Created on Tuesday, April 25, 2017
Updated on Monday, February 26, 2018
by Land Century
If you're considering a real estate investment, make sure that you avoid these six mistakes.
1. Not Doing Enough Research
If you're like most people, you probably spend a lot of time researching products before you buy them. Whether it's a television, a new phone or something as simple as an iron, you should compare reviews, features and prices to make an informed purchase.
But if you're buying real estate, you're going to have to do a little more research than that. How much research is needed and the type will depend on your plans for property. Are you flipping, renting, or buying for personal use?
Along with asking questions about the property, you'll also want to consider:
The nearby area
Whether the property is in a flood zone
The value of the property and its potential value
Costs to repair the property (if necessary)
Permit or zoning issues
Don't even consider putting in an offer until you've done all of your research.
2. Choosing a Bad Location
Location, location, location. When investing in real estate, you can't just pick any property out of a hat and hope for great returns. The property's location is essential.
Buying a home in the middle of nowhere will make it extremely difficult to find a tenant, and if you do, they may not be willing to pay what you're asking. And just because a property is in the city, that doesn't necessarily make it a good investment. It may be in a bad part of town, or an area with poor demand. Research each location to determine whether it's an up-and-coming area or complete wasteland.
It's better to buy a home in a great location with lousy financing or at a higher price because you'll have an easier time finding tenants which may just save you from those other mistakes.
3. Playing the Lone Wolf
When making real estate investments, you don't have to wear every hat and take on every task. Many investors, especially beginners, want to take on everything themselves. They may underestimate how complicated the process is. They may think they know it all. Or, they may think they can save money by playing the lone wolf.
No one runs a successful business alone, so why would you want to even attempt to make real estate investments on your own (even if you do know everything)?
Rather than going it alone, tap into every resource that's available to you. Experts can help you get out of a bad deal, or give you a piece of advice that could save you thousands on a transaction. And once you do have your property up and running, you might consider hiring a property manager (if you can realistically afford it). A property manager will take care of collecting rent and scheduling maintenance, so you can focus on making new investments.
4. Getting Bad Financing
Think carefully about the type of financing you use to make your investments. Research all of your options, weigh the pros and cons, and consult with those experts you just befriended to get the best deal possible. The housing bubble may have burst, but that doesn't mean lenders will have your best interests in mind. It's just as important as ever to consider all of your financing options.
An interest-only or adjustable/variable loan may sound like a great thing, but you'll be paying the price when those rates finally go up. When securing your financing, make sure that you'll have the financial flexibility to make your payments, and have a back-up plan in case things go awry.
5. Not Budgeting Properly
During the research phase, you should have calculated the cost of repairs to bring the property up to standard. But it's rare for renovations to come in at budget or below budget. Make sure that you budget for unexpected costs, and budget for the entire investment properly.
It's easy to underestimate the cost of a real estate investment because there are so many variables. Repairs aside, you'll also need to factor in your expected rental income as well as recurring costs, such as maintenance, mortgage, taxes, insurance, etc.
Overestimating your rental income or underestimating your recurring costs can cause you significant financial hardship down the road. Make sure your numbers are accurate and realistic before making any final decisions.
6. Not Vetting Your Contractors
If you're investing in property that needs work, finding reliable, trustworthy contractors is key. I know what you're thinking: Do they even exist?
Contractors get a bad reputation, but the truth is that there are professionals who take pride in what they do, show up on time, and get done on time (or within a reasonable time). So, how do you find these contractors? A good place to start is with other investors. Find out who they used, and ask about their experience.
With this strategy, you'll learn about the good guys and the bad guys. You'll know pretty quickly who not to hire. Along with asking other investors for recommendations, you can also check reviews of local professionals. Also, check to make sure any professional you hire is properly licensed and insured.
There's no surefire way to avoid bad contractors, and you may wind up making a few expensive mistakes along the way (that's par for the course). But doing your due diligence will at least minimize the risk of hiring a nightmare contractor that sends your budget and timeline off on a runaway train.
Real estate can be a smart investment everyone needs it. But just like with any other investment, it's important to do your due diligence, budget properly, find a great location and hire reliable contractors. Avoid these mistakes, and you'll be well on your way to seeing the returns you hoped for.