Common Mistakes in Real Estate Investing
Investing is an absolute must for serious long-term financial security. However, investing can be intimidating, especially to those new or unfamiliar with it.
It doesn’t have to be. Knowing the pitfalls empowers anyone to become a savvy investor with his or her money. Here’s a few common but avoidable mistakes:
1. Starting Without a Plan or Planning as You Go
You may have heard the old proverb “failing to plan is planning to fail” or some form it attributed to historical figures like Benjamin Franklin and Winston Churchill. It is true with investing, especially real estate investing. Lacking an investment strategy is the biggest mistake that investors often make in real estate investment. Many first pick properties that sound like great deals, then try to figure out their next step. Planning is a critical early step to begin real estate investing, and will help anyone find the right properties that fit his or her criteria. Any plan sets clear goals and should help answer questions like the following:
- What strategy is being pursued?
- What is the timeline?
- How much to invest per year? This year?
- What is the risk tolerance?
- How many deals will there be per year? This year?
- How much potential profit will be made per deal?
It’s important to remember to find balanced goals that are challenging, yet achievable. Unrealistic goals can be frustrating and counterproductive. Goals must also be consistent and shouldn’t be changed to often--it's hard to hit a moving target.
2. Overpaying for a Property
One of the biggest reasons investors don't make money is a simple one: they pay too much for the properties. Reasons for overpaying can range from mistakes in analyses to giving into what Millennials call “FOMO” (fear-of-missing-out). The key is to understand what the real value is in a neighborhood, becoming familiar with area cap rates, or prices per square foot (or unit), and researching what local properties are trading at to verify the prices. As part of being patient in real estate investing, it’s important to ignore outside pressure and refrain from making costly impulsive decisions. Don’t give in to FOMO!
3. Little to No Due Diligence
Many novice investors will fail to do due diligence. Investments should be made with plenty of research into a deal, its costs, and the market conditions. It is important obtain and review verified financial reports, leases, and other due diligence documentation. Some experienced investors might cut the process short due to time or other constraints, ultimately making it an investment risk decision.
4. Quantity over Quality
One of the biggest novice investors make, especially after a few deals, is focusing on quantity over quality. This mindset leads them to do less profitable deals and amplify their risk. For example, many wholesalers and rehabbers too confident loaded up on properties before 2006. Upon the economic downturn, these investors were left with large portfolios of worthless inventory, with most going bankrupt and lost all of their properties. Avoiding the temptation to focus on quantity can be a principle most investors refuse to accept and will unfortunately learn this lesson the hard way. It is important to concentrate on quality deals, which will yield better returns, and a smaller portfolio requires less management. The whole point of getting into real estate investing is to improve quality of life, not to work longer and harder.
5. Not Being Patient
“Rome wasn’t built in a day,” is another common proverb you may have heard. Essentially every one of the common mistakes above stem from some form of impatience. There is no “get rich quick” strategy with real estate investing. It’s important to remember that real estate is a long term investment and starting off can take several months. New real estate agents are often told by their brokers that it may take up to six months to close their first transaction. Similarly, real estate investors should expect to wait a few months to close their first transaction. Patience is essential building a portfolio of real estate investments. The rewards, in the form of steady and reliable returns, will be well worth it.
When you invest with RealtyReturns, you can be confident in the fact that you will steer clear of these mistakes. We heavily screen the track record of each borrower and each deal before listing them, doing necessary due diligence to provide only quality investment opportunities to our investors. All documentation, along with clear financial estimates, is available for each deal to ensure a transparent process and help you determine what investments fit your criteria, timeline, and goals. We're dedicated to make investing in real estate an accessible, hands-off experience for anyone.