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5 Mistakes New Real Estate Investors Make

Smart real estate investing is a proven path to financial freedom. But it’s also filled with pitfalls that can trap the new and unsuspecting investor. While it’s understandable that the new investor wants to hit the ground running, smart investors hold themselves back, learn the lay of the land, and never invest in something they don’t fully understand. 

Here are five common mistakes new investors make:  

1. Don’t Take the Time to Learn Their Local Market Fully

Understanding your local market takes time and focused study. New investors need first to learn neighborhoods: the retail values as well as rental rates; what is a typical house in that neighborhood as opposed to an atypical (and unsellable) house; who their buyers or renters will be. They also need to be aware of school quality, any coming assessments, large construction projects, flood zones, and anything else that will affect not only the values but the desirability of a neighborhood. Too many new investors end up with bad houses in undesirable neighborhoods because they think it’s a “steal.” It’s not.

2. Trusting the Wrong People

New real estate investors often hear the phrase “Do your due diligence.” Most of the time, this refers to the property. But do your due diligence on the seller, too. Whether the seller is the homeowner, one of the homeowner’s relatives, or another investor, it pays to do at least a basic check into whom you are doing business with. Does the person you’re talking to have the right to sell the property? If you’re dealing with another local investor, are they known to be a straight shooter, or are they a little sketchy? Is the selling party covering up known defects in the property? A lot of people talk a good game. Do business with the people who play by the rules and follow through on what they say. This is where a local realtor can assist you in uncovering any funny business. They know the local market better than anyone and can provide you will the right information to assist you in making an informed decision.

3. Being Underfunded

Being underfunded in any endeavor is a recipe for disaster. In real estate investing, miscalculations can be extremely costly. As a homeowner, you may live with something not working in your house. If the heat stops working in your home on a holiday weekend, you might tough it out for a few days before scheduling a service call. As a landlord, you’re required to fix those problems in a timely manner. That means paying a weekend rate for a plumber or replacing an appliance without having time to price shop. You need to have a reserve of funds, whether to maintain your rental properties or to cover an unexpected and costly repair in a rehab.

This also includes having good credit. While you don’t need stellar credit to invest, life is easier when you can open up credit lines at the building supply stores. You will get better interest rates when you buy properties. You may not have to put down utility deposits. Good credit saves you money. If your credit is not good, work on improving it.

4. Underestimating Rehab Costs

Any experienced rehabber will tell you that a rehab always costs more money (and takes more time) than you initially estimated. Most investors build a “fudge factor” into their rehab cost estimates for any overruns that may occur. As you get more experience, your rehab estimating skills will become sharper. Still, you always have to plan for unexpected problems such as you find termite damage behind a wall, that new AC unit wasn’t wired up to code, there’s a supply chain problem that created time delays that increased your carrying costs. These things happen. Building in a fudge factor is a smart buffer. Bonus: If you don’t have to use it, you’ll see a nice increase in your bottom line.

5. Too Anxious to Make a Deal, Any Deal

Experienced investors say no to many more deals than they say yes to. In fact, they can say no to most deals within a minute of hearing a few details. That’s because they have learned their market and how to spot red flags in deals. They’ve also established personal preferences. For example, they never buy properties with flat roofs, they only buy concrete block houses, or they prefer to work in certain areas but never in gated communities.

While many decisions not to buy are a matter of preference, new investors don’t yet have the hard experience to have any preferences. They don’t yet know what a bad deal (for them) is. Here’s a tip: If all the experienced investors pass on a property, there’s probably a reason.

It’s hard to keep passing on deals that look like they may be okay, especially when you hear other investors boasting about making a killing on a property. Take your time. Your first deal doesn’t have to be a grand slam; it just has to be a solid single.

Real estate investing is a business and should be treated as such. Go into deals with your eyes wide open and your pencil sharpened. There are few overnight millionaires in real estate — it’s a long-term investing strategy. By avoiding these costly mistakes, you can make sure your real estate investing career doesn’t crash before it’s even started.

Summer House Realty

Whether you are a new real estate investor or someone who has hundreds of rentals, Summer House Realty has worked with investors across the entire spectrum. We have excellent relationships with investors due to our due diligence and many years of negotiating deals. We know the local market better than anyone and can provide insight into what is a good deal and what is something you should pass on. If you are interested in seeing investment properties in Amelia Island, contact Summer House Realty today at 904.557.3020.