Watching real estate investing shows on TV or reading the success stories on the internet can make real estate investing seem like an easy way to make a financial killing in a hurry. The truth is that most investors make multiple mistakes in the beginning and are lucky to hold on long enough to finally succeed. And then they find out that it's not nearly as easy as others have told them.
The good news is that because you are reading this, you are learning what mistakes to look for so that you can avoid them.
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- Stocks/bonds and real estate are not similar investment strategies. With stocks and bonds, you study the market occasionally and then buy to hold long term. Real estate is a very different investment animal. Real estate is an investment that comes with clogged toilets, challenging tenants, complaining neighbors, uncooperative contractors, etc. This is not an investment where you look at the account statement every couple of months to learn how it is performing. Real estate investing is a business. It takes time and effort to succeed. Make sure this is what you want to do before jumping in.
- Always pencil out your cash flow. Up to 80% of investors make "educated guesses" when buying real estate instead of gathering all of the information and sitting down to truly calculate if the property will have positive cash flow. Just because it has positive cash flow for the seller doesn't mean it will for you. The seller bought the property for much less than you are and has allowed inflation to push rents up over the years to obtain the positive cash flow the property currently has. You need to learn what similar properties are earning for rents in the neighborhood and what all of the expenses are before you can calculate the cash flow.
- Don't use optimistic numbers. Even those that make the time and effort to pencil out the deal tend to over estimate rents, underestimate vacancy rates, and underestimate expenses. For instance, homeowner insurance for a non-owner occupied house costs much more than for an owner occupied house. Be conservative with your estimates or you could find your investment has low or no positive cash flow.
- Under estimating renovation costs and time. If you are planning to renovate the house to either flip it or increase the cash flow, use conservative numbers and then add another 20% to the costs. It's almost unheard of for renovation costs to come in under budget. Same with the schedule. It almost always takes longer to complete the renovations than what a contractor estimates. When a renovation stretches from two months to six months, as the investor, you're the one paying all of the utilities, mortgage, and other costs without having any cash coming in.
- Never think that real estate investing is low risk. There are a myriad of possible problems that come with owning real estate. There are ways that you can avoid or minimize these problems but they take extra due diligence and effort on your part to first uncover these problems and then find inexpensive solutions. Or you walk away from the deal after putting hours of work and piles of money into learning what could go wrong.
- Don't believe others find it easy and profitable to invest in real estate. People love to boast. They tell you about their success stories but seldom about their loses. For every success story, there are probably two or three loses. Ask them to tell you about the loses so that you can learn from them.
None of this is intended to discourage you from investing in real estate. People can and do make fortunes with real estate. Just be sure you understand what you are doing and realize it takes real work to run a successful real estate investing business.
Please leave a comment if this article was helpful or if you have a question.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.
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