The 6 Pitfalls to Avoid in Real Estate Investing
A recent Bankrate survey revealed the most common real estate investing errors that newcomers make. Topping the list was “planning as you go,” a sure-fire way to lose money in just about any type of investment endeavor. Many first-timers buy a house at a price they think is a bargain, and then begin thinking about what to do with the property afterwards. Experts say this is a backward way of going about things.
Savvy RE investors have a specific plan of attack and know what types of properties they are looking for, what they want to use them for, and what they can afford to spend on the process. If you want to invest in real estate, make your business plan first, and then shop for properties.
Here are the other pitfalls of RE investing that rounded out the top six in the survey:
Expecting to get rich on a few deals, or “get rich quick”
Especially for newcomers, there is no patented scheme by which to make a fortune overnight in real estate. As with any other investment, you need to know the ropes, understand your own risk tolerance, and be willing to work hard to make it all happen. Yes, there is money to be made by smart, hard workers who specialize in real estate investing. Those who are still learning the ins and outs of the business need to be more patient.
Going it alone
Being a serious, effective real estate investor means being part of a team. Sure, you might be in business for yourself as an independent contractor, but that’s only a tax status. The real world of buying and selling property means you will have to deal with other agents, inspectors, appraisers, attorneys, and lenders. That’s the bare minimum. If you are involved in fixing up the properties, you’ll need to have solid working relationships with plumbers, HVAC professionals, lawn maintenance services, painters, cleaning people, handyman services, and at least one electrician.
Beginners often want to go it alone but soon realize that it is virtually impossible to work that way as a real estate investor.
Spending too much money on properties
Once a deal is inked, you have either paid too much or too little. Beginners typically pay way too much for their first properties. That’s just the way it is for first-time investors in many businesses. The problem with doing that in real estate is that you don’t learn you’ve overpaid right away. Later, when you’ve gotten to the point of selling the property, you bump into reality. It becomes obvious, for example, that the house you purchased six months ago was not such a bargain after all. Now, the frustrated neophyte is massively disappointed with an abysmally low rate of return, or none at all!
Not doing enough homework
If there is any single type of investment that calls for lengthy planning and research, it is real estate. Too many newbies think they’re going to enter the market and make a quick killing, and then get out. Nothing could be further from the truth.
What usually happens to these types of investors is the get educated very quickly.
The smartest investors go slowly, read everything they can about the market, and attend a few National Real Estate Investors Association meetings to learn more. Experts suggest finding a local investor who can tell you about the health of the market and give you some pointers. Networking with like-minded investors is an ideal way to get your feet wet and learn about the real estate market in your area.
Many newcomers think properties will instantly appreciate and not have any down time. Experts warn that an asset can easily turn into a liability, especially if that house you purchased sits unsold for several months, during which time you’ll need to pay association fees, taxes, mortgage, insurance, and advertising and maintenance costs. Real estate investors need to have enough financial resources to cover their immediate expenses, which can be significant.
As is the case with so many kinds of investing, education plays a key role. Talk to people in the business before jumping in. Attend professional meetings and read, read, read about the sector. At least that way, you’ll know what you’re getting into in terms of risk, reward and the amount of hours that you’ll be putting in. Investing is serious business, and needs to be treated as such.