10 Mistakes Every Real Estate Investor Should Avoid

[Hannah Vohs]

Being a real estate investor is an enticing aspiration that comes with many rewards and benefits for savvy investors. As a separate asset class, owning real estate investment properties has become one of the most popular investment vehicles over the last 50+ years. Some of the benefits of investing in real estate are given below:

• Investing in a tangible asset that has historically appreciated over time
• Spread risk by diversifying your portfolio
• It can be a source of passive income, with minimal effort through short and long-term rentals
• Real estate investment properties have typically been resilient against inflation
• Depending on investment type, tax benefits can be availed

Thanks to these (and more) benefits, you’d think investing in real estate was a no-brainer, and in most instances, you’d be right! However, as with most investments, you should also know that along with the potential rewards come potential drawbacks, where substantial mistakes could have serious financial complications for you. As such, before making any investments always do your homework and consult financial advisors and real estate professionals where possible.

We’ve put together a list of common mistakes that first-time (and sometimes veteran!) real estate investors can make. We hope that by keeping these mistakes in mind, you’ll be able to avoid making the same ones in your next real estate investments. And once you’ve finished reviewing these and are confident in your ability to handle your new investment, you’ll want to find the best financing options for your deal. And that's where REI News comes in. Our team of specialists will work with you to identify the perfect lender from our qualified list of hundreds of reliable, affordable funding partners.

But before we get ahead of ourselves, first make sure to go through the list of common mistakes to avoid as a real estate investor:

Real Estate Investment Mistakes To Avoid

1. Not Planning

Probably the biggest mistake you can make, which can then compound into further mistakes down the line, is a failure to plan. As with most big decisions in life, insufficient planning means you leave a lot up to chance or luck, and you are sufficiently prepared for unforeseen obstacles in the future.

Make it a point to sit down and review the different real estate investment properties you can invest in (single family, mixed use, office building etc), talk to industry professionals to understand the real estate market, research industry trends and available properties, work out your budget for this investment (an example of some expenses to consider can be found in our article on house flipping expenses), and come up with contingency plans in case things do not go according to plan.

It might sound like a lot of work (and it is), but you will regret not doing this should your expensive deal go sideways and you are left scrambling to find a solution. Always do the homework, and plan in detail to reduce the investment risks and increase the likelihood of a profitable real estate property investment.

1. Neglecting To Do The Research

Even though I touched upon this point briefly above, it’s important enough that I’m dedicating a whole section to it. Before buying any long-term, expensive assets such as vehicles or washing machines, we always read reviews, talk to friends and family, and research options before making the purchase decision. Buying a home is no different, and in fact, it warrants even more rigorous research.

You’ll want to research the current real estate market, trends, investment type, available properties, neighborhood demographics, pricing trends, repairs, and other costs for the deal. You are attempting to make the most informed decision possible so that there are little to no surprises when you decide to pull the trigger.

1. Settling For Bad Financing

Investment property financing can be tricky at times. You have a wealth of options, ranging from traditional institutions like banks to private lenders, crowdfunding, and more. Always read up on the fine print and clearly understand the implications of what you are signing. Get an attorney or financial advisor to cross-check it for you if needed. Also, ensure that you can pay what is expected.

By this, we mean your payments should not stretch your monthly budget to the breaking point. This is because you need to account for emergencies and other unexpected costs that could eat into the budget. People on a variable interest rate loan may be suffering in the current economic climate and may have regretted going down that route. So always try your best to forecast for the worst when budgeting your interest payments.

The fact that the real estate funding option is 100% in your control before you sign up for it means that there should be no reason you don't decide on a good choice. It's always better to say no to a poor loan today rather than suffer the financial blowback later should you fail to pay. And if you need assistance finding an outstanding loan, speak to our team at REI News. We have the knowledge and experience to source options for you that can fit your needs.

1. Not Having A Plan B

During your planning stage, you must work through the possibility that your desired outcome may not come to fruition. If so, what other options do you have as Plan B to still come out on top? For example: should your house fix and flip project not sell as fast as you wish, you may want to consider renting the property in the short term until you can secure a profitable deal. Always think of the things that might go wrong and try to find ways to solve them or at least mitigate their impact.

1. Not Having A Team

In real estate, it is very uncommon, or rare in fact, for one person to be able to handle all facets of the deal. You should try to build up a team of go-to professionals who can help advise you in various aspects of the investment. You may need a reliable contractor to refurbish and repair a home for fixing and flipping. A close relationship with them might mean better prices, maintenance fees, and honest, favorable home assessments.

Working with a realtor may mean that they could find the best deals possible and negotiate even better ones. You may need a knowledgeable attorney to handle the documentation and legal aspects of the deal. Having reliable experts on your side looking out for your, and their, best interests can help you catch problems before they ever become one.

1. Not Sticking To A Budget

Having a clear budget that is not religiously adhered to can be the quickest way to turn a profitable deal into a bottomless money sink. When you’ve compiled a detailed and thorough budget, ideally, you should be able to stick to it. Even when things go off the rails, you should have a provision for unexpected expenses factored into your budget.

At a certain point of investing more and more money into the project, you’ll want to understand that you may need to course correct or even, in extreme cases, pull the plug and seek a quick exit and not give into the sunk cost fallacy. We know things can go wrong, but it’s important you work within your budget or towards returning to it as soon as possible.

1. Investing In The Wrong Refurbishments

When planning any enhancements to the home, always think strategically about what potential buyers may be looking for. Deciding whether to replace any infrastructure may be out of your hands, depending on its condition. Still, it would be best to try to do the bare minimum to get the maximum value. What qualifies as valuable can be subjective. However, doing thorough research on other properties sold in that area or the popular in-demand trends can help you prioritize costly repairs as needed.

1. Underestimating Your Cash Flow

So you invested in a desirable investment property for rental and have tenants lined up at the gates to rent out your units. You’re good right? Well, it’s the key consideration for sure, but simultaneously, you need to factor in operation overheads before sitting back and enjoying the passive income.

Handling tenants, arranging repairs, maintaining properties, and making statutory payments for taxes and inspections are some of the costs you may not consider when dealing with rental properties. Even just holding properties can have expenses attached like utility bills, homeowner association (HOA) fees, taxes, and more. Always review an operational budget so that the deal is as profitable as it looks at first glance.

1. Overpaying For A Property

Paying too much for a house or building can be the most critical mistake you could make with investment properties. Once the payment has been made and the sale transfer completed, there is no going back. If you overpay for the property, selling or renting it for a profit may turn out to be impossible, and there might be nothing you can do about it. Always research local pricing history and trends and speak to brokers knowledgeable in the immediate neighborhood to understand whether you have spotted a good deal.

1. Not Being Patient

Unlike shares in the stock market, where you can make a profit within days or even hours, real estate requires quite a bit more patience to start seeing gains. Waiting for your property to appreciate, the repairs to be completed, and the right tenant to be found can be nerve-wracking, but exercise patience. Your success can boil down to waiting for the right moment to strike.

Summary

While the potential for great reward exists, all temper these expectations with the work required to achieve them. We hope the above points were eye-opening and that you keep these in mind when planning your next significant real estate investment.