A relatively new investor contacted me recently and said “I want to buy a home where I can make “quick money.” Naturally, almost everyone wants to make fast cash, unfortunately, it isn't always as easy as some make it sound and that's the reason for outlining 5 main critical mistakes I seen investors make when trying to make fast money in the real estate market.
Mistake #1. Buying Property for Short Term Appreciation. No one knows where the real estate market is actually going from week to week, especially in the next 2 to 4 months. Counting on appreciation that will cover your buying - selling costs and still having money left over as a profit is very risky in the short term. Even buying the property below market value may not cover all the expenses of holding, repair and re-selling costs. Even experienced flippers are careful to only cherry pick the best deals and go in with their eyes wide open.
Mistake #2. Real Estate Investing Risk Factors. The risk of investing in real estate is directly related to the investor’s knowledge. Unlike mutual funds, there are no investment managers watching after your investment on a daily or weekly basis. There is an old saying in the real estate world "watch out for the deals that find you!" In this case there are many good deals, however, without the proper knowledge the buyer is either going to have to take someone's word for it or go in blindly and if the person giving the advise also lacks knowledge then it can get expensive very quickly. If you are using other people’s money then you could be a very unpopular person very quick.
Mistake #3. Not Having Enough Cash Reserves on Hand. The two most important words in real estate investing are "CASH FLOW and CASH AVAILABLE” Without a good cash flow or a substantial amount of cash on hand, the investor is dead in the water if they can’t handle the unexpected issues that usually come up. Just think about how many companies have gone out of business because their cash flow dried up. Circuit City comes to mind as a company that did really well until they spread themselves too thin. Handling a negative cash flow can be the kiss of death in a flat or declining market and there can be unexpected costs that come up, which could also include vacancies, evictions, under estimated rehab costs, longer than expected holding costs, etc.
Mistake #4. Not Treating the Real Estate Business Like a Business. People are attracted to the real estate business for many reasons including making a fast buck. In this business hitting an out of the park home run could take 2 or more years to accomplish and more than 93% of the people that take real estate seminars quit after 3 months because of the number of obstacles in the way of becoming an overnight millionaire. Remember that obstacles can be overcome with experience and experience takes time.
Mistake #5 Not Getting the Right Professionals to Work with You. Real estate is considered a big ticket purchase and many new investors feel that they can run the show themselves or use family and friends for some of the critical issues I.e. property valuation, rehab costs and marketing the property for sale. I've seen many newer investors pay too much for a property, under estimate the rehab costs, didn't plan on months of holding costs before the home sold or the investor didn't understand the lending process and the costs associated with insuring the home can be financed with all types of financing.
In Short, it's really hard to beat experience and for those just entering the real estate investment arena I always say; take your time in getting the right people in the right place, ask questions every step of the way and don't forget to learn from other people's mistakes. Those investors that are bragging about making fast money on every deal might be the same one's also filing for bankruptcy next week. Don't get me wrong, there are a few pros out there that hit many homeruns, just not as many as one might think.