Avoid These Four Common Investing Mistakes
Last month the median sales price of existing homes in the United States rose for the 48th consecutive month. This increase has led to a boom in the popularity of real estate investing. It seems that almost everyone wants to flip houses or own a rental property. While the real estate business is available to anyone it doesn’t mean that everyone will be successful. Like any other business you need to put the time in and study your craft. One false step can leave you wondering why you aren’t as successful as you imagined. Here are five common investing mistakes that you need to avoid.
- Assuming Appreciation. Owning a piece of real estate is not like purchasing a lottery ticket. Sure, there ceiling may be high but it is not guaranteed. Regardless if you own a rental property or a rehab appreciation is far from a certainty. To increase your value you either need to buy in the right market at the right time or make the right improvements. Trying to time the market at just the right time is very difficult, if not impossible. If you are banking on your home to appreciate without doing any work you will quickly find yourself in trouble. Even if you make improvements and upgrades appreciation isn’t a done deal. One of the most common mistakes that new investors make is assuming that all the work they do will yield a return. Your work has to be in line with the market and be something that creates demand. Getting the property at a discount does not mean you can sell for a higher price. Appreciation and value has to be something you work to create and not just hope happens automatically.
- Not Working Hard Enough. Real estate is one of the few businesses where your income is directly related to how hard you work. As an investor it is important to understand just what hard work is. You can easily fool yourself into thinking that you are working hard simply because you have some busy work to keep you occupied. Sitting in front of a computer for hours on end does not make you busy. You need to put yourself out there and find deals. There are numerous ways you can find deals that don’t require excessive capital. Knocking on doors may not sound appealing but if you do it for two hours a day for ten days straight you can probably find a few deals to work on. The same is the case with how you network. The more people you talk to the more opportunities you will have. At the end of each day you should feel that you did everything you could have to grow your business. If not you are not working as hard as you need to.
- Poor Due Diligence. If you watch one of the handful of real estate shows on TV you will see buyers making offers seemingly without much thought. What you don’t see are the hours they spend researching everything about the deal. Even though you aren’t living in the property you still need to treat it with the same sense of urgency. You need to examine every square inch of the property and fully understand the market. If there is a school scheduled to close you need to know about it. If there is water damage in the basement it has to be on your radar. You can’t walk a property for a few minutes and think you know it well enough to make an offer. Where investors get into trouble is by getting caught off guard on unexpected items. In most cases these items are easily detectable with a little due diligence. You can never guarantee the property will be without defects but you can do everything possible to know about them.
- Limited Capital. Investing in real estate takes money. This doesn’t necessarily need to be your money but you need to have access to it on some way, shape or form. Without capital to rely on you leave yourself open to disaster. The biggest reason that many rental property owners got in trouble when the market collapsed was not interest rate changes or even bad tenants. It was the lack of reserves they had to dealing with these issues. Without rental property reserves you do not have the ability to effectively manage the property. Eventually your tenants will be impacted which creates a domino effect of negative items. The same is the case with a rehab property. If you don’t have money to do the right work demand is not created and buyers will look elsewhere. Before you get too far you need to get your capital lined up. Even if you never plan on using it you never know when you will need to.
With the increased competition in the real estate business it is important that you avoid mistakes whenever possible. Things will happen from time to time but you goal should be to keep any mistakes to a minimum. What you never want to do is make a mistake based on work ethic or lack of planning. Hopefully any mistakes you make can be learning experiences instead of ones that cripple your business. As you are just getting don’t let these four common mistakes be the ones that set you back.