Interested in investing in real estate? Or maybe you’re already an investor and wondering what you’re fighting for. The following are 10 common mistakes when starting to invest in real estate:
- Not learning the basics.
When starting something new, including real estate investing, there are simple ways to learn the basics. You can go to your local library or bookstore, join your local Real Estate Investors Association (REIA), spend money on boot camps and educational seminars, or study online on your own. No matter how you do it, there are plenty of opportunities to learn the fundamentals of real estate investing. The most successful investors study and establish a good foundation from which to grow. - Not having a plan.
I often meet new investors who aren’t sure what they’re looking for, aren’t really sure what they want to do, they just think investing in real estate is a solid way to invest in their future. They’re not sure how to get started, they don’t know who to work with, they’re not sure what to buy or what strategy to use. What they’ve done is watch some “fix and flip” TV shows and decided they want success too. However, to be successful you must have a plan. Start by writing down your goals and determine how you are going to achieve them. - Have a short-term vision.
True wealth creation requires a long-term investment. You can’t create real wealth by getting in when you feel good and getting out when the going gets a little tough. The real estate market is always fluctuating, up and down, so investing in real estate for wealth it has to be long term. Renovating and reselling brings quick cash for today, but wealth requires that you put your money into properties that you will have for a long time and that will generate continuous income forever. - “Get rich quick.”
Go back to mistake number three. This is not a “get rich quick” company. “Fix and flip” the way it looks on TV is only a small part of the strategy for growing your investment portfolio. You will find that the tax benefits on liens (rental properties) greatly increase your wealth creation over time. And there’s nothing better than letting someone else pay his note while collecting rent and positive cash flow every month. That’s not getting rich quick, that’s building wealth forever over time. Eventually, when your houses are paid off and that full rent is your cash flow, you’ll find that you’ve created incredible wealth along the way. - Quit your day job.
Many novice investors are tired of their JOB. They are ready to move on, quit their day job, and go into real estate investing full time. We understand that! But wait until your real estate business is generating income before you quit your W2 job. You are acquiring assets that are going to be paid for by someone else, that are going to increase in value and create cash flow for you every month. However, it is very difficult to replace an entire year’s income with just $200 a month in rental cash flow. Real estate is an expensive business to be in. So until you’ve built your portfolio, use it as an investment strategy, not a way to immediately quit your day job. - Not having multiple exit strategies.
When you buy a property, you need to implement at least three exit strategies. Maybe you plan to quickly renovate and resell. What if it doesn’t sell? Are you able to put a tenant in it and maintain it? Maybe you can sell it without renovations for a smaller but quicker profit to another investor (wholesale). If you’re locked into a single exit strategy when you buy (“I have to quickly renew and resell”), you may back yourself into a sore corner. Before you buy, determine how many and what exit strategies are possible for the property. Always have a backup plan in case option number one doesn’t work. - Lack of cash.
Lack of cash can really set you back. And banks do not like to lend to speculate. A great source of funds, and something you absolutely need, are investment partners with cash. Cash doesn’t always mean a lot of green by the way. It’s money in CDs, in money markets, in a 401k or IRA; It’s in areas that you sometimes don’t think about. - Not understanding renewal costs.
Two major renovation mistakes: First: grossly underestimating the cost of a rehab. Over time, you’ll be able to walk into a home and estimate repair costs. You’ll also learn neighborhoods, learn exit strategies, and learn your personal plan from the moment you enter a property. But this takes time to learn. Second: don’t stick to a budget. Maybe start a property with a fairly accurate budget. However, once you get involved, you join in personally, and the next thing you know, the planned laminate countertop turns into Corian. However, what could be a laminate becomes a hard surface. You put updated fixtures where you don’t need them, new appliances where you don’t. Little things start to add up to big bucks, and pretty soon the budget has skyrocketed. What is needed is a mentor, someone with whom you can exchange ideas, someone who will hold you accountable. If you achieve the original cost estimate for the job, mentors won’t let you go over budget, but they will help you stay on track. That is important. - Waiting too long to start.
We met a 25-year-old man who owned seven properties. His exit strategy was to own twenty to twenty-five properties by the age of 40 and have those properties paid for. His goal was to average $1,000-$1,200 per property per month. pure profit. Minus some expenses, he would get a great return at a very young age. The moral is, don’t wait to get started. If he doesn’t buy now, in five years he’ll be sorry he waited! - going alone.
To be successful in almost any business, you need a mentor. Real estate is no different. A mentor is someone you work with, someone you trust, someone who agrees with your business philosophy. Having a good mentor to direct and guide you will pay off big. Never be afraid to ask for advice. There is no need to learn on your own. Know when to look for an expert and follow their experience. Bringing in someone with more experience will prevent you from making big mistakes. I promise you that you will pay for your education one way or another: either you pay the coaches or you pay with your mistakes. Going solo can be very, very expensive. Surround yourself with like-minded people who can guide you on the path to success.
Obviously, more mistakes can be made when investing, but we consider these 10 to be crucial missteps to avoid. Hopefully you can learn here from others so you don’t need to repeat this.
Do you find this useful? What can you add to the list?