistakes
Real estate investing can be a great way to approach portfolio diversification and make some extra money. However, it’s important to avoid the most common mistakes that many people make.
By following the tips above, real estate investors can avoid the most common mistakes and have a greater chance of reaching their investment goals.
Wait no more. Get started on your path to success and begin building your real estate portfolio by shopping real estate in your local market.