Real Estate Mistakes to Avoid
If you’re just getting started in real estate investing, don’t expect to become an expert overnight. Yes, it’s true that you can make money buying and selling properties. However, it takes knowledge, determination, and skill. It also helps to know some of the classic mistakes that others make when they start investing in property to help you avoid making them too. Here is a look at some of these pitfalls.
Failing to Make a Plan
The last thing you want to do is buy a house and then decide afterward what you want to do with it. When there’s a hot market, it can be hard to resist buying frenzy. But it’s important that you do.
Before getting a mortgage or plunking down cash, you need to decide on an investment strategy. What type of house are you looking for, for example—one-family or multi-family, vacation destination or not? Figure out your purchase plan, then look for properties that fit that plan.
Skimping on Research
Before buying a car or a television set, most people compare different models, ask a lot of questions, and try to determine whether the purchase they are considering is worth the money. The due diligence that goes into purchasing a house should be even more rigorous.
There are also research considerations for each type of real estate investor—whether a personal homeowner, a future landlord, a flipper, or a land developer.
Not only does it make sense to ask a lot of questions about the property, but you should also inquire about the area (neighborhood) in which it is located. After all, what good is a nice home if just around the corner is a college frat house known for its all-night keg parties? Unless, of course, you’re targeting student renters.
Doing Everything on Your Own
Many buyers think that they know it all, or that they can close a real estate transaction on their own. While you might have completed a number of deals in the past that went well, the process may not go as smoothly in a down market—and there is no one you can turn to if you want to fix an unfavourable real estate deal.
Real estate investors should tap every possible resource and befriend experts who can help them make the right purchase. A list of potential experts should, at a minimum, include a savvy real estate agent, a competent home inspector, a handyman, a good attorney, and an insurance representative.
Such experts should be able to alert the investor to any flaws in the home or neighborhood. Or, in the case of an attorney, they may be able to warn you of any defects in the title or easements that could come back to haunt you down the line.
Forgetting That All Real Estate Is Local
You need to learn about the local market in order to make purchase decisions that are likely to help you turn a profit. That means drilling down on land values, home values, levels of inventory, supply and demand issues, and more. Developing a feel for these parameters will help you decide whether or not to buy a particular property that comes up for sale.
Overlooking Tenants’ Needs
If you intend to purchase property that you’ll rent, you need to keep in mind who your renters are likely to be—for example, singles, young families, or college students. Families will want low crime rates and good schools, while singles may be looking for mass transit access and nearby nightlife. If your planned purchase will be a vacation rental, how near is it to the beach or other local attractions? Try to match your investment to the kinds of tenants most likely to rent in that area.
This issue is somewhat tied to the point about doing research. Searching for the right house can time-consuming and frustrating. When a prospective buyer finally finds a house that actually meets their needs and wants, they are naturally anxious to have the seller accept their bid. The problem with being anxious is that anxious buyers tend to overbid on properties. Overbidding on a house can have a waterfall effect of problems. You may end up overextending yourself and taking on too much debt, creating higher payments than you can afford. As a result, it may take years to recoup your investment.
To find out whether your dream investment has a too-high price tag, start by searching what other similar homes in the area have sold for in recent months. A real estate broker should be able to provide this information with relative ease (particularly with their access to a multiple listing real estate agent database).
But as a fallback, simply look at the prices of comparable homes on real estate databases or even in the local newspaper. Logic dictates that unless the home has unique characteristics that are likely to enhance its value over time, you should try to keep your bids consistent with other home sales in the neighborhood.
There will always be other opportunities. Even if the negotiation process becomes bogged down or fails, the odds are in your favor that there’s another house out there that will meet your needs. It’s just a matter of being patient in the searching process.
Consider your return on investment in making improvements—it may be hard to recoup your money on a high-end bathroom renovation if the house still has a leaky roof.
Every homeowner can attest to the fact that there is way more to owning a house than just making the mortgage payment. It’s no different, of course, for real estate investors. There are costs associated with yard upkeep and ensuring that appliances are in working order, not to mention the cost of installing a new roof or making structural changes to the house.
The best advice is to make a list of all of the monthly costs associated with running and maintaining a house (based upon estimates) before actually making a bid on one. If you plan to have tenants, once those numbers are added up and you add in the monthly rent, you can calculate an ROI that will give you a better idea of whether the income will cover your mortgage and maintenance costs. This will tell you whether you can really afford the property.
Determining expenses prior to purchasing a property is also critical for house flippers. That’s because their profits are directly tied to the amount of time it takes to purchase the home, improve it, and resell it.