The beginning investor has a lot to learn. When possible, it’s wise to learn from the mistakes other investors make. Below, we dive into six of the most common mistakes people make about investment property.
Investment Property Pitfalls: Six Mistakes Beginners Need to Avoid
1. Doing Insufficient Due Diligence
Ultimately, you are responsible for making sure you get the deal you want when you buy a property. You are also responsible for checking out and vetting every aspect of the property. Skipping steps or cutting corners in this process can prove devastating. Many investors who lose money can point to their own failure to do their complete due diligence when asked what went wrong.
Property inspection is a crucial due diligence step. There are a number of ways to handle issues that pop up during inspection. You may always pass on the deal, but you can also negotiate. An attorney can also help you craft a contingency clause that guarantees a solution to the problem before you buy the property.
2. Failing to Ask for Help
Understanding that real estate investment is a team effort early on will put you in a good starting position. Even if you personally lack experience, you should not be the only person working on your property deals. A good team will typically include these players at a minimum:
- Thorough inspector
- CPA or other tax professionals
- Other investors, whether as partners or sounding boards
The combined experience of these parties will directly influence how well you do at dealmaking. You may also need to ask for property management help if managing your property yourself is impractical or inadvisable. Sometimes employing a single individual will suffice, but other situations may call for involving a third-party management company.
Attempting to perform every task yourself is asking for trouble. First of all, you aren’t an expert in everything. And even if you are one of these types of real estate professionals, your time, resources, and energy are finite. Experts are available to help, and investing in the right team will positively impact your portfolio. Real estate investors rely on these dream teams to succeed, so vet yours well and use them wisely.
3. Performing Inadequate Research
Establishing yourself as an investor requires getting yourself an education. Doing your real estate investing homework can look like reading, asking questions of experts, and discussing strategy and details of deals with other investors. Nobody ever got ahead in the real estate game by being a know-it-all.
First, you will need to research investing strategy. Your specific goals will influence what asset classes you focus on and how you run your business. The investor looking into apartment building syndication will take a different approach than the middle-class investor with one single-family property. Some fundamentals remain the same though, and you should crunch numbers and practice building pro formulas before spending any money. Read as much as you can, particularly in your early days as an investor.
Next, your homework should include diving into the specifics of your circumstances and investment. One area to research is your market. Knowing how your property compares to others in the neighborhood, city, and region matters for your bottom line. Understanding the dynamics of your market will inform everything from property management to whether you purchase future properties in the same area.
4. Underestimating Your Budget
One of the most common mistakes new real estate investors make is failing to account for necessary expenses such as emergency costs, repairs, taxes, or commissions and fees for the professionals who assist them. Account for all realistic costs while also expecting some unexpected expenses. Another way to avoid this mistake is to leave yourself a “buffer” when building your budget to be proactive in the face of the unexpected.
Being unaware of your costs won’t make them go away. Here are some of the commonly overlooked expenses that early investors don’t always account for, often because they just don’t know to expect them:
- Insurance costs
- Vacancies, or the cost of holding a property with no tenant
- Attorney’s and CPA fees
- Closing costs
- Interest and other lending costs
Making a list of monthly and yearly expenses is vital. The best time to add up these costs is prior to purchasing the property, as the mortgage fee alone isn’t the whole story. Only when you have your accurate list of expenses can you know whether you can genuinely afford a particular property. Sometimes the property that seems like a great deal isn’t when you do the math.
5. Making Poor Financial Decisions When Purchasing
New real estate investors often end up overpaying at some point in the purchase process. Sometimes the beginner is a poor negotiator or has failed to research the property or market. A good realtor can help prevent you from over-paying.
Accepting poor financing deals is also a common beginner’s mistake. Rising interest rates can make interest-only and adjustable loans more costly than their alternatives in the long run.
6. Forgetting to Plan for All Possibilities
We all hope an investment property will be a success, but the reality is that sometimes you will have to make decisions because things haven’t gone according to plan. In real estate, one back-up plan often isn’t enough.
Seasoned investors consider their exit strategies for a property. When running these scenarios, be realistic about what could go wrong. Looking at your property through multiple lenses can be useful if you encounter a problem. For instance, let’s suppose you have a multi-family property in a popular tourist destination but are having difficulty securing a tenant. One possible solution might be to transition the property into a vacation rental, giving it a new purpose and relieving you of the cost of an otherwise vacant property.
Be Proactive for Success
You have already begun taking the proactive step of reading this article. Proactive preparation can counter many of these common beginner mistakes and help you make your investment profitable. Continue researching and reading, actively consider thoughts of experts and other investors, and take the time to fully-engage with your team and the process. These practices will serve you throughout your investment career.