|As it happens during changing market conditions, there are many new investors entering into the “Real Estate Investing Craze.” With interest rates low and bank accounts, cd’s returns at all time lows, and real estate at historical lows, it has become a prime time to make profits in real estate. As a property manager with a many investor clients one of the biggest challenges we see is rookie mistakes when approaching building a real estate portfolio.|
|So here they are, the 7 Common Mistakes of rookie Real Estate Investors
Mistake # 1 Emotional Purchases
If you buy it wrong, you are defeated before you begin. It is very easy to go out and find what you think is a great deal and become enamored with the deal. You run the numbers and it looks so sweet and you decide you have to have this house. One of my mentors use to say “if you want the house you are in trouble, if you want the deal you are starting well.” It can be very difficult to make good business and investment decisions once your emotions are involved. Business is not the place for emotionally charged decisions. The cool thing about the market is that no matter what the market conditions are, there are always great deals available. The opportunities that create great deals always exist; divorce, death; taxes; business partnerships gone bad, etc…
Mistake # 2 Lack of Due Diligence
There are 2 parts to this equation, 1st – You don’t know what you need to know the 2nd is you know what you need to know but don’t bother doing the homework. The truth is there is no so thing as too much information. Especially for the beginner. While you don’t want to get “analysis paralysis”, a smart investor will due their proper due diligence; know the property you are buying, know the neighborhood you are buying the neighborhood in; know the actual repairs needed and cost of these repairs; know the rental rates; know your exit strategy and have contingency plans. Learning how and what you need to know takes time and training. So in the beginning, I don’t believe there are any bad questions. One way to help deal with this is to build a good team of professionals to work with. Some pros to think about in building your team that will become very valuable to you; realtors, property management team, mortgage professional; real estate attorney; contractors and title and escrow (depending on your state).
Mistake # 3 Lack of Cash Reserves
I have seen this to be a huge mistake for many real estate investors. Key to success in any business; Cash Flow. Cash Flow is king in real estate. The ability to navigate challenging situations and circumstances in a real estate investment, often comes down to the ability to whether financial storms. Maybe you buy a house to flip, you get a great deal, fix it up and put it on the market at what you feel is a good price. The market is slower than you thought and suddenly you are worried about making payments without a buyer. Proper reserves will help get you through the stressful time until you can find or buyer, or may allow you to lower the price and still make a profit to get the investment faster.
If you own rental property, lack of cash reserves creates big time stress if there are vacancies or repairs needed. When you have a decent cash reserve account, you can respond to problems instead of reacting to them. Having these cash reserves allows you to:
I teach my clients that proper positioning will help build a strong foundation for a successful investing career. At our firm we strongly recommend to our clients build cash reserves before investing in rental properties.
Mistake # 4 Lure of Instant Success
It is easy to get lured in at real estate investment seminars about the stories of overnight millionaires. The stories are compelling and sometimes used to motivate people to buy the corresponding guru real estate course. But understand the rarely is their success overnight and easy. To be successful as a real estate investor you are looking for long term results; this is where real estate excels as an investment vehicle.
We have all heard the expression “Rome wasn’t built in a day.” This definitely applies to investing in real estate. Take the time to get your education and then develop your plan. Your plan should consist of short, mid and long term goals. Once you have a plan you have to take action. A step-by-step approach will help any rookie investor get off the fence and get going, and the plan will help keep you on track.
Mistake # 5 Lack of Education and/or Mentorship
I have been to countless seminars and heard people snickering “I wouldn’t pay for that education, only the guru is getting rich.” While it is important to spend your education dollars wisely, a smart investor is going to invest in their real estate education. This education will be an ongoing investment and a cornerstone to the rookie investors likelihood for success. I believe that a proper real estate investor education is essentially priceless. As the old commercial use to say “you can pay me now, or pay me later.”
Becoming a successful investor that is able to build and keep a growing real estate portfolio will require continuous education, as real estate is an ever changing, dynamic environment. It is a puzzle with many quirks to navigate, and requires a creative and knowledgeable mind. This knowledge comes from education and experience. It is especially helpful to have mentors that have achieved what you are trying to achieve and have been where you want to go.
A great place to find mentors and accountability partners is at a local real estate investment club. There are many experienced investors at different places in their careers and these environments provide a wonderful place to network and share your dreams in a supportive environment.
The more knowledge of investing techniques, financing, acquisition, negotiating and, of course, your local marketplace, the less risky your investments will be. A great deal on a real estate investment will generally always be a safe investment as people will always need a place to live.
Mistake # 6 Taking Cost Cutting Shortcuts
When people come out of seminar land and decide to jump into the real estate investor world, they often come to it with a job mentality. This will not work here. It is a business and there are cost. Don’t take shortcuts on important things like a home inspection or property management. The goal is to be profitable and many new investors don’t want to pay for valuable resources and real estate professionals when they first get started. Or they try to do all the work on the property themselves when they don’t have the proper skill sets to accomplish things. I have seen more “flip” projects take 3 to 4 times longer when novice flippers try to cut costs and do all the work themselves. There are times when this makes sense, but most of the time it takes longer, cost more and the work is done poorly and often times has to be redone by a professional. Take head rookies, it is a business and there will be expenses. Be wise, but not cheap!
Mistake # 7 Greed
Oh greed, one of the 7 deadly sins. While most real estate investors get in this game to make money, we have to be careful not to be greedy in the wrong places. You have to learn to properly evaluate your deal and your profits before you buy. This will help you not to get to greedy and to make sure you are creating win-win business relationships. Sometimes, especially when you are new and working to build your capital you may come across a deal that you don’ have enough capital to buy. Well it would make a lot more sense to wholesale this deal to another investor and make some money than lose the deal trying to capture all of the profits to yourself. This also helps with the law of reciprocity
So I hope this helps all of you rookie investors out there get on your road to a successful real estate investing career!
To Your Success,
Lyle Crews, Jr.