Investing in real estate is a craft that is shaped by experience. If you’ve never made a property investment, good news–these ten tips will help you ease your way into making a great decision on that first big deal.
With that in mind, read carefully and be sure to avoid these mistakes. Taking the time to learn about investing will prevent you from kicking yourself later.
Now, let’s get started.
MISTAKE #1: BAD FINANCING
Bad financing can be the biggest mistake that knocks you out of the game. Real estate investors most often lose money or go out of business because of financing issues. What do we mean by bad financing? It could be a combination of the following:
- High interest rates
- Adjustable interest rates
- High monthly payments
- Personal recourse
If an investment property has a high interest rate, it’s possible it will have a negative cash flow. As a lender, we always want to see you win financially. If a deal doesn’t make sense for you, then it doesn’t make sense for us.
MISTAKE #2: BAD LOCATION
Real estate value always begins with location (even when playing Monopoly). The people and businesses who will rent from you begin with location, then move on to other criteria like the size of the lot and condition of the house. Because this is so important, you should be well versed in which streets and neighborhoods in Redding have high market value.
Buying a house at below market price, with excellent financing, typically sounds like a good idea. But if the location is off the mark, it will be tough to attract reliable tenants. On the other hand, if you buy properties in good locations–and even make mistakes on them–the good location can help bail you out down the road.
MISTAKE #3: MISJUDGING RESALE OR RENT VALUE
You could argue that the number one job of investors is to understand how your customers will make buying decisions. That translates into the value of the investment. The more confident you are of the full value potential, the more confident you will be making a purchase that you know will earn a profit.
This is a skill that you will surely learn and refine over the course of your investment career, but you can keep these tips in mind as a good starting point:
- Reduce your target market to a relatively small, manageable area.
- Study transactions in your market daily. Like weight training, it keeps you fit and sharp.
- Hire professionals for assistance. Utilize a real estate agent or appraiser to determine resale value. Use property managers to determine rental values.
- Take real estate investment courses and continue your education.
MISTAKE #4: UNDERESTIMATING REPAIR COSTS
Unfortunately, it’s not uncommon for people to underestimate repair costs. So, you’ll want to avoid enormous cost overruns that could cause you to run out of cash or face other problems.
To avoid large mistakes, learn a good repair estimating system.
HomeAdvisor offers a resource that shows the real cost of repairs from real life examples. This will help give you a straightforward and honest budget of what to expect. There’s 300 different types of projects and over 1 million costs reported. You can also find local resources in Redding, like real estate club meetings, or referencing more knowledgeable local investors or contractors. If this is your first time investing, look for a trusted guide to help you out along the way.
MISTAKE #5: RUNNING OUT OF CASH
Your investment properties are like your race car. Cash is like your car’s fuel. When out of fuel, even the fastest race car in the world sits still. If you run out of cash, even a great investment property can quit building your wealth.
You definitely want to avoid running low or running out of cash. This usually happens for a couple of reasons:
- Underestimating repair costs (see mistake #3 above)
- Underestimating future capital expenses on a rental property
Capital expenses are big ticket items like a roof or a heating-air system replacement. If these costs hit you unexpectedly, they can be detrimental.
MISTAKES #6: LETTING EMOTIONS DRIVE YOUR DECISIONS
This is a typical mistake for newbie investors. And it’s understandable. Entrepreneurs naturally have more enthusiasm and that should be expected when you’re chasing your first deal. But you can’t allow emotions to cloud your judgment when making big financial decisions.
To counterbalance this, gather statistics and calculate mortgage costs to make sure what you are doing makes sense. Start with this:
- Property details – Physical design of the property, square footage, utility metering design
- Purchase information – Basic cost information such as purchase price, cost of any home renovations, and upfront maintenance
- Financing details – You’ll want to talk to a loan officer to get specific details about down payment and the cost of the loan
- Income – Calculate how much revenue the property is going to generate, typically from rent payments
- Expenses – Includes all costs, such as property taxes, insurance, and maintenance
For your first few investments, it is always wise to run the deal by a third party and get their opinion on whether or not it’s a good idea.
MISTAKE #7: CHOOSING THE WRONG REAL ESTATE STRATEGY
There’s no perfect real estate strategy, but there are certainly a lot of bad real estate strategies. Make sure that you land on one that fits with your short-term needs and long-term goals.
Remember why you’re doing this and what you’re getting into. If this is your first investment, we suggest “house hacking” – this is when you buy a property and live in one of the bedrooms or units, and have renters from the other units cover your mortgage. This is a great way to learn the real estate strategy that works for you–with minimal risk.
MISTAKE #8: CHOOSING BAD CONTRACTORS
Using multiple contractors to get the job done right is an expensive mistake. Flipping houses is becoming a popular motive behind Redding real estate investing, so it’s critical to find contractors who will get the do a professional job, clean up after themselves, and finish on time.
Finding the right contractors when you’re doing a fix-flip or rental deal could make or break your success. Know who you’re going to use before you purchase the property.
MISTAKE #9: NOT USING YOUR DUE DILIGENCE PERIOD
Some experienced investors make offers with fast closings, in as-is condition, and with no due diligence period. This may help them get a lower price, but for your first deal this is probably not the right route to go.
Instead, include a short but reasonable due diligence period that allows you to get out of the purchase contract if you find a problem.
Here are a few of the important things I usually do during due diligence:
- Obtain a very good professional third party property inspection
- Repair estimates (Mistake #4 in our last post)
- Evaluate zoning and local ordinances
- Get a professional third party opinion of value and rental comps
Basically, you want to double check all of the key assumptions you used to make your offer. If you find that you made a bad assumption, you may need to renegotiate or walk from the deal.
MISTAKE #10: NOT LEARNING FROM YOUR MISTAKES
You’ve now read 9 mistakes to avoid, but this is just the tip of the iceberg. No matter what, you will make mistakes–and the biggest one you could make is not learning from them.
Once you become an investor, you also become someone who never stops learning. Real world lessons always make for the top teachers.
The greatest rewards always belong to those who were willing to take a risk. Get a professional opinion, and sit down with a loan officer who does this everyday for a living. Together we’ll create a plan and a pathway to success.
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