Everybody makes mistakes, and a failed attempt at real estate investing is no different - in fact, it is a fairly common occurrence. Unfortunately, a failed venture into the real estate market can be costly. Evaluating the most common missteps investors are prone to making allows investors to not only avoid these pitfalls themselves but make smarter choices in the future. Given the hefty price tag associated with real estate assets, more-so than with many of the traditional asset classes (i.e. stocks and bonds), most investors can’t afford to make these mistakes to begin with. It is therefore vital that they conduct their due diligence to identify these mistakes before they put their money on the line.
There are eight common mistakes often associated with investing in real estate. As part of a strategic investment strategy, anyone considering getting into the market should run through this list of potential mistakes with respect to each new investment opportunity.
Oftentimes, a real estate investor will purchase a property before determining how they will make a profit from it– but in reality, this should be the other way around. One of the most common, and most costly, mistakes in real estate investments is a lack of planning. Purchasing a property and trying to figure out how to profit from it after is a direct path to losing money. In order to be successful, it’s vital that one plans his or her investment strategy first and then looks for an investment opportunity that matches their goals. To guarantee the highest possible returns, start with a plan and end with execution–not the other way around.
A property can look good and be priced attractively– but signing on a property based on face-value is a classic mistake that reflects a lack of investment strategy– and it can cost you. However, the gap between “this property looks good” and “this property is good” is called a loss, and it’s important to do one’s due-diligence when selecting an investment property. Investors can close this gap in a variety of ways, including setting a built-in investing strategy, a comprehensive due-diligence process, a professional value estimation / appraisal, and a thorough methodology for deals’ assessments. One should never judge a book by its cover, and the same goes for property. Never make an investment before you know that the property is in good shape on the inside– not just the outside.
One of the largest mistakes that investors make is acting on impulse. Without a built-in investing strategy, it’s easy for investors to be caught up in a feeling and to make a decision based on optimism and a deal seeming like the right idea in the moment. As a result, it’s vital that investors take the time to weigh the pros and cons of each potential investment and stick to their unique investment plan before signing on the dotted line.
Individual investors who choose to conduct their investments as loan riders tend to make more mistakes during the decision-making process– and this may be because they aren’t effectively analyzing their choices. To avoid making critical mistakes and losing out on potential returns, it’s key that a real estate investor utilizes a team of professionals to assist with their investments. In real estate, these investors should also build key relationships with a real estate agent, an appraiser, an engineer, a lawyer and a financing body to ensure all of their bases are covered. To ensure their highest chance of success, it’s vital that they build and maintain a relationship with a real estate analyst, as well.
Investing is not the same as trading, but it can be easy to confuse the two. Investing requires a mindset that is centered on building a vast portfolio of properties, learning the market and making offers for a variety of properties, whereas trading is merely an exchange.
A common mistake between novice and experienced real estate investors alike is the belief that investing is a commercial activity. These individuals tend to pursue one investment at a time instead of maintaining a pipeline of various opportunities and purchase offers. Operating this way is making a transaction– not working with an investment plan.
The cost of a property isn’t the cost of your investment, and a common mistake investors make is failing to take potential overhead expenses into consideration. Many investors follow a rule of thumb that one should calculate all profits and losses and then double the potential losses, then factor these numbers into the total estimated cost. However, this approach can turn many investments unprofitable. Walking on the “brink of a cliff,” or taking a risk with your investment, may put you at risk– but steering away from said cliff may waste your time and reduce your profits. The ideal solution to this issue is the Modular Scenarios Method, which allows you to work with manipulations and calculations different from the profits and losses model (e.g., giving some risk factors to several calculation lines), so that a margin of security that is real is created.
It takes more than a knowledge of finance to be a successful real estate investor, but the basics are key. For example, in order to find success, investors must have an understanding of cash flow, its importance, and how it affects one’s investment portfolio. As a result, expenses such as mortgage payments, taxes, insurance, advertisement costs, management costs, and the like need to be taken into consideration during the investment decision process. While the cost of the property and its potential profit is important, without considering the potential negative cash flow of a deal, an investment can collapse entirely.
Making a profit from real estate investing is a complicated and demanding feat, but it’s not impossible. While many believe they can make one successful deal and suddenly build a fortune, real estate investing is a long-term process that can make a growing profit throughout time. As a result, it’s a process that requires patience, tolerance and rational behavior based on a built-in investing strategy.
When it comes to investing in real estate, it’s easy to fall victim to one of these common mistakes. However, with a clear investment strategy in place, investors can put their best foot forward to maximize on their returns and find success.