Thinking of making an investment in real estate? If so, be sure not to dive in headfirst. As it turns out, it is not as simple as it appears. Although you may have done all your homework, don’t assume you are in the clear just yet. Below is a list of mistakes that new real estate investors commonly make. Check out the list to make sure you don’t fall for these traps too.
1. Penciling out unrealistic numbers
This can refer to a variety of numbers. Many people tend to underestimate their expenses and overestimate the potential revenue. Investors will factor in the mortgage, insurance and taxes, but fail to include the costs for maintenance. When you overestimate the rental income and underestimate the vacancy, you will end up underestimating the majority of the expenses that come with operating a property, and will end up with low or negative investment returns.
2. Underestimating renovation time and costs
Inexperienced investors have little knowledge on how long renovations will take and how much they will cost. What ends up happening is they underestimate the cost and time, resulting in problems. Chances are, however much money you think the renovations will cost, it will cost much, much more. In regards to time, many new investors assume a good renovation can be done in 30 to 60 days, but your best bet is to talk to some experienced investors in order to create a realistic time frame.
3. Relying on the property value to rise
People chose to invest in real estate, assuming that they will be making more money than they spent. Most people don’t have the cash lying around to buy property, so what they do is borrow money. That money is a loan, and must eventually be paid back. This would not pose as an issue, as long as the value of the property continues to rise. If home values fall, which they sometimes do, you may find yourself in a situation where you owe more than you are making. Be careful, because the interest payments will build up.
4. Not spreading out your investments
New real estate investors tend to put all their money on one property. But the key to long-term success in investing is spreading out your investments throughout a variety of properties. If you put all your money into one location and a natural disaster occurs, such as a hurricane or wildfire, you might be in big trouble. Even if nature doesn’t tamper with your investment, significant damages to the house such as mold or cracks could wipe out your potential cash flow.
5. Believing everything you hear from other investors
It’s always a good idea to get tips from experienced investors. Those who know what they are doing can easily help you avoid making a huge novice mistake. While their advice is valuable, that isn’t to say you should follow directly in someone else’s footsteps. There is no way to verify their claims and assure you achieve their same success. Even the most successful investors make mistakes, so listen carefully, but make sure to draw your own conclusions.
6. Thinking that real estate is low-risk
There are tons of risk issues that come along with owning property. Even the most experienced investors know that any investment can pose a risk. By putting in your time and remaining diligent, many investors can avoid certain disasters and keep the process financially painless. However, there is no foolproof method to avoiding those minor and major bumps in the road.
