4 Common Mistakes New Real Estate Investors Make
Real estate is an ever-changing and growing commodity that can be very attractive to investors. I’ve previously talked about how real estate is a better investment than anything else, but what are the dangers to avoid when jumping into the market as an investor? For example, while South Florida property investment or Florida real estate investing in general might be a great place to start, there are costs and red flags to look out for in each property listing in order to stay out of hot water.
Below are four common mistakes that many new investors make, with tips on how to make profitable real estate decisions:
- Investing with no cash reserves.
There are many unforeseen costs that can spring up from time to time with properties. Most often, these occur based on the age of the property. Maintenance, annual property taxes and insurance premiums are all costs that need to be factored into a budget. Cash reserves are necessary for investors to be able to handle any and all of these costs, especially if a property is not generating the income initially expected.
- Expecting a big payout immediately.
In this world of instant gratification, it’s easy for investors to go for short-term appreciation. But those interested in a quick “flip” might be setting themselves up for a rude awakening if they think that appreciation alone will get them that quick score. Typically it is not possible to buy a property and then cash out shortly thereafter without doing some sort of “value-add” to the property. For a home, this might include a renovation, adding an addition to increase the square-footage or cosmetic upgrades to increase the desirability of the home to a potential buyer. To add value to a commercial building or apartment complex, monthly rents must be increased and costs decreased.
All of the above takes time, effort and money. It is possible, but rare, to find and be able to buy a piece of property that needs no work and that can be sold quickly for a profit because of rapid appreciation.
On the flip side (pun intended), those interested in the long-term view also need to be prepared for what they are getting into. Owning property can be a full-time job requiring effort, time and money as well. Investing in real estate can be lucrative and enjoyable, but coming up with a plan based on your profile and goals is essential.
- Not doing your research.
Not doing the proper research prior to making a real estate investment can cause investors to make poor decisions and lose a lot of money. Before buying, one must evaluate a property and location and see if it fits his or her real estate objectives. Once objectives are determined, there are a great many tools that can be used to become familiar with the property and the market. Most often, internet-based portals and websites have lots of information regarding area locations, available properties and values. Some of these sites are Zillow.com and Trulia.com.
There are companies who will assist investors in making the right choices and provide services to help them determine their objectives, find properties, manage renovations needed and pair them up with best-in-class property managers. My company, Portfolio Builders, is one such business.
- Trusting a deal that seems “too good to be true.”
I always think to myself, if something seems too good to be true, it probably is. Calculating risk can be difficult, but the first part of calculating risk for a property is evaluating how “good” of a deal you are getting. If a seller is over-aggressive on pricing and giving you an amazing deal, that should tell you there is more to the story. Why are they willing to give the property up for such a low price? When deciding on a property, Pfeffer likes to ask himself: “Why am I so lucky to be seeing or having the chance to buy this amazing deal?” As the CEO and founder of PortfolioBuilders.com, I have been investing in property for over a decade with thousands of transactions under my belt, but I am still cautious when a deal seems too good to be true. The same concept should apply to new investors too.
In summary, I suggest that all new real estate investors make a plan based on their individual profile and goals (with help if needed), save up some cash reserves for routine property costs, understand return on investment can take time and finally, trust your gut when something seems too good to be true.