The slow but steady rebound of the housing market has brought about a rise in real estate investing. But investing in property is no easy business, although the dozens of money gurus on the Internet would tell you otherwise. There is a right way to go about it—it’s just a matter of finding it while avoiding the many pitfalls. Here are ten of the most common real estate investing mistakes and how you can avoid them.
Not having a game plan
Atlanta-based investor Andy Heller says many new investors take the plunge without a plan: they snap up good deal, then don’t know what to do with it. Eventually they’ll end up with a number of properties just gathering dust. Your first step should be choosing your strategy, then finding a home that fits it.
Expecting returns overnight
What the Internet ads don’t tell you is that a lot of work, time, and money goes into real estate. For your cash to work for you, you need to make smart decisions, develop negotiation strategies, and understand the risks of the business. It takes time, but with good direction, it’ll start paying off eventually.
If you think real estate agents are just for first-time buyers, think again. A good network is part of any successful investor’s arsenal, both for buying his own properties and selling them off. Build strong relations with professionals in the field. Ideally, you should be on good terms with at least one realtor, a lender, a home inspector, an appraiser, and a closing attorney.
The idea is simple: you buy a property, then you sell it off for a profit. So the point is to not pay too much for a home—but according to Heller, that’s what a lot of new investors do. Take the time you need to analyze the value of a home—how much it’s worth, what improvements will be needed—before putting your money into it.
Not doing research
First-time investors are often taken aback by the complexities of the real estate business, and this often leads to costly mistakes. Start by joining a National Real Estate Investors Association (REIA) chapter in your area. The monthly meetings touch on a wide range of topics, from buying short sales and foreclosures to leasing issues.
Counting on appreciation
A lot of buyers snapped up properties during the housing boom, thinking they can make quick profits given the strong seller’s market. But the ensuing crash taught them a hard lesson. There’s no telling where the market will go, but with sufficient research and smart analysis, you can lower your risk and find other ways to make proft.
There’s a lot more to home ownership than the asking price. Mortgage, insurance, and property taxes add up over time. And since it takes time to lease or sell a home in today’s market, you’ll be paying them out of your own pocket for a good while. If you’re not prepared, what started out as an asset will become a liability before you know it.
Focusing on single deals
It takes more than one deal at a time to run a real estate investing business. Besides, you miss out on many opportunities by limiting your volume. Build a steady stream of prospects; with enough deals on the horizon, the good ones will naturally come to the fore.
Not having an exit strategy
So you have a plan, but what if it doesn’t work out? Make sure you have at least two backup plans so you don’t get stuck with a property. Plan A might be to work on the home before reselling it. If the market is slow, Plan B could be a lease-purchase offer. And if that doesn’t work out, you can either just rent it out. The profits may be lower with succeeding plans, but it’s better than losing money by simply holding on to it.
You don’t need an engineering degree to estimate costs, but you do need a good buffer. When you decide to rehab a home, always set aside twice as much time and money as what you would expect it to take—and if you can still make a profit then, it’s worth taking on. This will give you a comfortable cushion against any problems.