The 32 Biggest Mistakes Every Real Estate Investor Should Avoid

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Your first investment will be a learning process. While you’ll likely make a couple of real estate mistakes along the way, there are a few common pitfalls that can be avoided if you educate yourself beforehand.

From financing errors to underestimating repair costs, newbies are at risk to lose serious cash if they’re not careful. Still, real-world education is invaluable, and this guide will help steer you down the best path possible to your very first real estate investment.

Why Avoid Real Estate Mistakes

You may have heard that your first real estate investment is the most difficult one. It’s true.

Your first deal is difficult because you don’t know enough. How could you?

Yet you still need to move forward and get started. If you wait until you’re 100% ready, you’ll never make progress.

But even though your first deal won’t be perfect, you still don’t want it to be so bad that it will knock you out of the game.

So, this article will help you avoid the 10 most lethal mistakes on your first real estate investment. Use this like a checklist of real estate mistakes to ensure that you avoid the worst-case scenarios.

When you prevent the worst from happening, you will gain confidence so that you can buy your first deal, move forward, and begin your real-world education. With that in mind, here are the biggest mistakes you could make in real estate.

1. Failing to Make a Real Estate Investing Plan

Always remember: real estate investing is a long game. Simply buying the first property you can afford without planning on how it will make you money in the long term is a bad financial decision. Performing market research, learning about real estate comps, and building a pro forma are all examples of good investment planning. Don’t just rush into investing without understanding how it works.

2. Getting Poor Financing When Investing in Real Estate

What is bad financing? For me, it includes a combination of the following:

1. High-interest rate
2. Adjustable interest rate
3. High monthly payment
4. Balloon payment
5. Personal recourse

Most residential bank mortgages at least save you from the first four mistakes because the interest rates are low, fixed for 30 years, with amortizing payments, and there are no balloons.

But they almost always require personal recourse, meaning that you will personally guarantee the loan with your other assets and future earnings. This is probably a reasonable trade-off.

Many commercial, portfolio, hard money, and private lenders, however, do not meet any of these criteria. And that could be a problem, especially on your first deal.

If you borrow at 12% interest with a large monthly payment, a balloon due in one to three years, and full personal recourse for the loan, you are likely taking too much risk.

Why? Because the property will probably have negative cash flow with the high-interest rate. A balloon note means you will have to refinance or sell in a very short time frame. As many learned in the 2008 credit crisis, trying to refinance when credit dries up is very difficult – even with perfect credit and good income.

And personal recourse means that if anything goes bad and your lender loses money, they could take ownership of your other assets to collect on the debt.

I have always used a lot of private and seller financing for my real estate deals, and I keep this list of financing mistakes in mind. For example, I might trade off a little higher interest rate and a larger down payment in exchange for a longer loan term and no personal recourse.

Related: The Biggest Mistake I Made as a New Investor (& How You Can Avoid It)

3. Losing Money With Auctions

Do you know what a real estate auction is? A form of gambling. If you take that route, you need to be very, very strict about your budget. Do not go over that budget no matter what, even if the property seems like an attractive investment opportunity.

4. Buying Without Actually Seeing the Property

This is a big no-no, even if you have some experience in investing. Even if the property is an investment and you’ll never live in it, you need to know what it’ll be like for your tenants. Online photos and tours can be misleading: always see for yourself.

5. Overlooking the Extra and Hidden Costs

Every property, no matter how good the condition you bought it in is, will come with unexpected expenses. Most of them will come from repairs you don’t yet know the house will need, but other things, like increased taxes or insurance premiums, should also be taken into account. Always allow extra (at least 5% of the home’s rental income) to cover these unexpected costs.

6. Overpaying for a Rental Property

This is a big real estate mistake. There’s only so much you’ll be able to raise rents to cover your losses if you make this mistake. Putting your rents up too much will result in increased vacancy periods, which will lose you money, making that gap you made with the splurge even harder to close.

7. Underestimating Rehab Expenses on an Investment Property

Estimating rehab costs correctly is crucial to successfully flipping houses or becoming a successful BRRRR investor. It is a process, though, and arriving at the amount you need to budget for is not a magic trick or a wild guess. Underestimating rehab costs will inevitably eat into your cash flow and your profits, so avoid buying a distressed property if you don’t have the budget for rehabbing it properly.

8. Skipping the Loan Pre-Approval Step

You’ll have a hard time buying a home without a pre-approval letter from a lender as many sellers now only show to buyers who can demonstrate that they have been pre-approved for a loan.

9. Not Having a Realistic Budget

And what does setting a realistic budget involve? Knowing how much you can afford on a property overall, not just on the mortgage payments. Always factor in taxes, maintenance expenses, and unexpected costs that may arise later on.

10. Running Out of Cash

Your investment properties are like your race car. Cash is like your car’s fuel. When out of fuel, even the most powerful race car in the world sits still. If you run out of cash, even the best investment property will hurt your wealth building.

So, you want to avoid running low or running out of cash.

This usually happens for a couple of reasons:

1. Underestimating repair costs (see real estate mistake #3 above)
2. Underestimating future capital expenses on a rental property

Capital expenses are big ticket items like a roof or a heating-air system replacement. If these costs hit you unexpectedly, it can become a big problem.

Related: Want to Lose All Your Money & Cry Yourself to Sleep? Make These 4 Newbie Mistakes!

11. Choosing Bad Contractors

While it’s true that as an investor, you don’t want to spend excessively on your property rehab, choosing poorly-rated or inexperienced contractors will cause far more problems than it will solve. Especially if you’re investing in a rental property. Always choose the best contractor you can afford.

My business partner and I bought our very first fix-flip deal in December 2003. We proceeded to go through three different painters, two different heating and air companies, and two different carpet installers before we got the house looking decent.

These were expensive mistakes. We were lucky to even make a small profit on that first deal!

Finding contractors who will do good work, finish up on time, clean up after themselves, and charge reasonable prices is harder than finding buried treasure on a beach. Yet the people who do work on your fix-flip or rental deal will make or break its success.

Related: Brandon Turner wrote a really good article about estimating capital expenses and budgeting for them on your rental properties.

12. Skimping on Research

Making a hasty decision and not researching the property, the area, and the neighborhood will cost you. Apart from the obvious questions about the house, you should also ask and research a whole range of questions. First, consider the city and the area the property is located in. Is this a good area? Are there any developments nearby that could affect the property’s value in the coming years? Are there any problems with utilities or local services? Next, ask very detailed questions about the property itself – are there problems with the property; when were the last major renovations made; and what is the reason for the sale? The more you know, the better investment decision you will make.

13. Forgetting the Importance of Due Diligence

Some experienced investors make offers with fast closings, in as-is condition, and with no due diligence period. This may help them get a lower price, but for your first deal, this is probably not the best route to go.

Instead, include a short but reasonable due diligence period that allows you to get out of the purchase contract if you find a problem.

Here are a few of the important things I usually do during due diligence:

• Obtain a very good professional third-party property inspection
• Repair estimates (see real estate mistake #3 above)
• Evaluate zoning and local ordinances (for example, the college town where I invest has a law that you can’t rent to more than two students in a residential zoning district)
• Get a professional third-party opinion of value and rental comps

You will want to double-check all of the key assumptions you used to make your offer. If you find that you made a bad assumption, you may need to renegotiate or walk from the deal.

14. Choosing a Bad Location

Real estate value always begins with location. The people and businesses who will rent or buy from you begin with location, and then they evaluate other criteria like the lot and the house.

Because it’s so important, you should study the best and the worst locations in your area before buying. Some investors can make money in bad locations, but it’s a challenging game that beginners should probably avoid.

15. Believing Every Word in an Advertisement

Real estate advertising has its own jargon, and you should learn it before you make any decisions about your investment property. Is the house advertised as ‘cozy’? It’s almost certainly very small. ‘Quirky’? It will need a lot of work. And so on. Never take what an ad says at face value.

16. Trying to Do Everything on Your Own

We’ll tell you a secret: no successful real estate investor makes it on their own. They always get there with the help of a well-chosen team of experts. At a bare minimum, you should build a real estate investing team and tap into the expertise of experienced real estate agents, lawyers, property managers, insurance brokers, and many others.

17. Not Doing Local Market Research

This is especially important for investors who are new to a particular area. What worked for you as an investor in one place may not work so well in the new one. For example, if you’re moving from a family-friendly area to an edgy, urban one popular with young professionals, you’ll need to understand the local apartment rental market.

18. Ignoring What Tenants are Looking For

This is closely tied to our previous point. How well do you understand what your potential rental clientele is looking for? If you’re renting in an area popular with families, you’ll need to look for properties that are close to playgrounds, good schools, and have nice backyards. If you’re buying a vacation home, do thorough research into the nearby area. Is it close to local attractions and amenities?

19. Buying a Home Without a Professional Inspection

A home inspector will invariably find flaws and imperfections in areas you didn’t even think to look at. They’ll also take photographs as evidence. All of this will help you to avoid paying for costly repairs further down the line.

20. Falling in Love With the First Property You See

If you’re buying your very first home, whether as an investment or for yourself, you should always see at least 3 comparable properties before you make a decision.

21. Not Researching the Neighborhood

I bought a lower-priced single-family house once at a below-market price with excellent seller financing terms. But the location was awful. I could not consistently attract good tenants because the neighbors were not pleasant (or safe) to live around. On the other hand, buying at slightly above market value in a good neighborhood will attract good tenants and will help you with occupancy rates.

22. Not Providing Easy Access for Showings

Buyers often have to rush to showings after work, or even take time off to make it to a showing. They need easy, quick access to a property, including a clear driveway. Otherwise, they may just choose to skip your house and go see the next one instead.

23. Failing to Market Your Property in Different Ways

It may surprise you to hear that some sellers still just choose to put a ‘’for sale’’ sign in their front yard and that’s it. Or if they advertise online, they only give a brief description and don’t include pictures. Make sure you advertise on as many different platforms as possible, with as much information and as many photos as you can provide.

24. Pricing Your Rent Too High

It’s also a very common one. In the long run, this move is guaranteed to lose you money. Homes that are overpriced stay on the market longer and eventually sell for less. And overpriced rentals stay empty because renters always do their research on local rents.

25. Trying to Sell an Investment Property in the Spring

While it’s true that residential properties tend to sell better in spring and summer because that’s when families move the most, you don’t have to wait until spring to sell an investment property. Winter or fall, any time is a good time if you market and advertise it well.

26. Not Using a Real Estate Agent

This closely relates to the ‘doing it all yourself’ mistake. A real estate agent will have access to the Multiple Listings Service (MLS). When your property is on the MLS, it is available to a much wider community of potential buyers. And if you’re buying an investment property, you will have many more properties to choose from than if you do your own research.

27. Treating Real Estate Investing Like the Stock Market

We’ve said this before, and we’ll say it again: real estate investing is a long game. Real estate prices fluctuate, but that doesn’t mean you should sell your best properties when their values rise. In fact, it’s the opposite. Your best-performing properties will continue generating long-term income, so don’t treat them like shares on the stock exchange.

28. Picking the Wrong Real Estate Agent

Does your real estate agent know the area you’re buying/selling in well? Have they dealt with the type of property you’re interested in before? Real estate agents, like all other professionals, have specialisms. Don’t go to a real estate agent who specializes in single-family homes for a commercial property, for example.

29. Not Creating an Exit Strategy

No one likes thinking about the worst-case scenario, but as an investor, you have to. What will you do if your properties stop generating rental income? Will you be able to exit the real estate investing scene without going bankrupt in the process? You need a plan in case everything does go wrong, and you may as well consult a financial advisor to help you devise one.

30. Visiting a House Only Once

A house that looks like a good investment during the day may suddenly seem less attractive at night if you discover that the area is less safe than had appeared during your first visit. Or you may notice imperfections you hadn’t seen the first time around. If possible, attend two showings instead of just one.

31. Not Planning for the Unexpected

What will you do if there is a flood or another natural disaster that will leave your property in need of major repairs? How would these unexpected expenses affect your cash flow? Always prepare (that is, budget) for the unexpected.

32. Failing to Learn From Your Mistakes

No matter what you learn, you will still make mistakes on your real estate investing journey. I guarantee it.

This is called “The School of Hard Knocks.” Go ahead and listen to Annie sing “It’s a Hard Knock Life” and join the club.

But the biggest real estate mistake you can make is not learning from this School of Hard Knocks.

In our first year of business, my partner and I agreed that we didn’t know everything. We knew we would screw up, potentially many times. But we decided to label each of our real estate mistakes as a ‘seminar’, and then write down the lesson we learned from each seminar (aka mistake).

We have attended thousands of these real-world seminars since then, and our education continues today.

I encourage you to create your own version of the School of Hard Knocks. It’s an invaluable education.

Conclusion

Real estate is an entrepreneurial venture. We entrepreneurs shoot for the stars, but we also take risks that could turn out badly.

This can be a difficult pill to swallow on your first deal.

But the risk doesn’t have to be a bad word. I see it as a barrier to entry. It means that the less committed, pretender-investors don’t bother. They drop out when it gets too tough.

Successful real estate entrepreneurs aren’t perfect. They have scars to prove all of their past real estate mistakes. But they learn to avoid the fatal mistakes that would knock them out of the game. And they learn to always keep moving forward.

Forward movement. That’s what entrepreneurship is all about.

I hope these lessons and real estate mistake insights will help you to continue moving forward at whatever step of the entrepreneurial journey you find yourself.

What did you think of these fatal real estate mistakes? Are there others that I missed? What challenges are you facing as a new investor?

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.