5 Mistakes New Real Estate Investors Make
Smart real estate investing is an excellent path towards true 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’s five common mistakes they make – and that you should avoid.
Fail to understand the local market
This takes time, which many new investors don’t give themselves.
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” when it’s a money pit.
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.
For investors, this applies to 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, but shady characters do exist.
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.
In real estate investing, miscalculations can be extremely costly.
As a homeowner, you may be able to live with something not working in your house. For instance, 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.
Having a reserve of funds, whether to maintain your rental properties or to cover an unexpected and costly repair in a rehab, is a must.
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 local building supply stores or securing better interest rates when you buy a property.
Good credit saves you money!
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 constantly. And so building in additional buffers to your cost estimates is a must.
And the bonus: If you don’t have to use it, it’s nice increase in your bottom line.
Impatience for the deal
Experienced investors say no to many more deals than they say yes.
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 (due to HOA constraints).
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 something amazing – a solid win gets you moving in the right direction.
Avoid these mistakes with our realtors
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 – and know your local market inside and out. And we’re not afraid to recommend saying “no” to any deal, too.
Contact us today to get started and see how we can help you.