Investing in real estate is an exciting prospect. But while an investment property can deliver admirable returns, it can also mean you lose a great deal of money if you’re not careful. Here are five common mistakes that novice real estate investors make and advice on how to avoid them.
Mistake #1: Relying on Feelings Over Facts
Purchasing a rental property? Envisioning how you’d paint the bedroom and the fun your kids would have in the backyard is fine when you’re buying your personal residence. But buying an investment property requires a completely different mindset. You need to think about structural integrity, overhead costs, and monthly profit potential. You also need to consider what types of tenants you’d attract in the neighborhood your in. A property may be beautiful, with attributes you find desirable, but not be a good investment.
Mistake #2: Making a Poor Financing Decision
There are lots of financing options available to real estate investors, and some much riskier than others. Before you commit yourself to a loan, do your research and learn which method of payment is going to work best for you and your investment goals. Beyond determining how to pay the up-front cost of your property, you also need to make sure you have a healthy emergency fund. When things break, you’re responsible for getting them fixed. Even more critical, when your property is vacant, you’re still responsible for making payments on any loans you took out to purchase it. To avoid stressful financial situations in the future, make sure you keep these things in mind before you purchase any property.
Mistake #3: Taking on Too Much on Your Own
There are a lot of people you need to have in your professional network in order to be a successful real estate investor. First and foremost, having a good real estate broker who is familiar with real estate investment needs is important. Additionally, you need to build a good team of trustworthy partners that consists of a real estate attorney, insurance broker, contractor, home inspector, and perhaps even a property manager. If you’re going to be managing small-scale investments, you may be able to manage all the day-to-day on your own. If you’re purchasing a large, multi-unit property, there’s a good chance using a management company is the way to go.
Mistake #4: Speculating Instead of Researching
A neighborhood may be “up and coming” but you shouldn’t base your investment decision on what the market rent could be. What is it right now? Calculate the property’s cap rate based on your expenses (mortgage, property taxes, insurance, utilities, and other expenses) and how much rent you’ll receive assuming a tenant occupies it all year. Analyze the cap rate and dollar amount of the return to determine if you should move forward with this property.
Mistake #5: Picking the Wrong Property
So what type of property should you purchase first? It really depends on what your budget is and what your ultimate goals are. Though there’s no magic bullet for what your first rental property should be, it’s a good idea to focus your search on areas you’re very familiar with to avoid surprises down the road. Also, consider starting small – with a single condo or townhome – before you take on multi-unit or commercial properties. Think about what you’re most comfortable with and a few years down the road, once you’ve got some experience under your belt, work your way up to more complicated properties.
Investment properties can be a money generator, but they can also quickly become a money pit if you don’t invest intelligently. Always do your research and make sure the decision makes sense financially.