This article will discuss the most common real estate investment mistakes. It will also provide a few suggestions for new investors.
Real estate can be one of the most rewarding and profitable investments. It requires hard work, organization, research, tenacity, and a willingness to ask for (and accept) help. But it can, when managed properly, also bring returns that are far beyond even the best-managed stock portfolio.
Perhaps more than any other investment option, property investing is full of pitfalls. However, if you avoid these common real estate investment mistakes, you’ll increase your chances of creating an excellent portfolio.
11 Common Real Estate Investment Mistakes to Avoid When Starting Your Journey
1. Skimming or Skipping Research and Planning
Real estate requires research and knowledge. Long before making your first purchase, take the time to understand the local market and the industry in general. Research the various types of loans, the best rental types in your area, real estate and housing laws, and the typical rental prices for your market.
Talk with landlords, meet with lenders, talk with real estate agents, and read heaps of books and trade publications so you have a clear plan.
2. Unwilling (or Unready) to Walk Away from a Purchase
In an over-simplified summary of real estate purchases, a property is either a good or bad investment. It’s hard to know which properties are which. You can either buy the property or not.
This leaves us with four options:
Result: Profit and growth
Result: Saddled with a financially-draining asset.
Result: No gain, no loss
Result: No gain, no loss
As you see from the (extremely over-simplified) table above, when you purchase a good property, you win. But when you purchase a bad property, you lose. If you don’t purchase, there is no gain nor is there any loss; it’s essentially a financial wash. But a new opportunity will arrive. Basically, what we’re saying is that if you have any reason to believe it may be a bad purchase, be willing and ready to walk away from the deal. (Another “once-in-a-lifetime opportunity” will always appear in the future.)
3. Buying a Property that is Far from Your Home
Most landlords prefer to be within easy driving distance of their properties. They like to know that at any time, if needed, they can drive to their property in an afternoon, conduct whatever business is needed, and be home at night.
How far is too far? That’s a matter of debate, and there are successful long-distance landlords. But for when starting your journey, avoid purchase a property that is too far to visit quickly.
4. Purchasing on Emotion
A grandparent’s house may hold special meaning. It be great to keep it in the family. Wouldn’t it be neat to purchase a friend’s childhood home, where you spent so much time as a youth, and turn it into a rental?
These examples, and more, sound great, but you are not building a real estate portfolio on emotion. Maybe they would make good rentals, but purchasing on emotion is a quick way to start a disastrous journey. This is one of the most typical real estate investment mistakes, and it’s especially common when a family property is involved.
5. Trying to Do Everything Yourself
As investors, we often try to do everything on our own. This is, after all, a good money-saving strategy. If you can avoid hiring people, you’ll reduce costs and increase profits. But real estate investment is complicated, and you’ll need help with at least a few costs.
Be ready to hire professionals for anything that may take you too long or won’t produce quality results. Plumbing and electrical work are obvious, but you’ll also want to hire a professional accountant who can help you get the best returns.
6. Using High-Interest Loans
How much will high interest cost? Suppose you have a mortgage balance starting at $600,000 for your property. With a 4.25% interest rate and 30-year terms, you would have a principle and interest payment of $2,952 a month, which equals $35,424 a year. Over the course of the mortgage (360 payments) you would pay a total of $1,062,720.
If the rate is reduced to 3% (admittedly, a massive reduction), the monthly payment is $2,530, good for $30,360 a year and $910,800 over the life of the loan.
The lesson? Don’t make the mistake of settling for a high-interest investment-property loan.
7. Overestimating Rent Value
It’s easy to assume that you will bring a large amount for a rental property. But don’t assume, know. Do your research on average rent price for comparable properties, and even have a professional analysis so you know how much you should earn.
8. Underestimating Repair Costs
A property won’t cost all that much to repair, right? Hopefully not, but a chronic money pit can ruin your well-laid financial plans. Estimate how much it will cost to make repairs, then add 10% so you are prepared for this expense.
9. Remodeling for the Home You Would Want
It’s one thing to make the home livable. It’s entirely different to make the home a luxury estate. Keep your costs down and don’t try to create the wonderful home you would want to live in; you likely won’t see a positive return if you do.
10. Avoiding Important Repairs and Maintenance
Some money just has to be spent, and it’s better to spend a little now than spend a whole lot more later. Roofing repairs, for example, can be costly. But if you wait, you could be hit with both the cost of repairing the roof and repairing water damage.
The same goes for foundational issues, damaged windows, uneven sidewalks (which could lead to a lawsuit) and other potential problems.
11. Not Forming an LLC or Another Type of Entity
Instead of making the purchase and holding the property (and the loan) under your personal name, it’s often best to make the purchase as an LLC or another corporate entity.
An LLC can help shield your personal finances from liability, while also providing some tax benefits. Avoid purchasing under your own name and leaving your financial assets at risk of lawsuits and other issues.
Get the Loan You Need to Start Your Real Estate Investment Journey!
If you want more information about finding the right loan for your investment purchase, contact our team today. Whether you are buying in San Diego, California or in one of the many areas we serve, our team is ready to help with your next home purchase!