Real Estate Investing Mistakes
You’ve heard the buzz, and we can confirm it’s true! Real estate investing can be one of the best ways to fast track your income for numerous reasons. Once you have the process down pat, you just continue to follow a simple formula. You buy one house, rent it out, use the money to pay down the mortgage. When you have enough capital, buy another house, rent it out, and use the money to pay down that mortgage. It’s a domino effect with tremendous financial benefits for you.
You may be ready to take on the role of landlord, and are looking for prime property to buy and rent out. Maybe you’re looking for a place that needs a little TLC and you have what it takes to rehab and flip it for a tidy profit. Or you want to find a duplex and live on one side, known as owner occupied, using the rental income from the other side to foot the bill for the whole mortgage. Or you want to go the short term rental route and rent out a condo for an Airbnb.
These are all good plans!
But it isn’t as easy as it may appear on the surface. Like any new venture, it’s vital to know the nuts and bolts of the subject, and when it comes to spending your hard-earned money, the more you know, the more you will thrive.
Here are 7 major mistakes made by those new to the game.
1. Believing in the “get rich quick” scheme.
Everyone is looking for that pot of gold at the end of the rainbow, or the winning lottery ticket, or an inheritance from the great uncle you never knew. But if you think owning real estate is the answer to your financial aspirations, think again. Real estate isn’t an investment that will accrue funds over night. In fact, most investors build their wealth over the course of their venture, which may be decades.
Markets swing wildly over time, with spikes up and downturns on a regular basis. You will need to be patient and well-prepared for whatever comes your way with your property, including the financial ups and downs. Think of real estate as a long-term investment, not a way to triple your net worth in 12 months. That just isn’t going to happen!
2. Not doing your homework.
One common mistake made by newbies is falling in love with a property and believing it’s “the one” that will make them outrageous money (read mistake #1 again!) Never rush a decision or allow yourself to be pressured by brokers, investors, business partners, bankers or others in the field. A good business plan starts with analyzing your financial goals. Keep your wits about you if things don’t go exactly as planned; this is a good skill for investing in any market.
Whether or not you will be calling your new property home, you need to develop a long checklist including some of the following:
- What’s the going rent for other properties in the neighborhood? Does this one provide significant assets (hot tub, walking distance to downtown) that will allow me to charge more rent? Then, determine the monthly mortgage payment to ensure the rent will give you sustainable profit.
- What’s the age of the house, and what will need repair in the short-term future? Am I able to do any of these repairs? If the house is in disrepair but you aren’t handy with even a hammer and nail, nix the idea of flipping.
- Why is the owner selling the house? Doing your homework also includes having the house inspected by someone licensed, and reading the disclosure statement thoroughly. If items crop up with repair costs of more than $1,500 you can walk away from the deal, or require the owner to make the fixes before you close on the property.
3. Jumping the gun.
This ties in with doing your homework. Searching for the right house can be an extremely time-consuming, confusing and frustrating process. You may get sucked into believing a property you’re looking at will be scooped up by another buyer in a matter of hours if you don’t jump.
Anxiety has no place in real estate investing! Anxious buyers tend to act too quickly, skip pivotal steps such as an inspection, overbid, and generally act on impulse rather than knowledge of the market and good old common sense. Overbidding carries a cascade of unwelcome results, such as overextending yourself, taking on too much debt, creating higher monthly payments that you can’t afford, and opening the potential for default.
The old adage to “sleep on it” speaks volumes here. Don’t make major decisions that will tie up your finances for years on a whim. Keep emotions out of it and realize there are dozens of other properties out there that fit your wish-list.
4. Underestimating expenses.
Sure, you’ve crunched the numbers, and you stand to make a hefty profit with rental income, with the added benefit of paying off a mortgage simultaneously. But keep in mind, there’s a whole lot more to owning property than the monthly mortgage payment. This is an area that first-time owners tend to overlook. There will be start-up costs such as having the home cleaned and doing any repairs, minor or major, that are needed to prep the property for your tenants. If you got a great deal on a less than perfect house, renovations will come with a steep price tag.
Then, of course, are the things that go wrong in the middle of the night. As the landlord, you’re the one who’s going to get that phone call, unless you decide to hire a property manager. Learn how to make minor fixes like running toilets or loose cabinet handles yourself, or better yet, cultivate good working relationships with electricians, plumbers and other handymen to call when emergencies erupt. Some houses can be rented without major appliances such as washer and dryer, but chances are good your tenants will want these amenities.
If you’re planning to flip, your budget will be extensive, but also pay particular attention to short-term financing costs, prepayment penalties and any cancellation fees you may have to shoulder when the house is sold in short order.
5. Having a lease with lots of “holes.”
You don’t want a lease that resembles Swill cheese. It may be tempting to pull a generic lease off the internet, but that could leave you open to liabilities and unexpected duties. You need to spell out who’s responsible for upkeep and maintenance including minor repairs, lawn maintenance, snow removal, trash pick-up, home association costs, rental insurance with your homeowner’s plan, and myriad other smaller details.
A properly executed lease needs to hold tenants accountable for timely rent payments, with penalties spelled out, as well as the process for possible eviction. Conversely, potential tenants should take the lease-signing seriously, and if they don’t, we recommend cutting loose and finding someone else. After all, this document will allow them to know exactly what they’re allowed to do (late night keg parties? No!) protect them from rent hikes or early termination of their rental, and spell out what will happen in the case of damage to property (scuffed floors are ok….. backing into the garage door….definitely not!)
6. Overestimating your time and money.
Many, many rookies start out with a pledge to devote themselves entirely to the success of the property, which starts with a property search that takes months. If you’ve done your homework, you will be able to study the numbers and see the bottom-line profit. Then, there’s the possibility of going OCD with other steps, from screening dozens of potential tenants to driving by to “check” on the house (potentially stalkerish!) once it’s occupied to ensuring there’s always a perfectly landscaped front yard.
Many owners hire property managers who take a percentage of the rent as their payment. Property managers deal directly with prospects and tenants, saving you time and worry over marketing your rentals, collecting rent, handling maintenance and repair issues, and responding to tenant complaints. They hire, supervise and assign duties to maintenance staff; and contract for services such as trash removal or landscaping. They also show properties to prospective tenants or buyers, explain occupancy terms and pay taxes and other maintenance fees.
Remember, your time IS money. It’s probably not worth running out with your push lawnmower after your day job to mow at your rental. Or driving in a snowstorm with a shovel to clear the driveway. Realize you can’t do it all. So find some business partners or learn to delegate.
7. Forgetting to have a life.
Immersing yourself entirely in one aspect of your human existence is never a good plan. Lose sight of the big picture, and you will become the anxious real estate owner that makes ill-fated decisions. Remember, your time IS money. There are plenty of real estate deals in your future. Just take them one at a time and act with due diligence. You will still need to maintain some semblance of an organized life, even as a real estate mogul.
Remember, there is more than one way to invest in real estate! If you are looking for a more passive approach to investing in real estate, we recommend checking out crowdfunded real estate investing. This allows you to pool your money with investors all over to purchase cash flow producing real estate. You invest, earn dividends, and they handle the rest!