Real estate investing today can be a very fun and profitable business, if things are done correctly. After observing the plethora of novice investors jumping on the bandwagon in today’s market, it has become apparent that there are 5 very prevalent re-occurring themes that cause an investor to get burnt and leave the business.
1. Emotional buying
Many new investors do not understand that investing in real estate is just that, an investment. You don’t want to own an investment in an area that has high crime rates, or other unattractive characteristics, however it does not have to be a home that you yourself would feel comfortable living in. Many times the rate of return is greater in an area where you can purchase a home for $50,000 to get $850 in monthly rents as opposed to buying something for $100,000 and getting $1200 monthly. I see this time and time again. Take almost everything you learned about buying your primary residence and throw it out the window!
2. Over rehabbing
There is almost an epidemic out there of new, and inexperienced investors that are using feelings, and emotions when making investment decisions. An investors that are looking for long term cash-flow, have been known to completely re-modeling their properties (10-15K) is cost, so that they might get $100-200 more monthly rent. On the other hand, if you make the home livable and clean (2-5K) it is quite likely that you will be getting about the same for rent as you would with a completely remodeled home. Is $100 a month going to justify spending an extra $10,000 up front, just so you feel cozy in your investment property? When relating to fix & flip real estate investments, novice investors have been known to buy a house in an area where the homes are older, in a working class neighborhood, and remodeling them with granite countertops, travertine flooring, and all other types of higher end materials. The sometimes difficult to face truth is that you will not get your money back out of the property in value. Doing a fix and flip, you do want to make the homes look good in comparison to the competition on the market, while being competitively priced. Over rehabbing is a very common error that novice investors make.
3. Paying to much for the property
When investing in real estate, ‘its all about the buy.’ If purchasing the property for the right price, it makes your ability to profit much greater, and significantly lowers your risk. If you find yourself looking at the numbers and saying ‘If we can sell it for $5,000 more and put $5,000 less into this property, then this deal will work..’ STOP immediately! Numbers are numbers, and as a smart investor you have to know where your risk tolerance level is, and when to walk away. There is always another deal. Even when doing this, not every deal is going to be a home run. There will be surprises in the fix up costs, and appraisals will occasionally come in lower than you contract sales price . The bottom line here is to stick to what you know, be honest with yourself, and if you don’t know much, find someone that has experience and is willing to partner with you.
4. Not knowing comparable values
Much of your Success as an investor is going to be based on your ability to evaluate property. Let me clarify this a little bit. You should choose an area that you know extremely well, pick 2 or 3 neighborhoods that you know inside and out. Keep an eye on what is selling, both distressed sales and fixed up, so you can quickly see value in that other investors may not realize exists. Having these skills takes time to develop, and your Realtor or title company can help you with finding the ‘comps.’ Title companies will often times give you access to an online tool to look at recent sales in the areas, which for you non Realtors out there, is a great place to start.
This is a classic example of being in denial of having made one of the previously mentioned 4 mistakes. Being an entrepreneur is very difficult, and sometimes we have to loose money and learn the hard way. Unfortunately I sure did! With that said, I recommend finding a good mentor in the business, and offer value to them in the form of sweat equity or cash. If you own a flip that you have made mistakes on, and cannot sell it, the good news is that the markets are low right now, and most likely if you are able to hold the property longer term, you can recoup your capital. If you don’t have the ability to hold for the long term, I would recommend getting the property sold, taking it as a learning experience, and moving on. Remember to never give up, because on your next deal you could very well make up for your loss and within a short period of time be well on the way to profitable investing.
In the market today much opportunity exists, however its important to align yourself with the proper professionals in the area before you do so. If you plan properly and make wise decisions, it will make your real estate investing experience less stressful and allow you to position yourself to profit!