3 Common Mistakes in Real Estate Investing, and How to Avoid Them

A good private real estate manager should be performing the proper due diligence to protect and grow your investment. Read BENA Capital's quick tips below on how to avoid falling victim to 3 common mistakes in real estate investing.

1. Substituting Technology for Niche Market Knowledge

We have all heard this age old adage when it comes to real estate: “Location, location, location.” In an era where technology rules the world – where you can virtually stroll through the neighborhood using Google street view and where Yelp provides additional transparency on proximity to local amenities – it can be tempting to make real estate decisions based solely on the information available on the internet. But while technology is a useful tool for a preliminary assessment, it is no match for niche market knowledge from those who live and breathe the local real estate market every single day.

That's why it's important to have strong relationships with:

• Brokers – the best brokers will send you hot listings with your criteria in mind prior to them hitting the market. They will know up and coming areas in major transition where you can capitalize on the growth and capture the appreciation.
• Property managers – dependable property managers will understand your tenant base, won't need hand holding, and can come up with innovative solutions that align with your investment strategy, save you money, while keeping tenants happy.
• Contractors – most people forget that good contractors are worth their weight in gold. Bad contractors make false promises and cause you delays (which can waste valuable time and cost you thousands of dollars in lost rental income).

2. Trusting Numbers as Advertised

Whether you are trying to figure out the best financing strategy for you, property valuation, or the asset's return on investment (ROI), you should always run the numbers independently of what has been advertised. With listings touting high rental incomes, cap rates, and cash on cash returns, some make the mistake of taking those numbers at face value without understanding the assumptions behind them. For example, does that 11% cap rate include pro forma rental income numbers much higher than what's achievable in the local market? How long will your rental have to sit vacant for to get to the rental income advertised? What routine expenses and maintenance are being included or omitted? When do the current leases end, or are tenants renting month to month? Are the comps provided in the same vicinity of the subject property, or are they too far away to be relevant? While most brokers will not blatantly lie when asked those questions, they will rarely offer such information voluntarily.

3. Letting Emotions Drive Decisions

Investments are like businesses and should be treated as such. You need to determine the short term and long term goals that work for you, your investment criteria, your exit strategy, and the level of risk you are willing to accept. Without this solid foundation, your resolve can waiver during the course of a stressful real estate transaction, and your decisions could come back to haunt you. When you’ve invested time and effort to close a deal, it can be tempting to move forward even in the face of red flags – whether that be in the form of a bad inspection report or not being able to find a trustworthy property manager – knowing your risk threshold and when to pass on a transaction is important. On the other hand, many of the best investments are not turnkey. Knowing how to evaluate cost vs. benefit, risk vs. reward, is crucial. In each case, keep your original set of criteria and goals in mind instead of letting emotions cloud your judgement.

We all have that one friend who boasts about their real estate success in XYZ city every chance they get, or the one that laments buying property in the same XYZ city when everyone else did. Don't jump into investing in real estate without understanding the level of commitment needed to make your investments successful, and don't make hasty decisions based on one case study. One single point of data does not make a trend line. It's not easy, but with the right planning, mindset, and focus, real estate can be a strong component of an investment portfolio.