Interested in real estate investing? Or, perhaps you're already an investor and wondering why you're struggling? Following are 10 Common Real Estate Investing Starting-out Mistakes:
Failing to learn the basics.
When starting anything new, including real estate investing, there are simple ways to learn the basics. You can go to the local library or bookstore, join the local Real Estate Investors Association (REIA), spend money on boot camps and educational seminars, or study online on your own. No matter how you go about it, there’s a lot of opportunity to pick up the fundamentals of real estate investing. The most successful investors study and establish a good foundation from which to grow.
Not having a plan.
I often meet new investors who are not sure what they’re looking for, they’re not really sure what they want to do, they just believe that real estate investing is a solid way to invest in their future. They’re not sure how to get started, don’t know with whom to work, and don’t know for sure what to buy or what strategy they’re going to use. What they have done is watched some “fix and flip” shows and decided they, too, want the success. However, to be successful you must have a plan. Start by writing down your goals and determining how you’re going achieve them.
Having a short term vision.
True wealth building requires long-term investing. You can't create real wealth by getting in when you feel good about it and getting out when things get a little rough. The real estate market always fluctuates - up and down - so real estate investing for wealth has to be for the long term. Renovating and re-selling brings quick cash for today, but wealth requires that you put your money into hold properties that you'll own for a long time and that will generate ongoing income forever.
“Get Rich Quick"
Refer back to mistake number three. This is not a “get rich quick” venture. “Fix and flip” the way you see on TV is only a small part of the strategy to grow your investment portfolio. You'll find that tax benefits on holds (rental properties) greatly increase your wealth building over time. And nothing beats allowing someone else to pay off your note while you collect rent and positive cash flow every month. That’s not get-rich-quick, it’s building forever wealth over time. Eventually, when your houses are paid off and that full rent is your cash flow, you'll find that you’ve created amazing wealth along the way.
Quitting your day job.
A lot of newbie investors are tired of their J-O-B. They’re ready to move on, quit their day job, and get into real estate investing full time. We understand! But wait until your real estate business is generating income before you quit your W2 job. You’re acquiring assets that are going to be paid off by someone else, that are going to go up in value, and are going to create cash flow for you each and every month. It’s very difficult, however, to replace an entire year’s income from $200 per month rental cash flow alone. Real estate is an expensive business. So until you’ve built your portfolio, use this as an investment strategy, not as a way to immediately quit your day job.
Not having multiple exit strategies.
When you purchase a property, you need exit strategies in place. Perhaps you plan to renovate and resell quickly. What if it doesn't sell? Are you able to put a tenant in and hold it? Perhaps you can sell it without renovations for a lower but faster profit to another investor (wholesaling). If you're locked into only one exit strategy when you purchase - "I have to renovate and resell quickly" - you can back yourself into a painful corner. Before you buy, determine how many and which exit strategies are possible for the property. Have a back up plan in case option number one doesn't work out.
Lack of cash.
Lack of cash can really slow you down, and banks are not fond of lending for speculation. A great source of funds, and something you absolutely need, is investment partners with cash. Cash doesn’t always mean a pile of green by the way. It’s money in CDs, in money markets, in 401ks or IRAs; it’s in areas that sometimes you don’t think about.
Not understanding renovation costs.
Two main renovating mistakes: First - Grossly underestimating the cost of a rehab. Over time, you'll be more comfortable walking through a house and estimating repair costs. You'll also learn neighborhoods, know exit strategies, and know your personal plan from the time you enter a property. But this is a skill and takes time to learn. Second - not sticking to a budget. Perhaps you start a property with a fairly accurate budget. However, once you get into it, you become personally attached and, next thing you know, the planned laminate countertop becomes corian, or what could be a laminate becomes hard-surface. You put in updated fixtures where you don’t need to, brand new appliances where they aren’t needed. Little things start adding up to big dollars and, pretty soon, you've blown the budget. What's necessary is a mentor, someone you can bounce ideas off, someone who holds you accountable. If you nail that original cost estimate for the job, mentors don’t allow you to go over budget but help keep you in line. That’s important.
Waiting too long to get started.
We knew a 25 year old who owned seven properties. His exit strategy was to own twenty to twenty-five properties by the age of 40 and to have those properties paid off. His goal was to average $1,000-$1200 per property per month. Pure profit. Minus a few expenses, he'd clear a great return at a very young age. Moral is, don’t wait to get started. If you don’t buy now, in five years you’ll be sorry you waited!
Going it alone.
To be successful in just about any businesses, you need a mentor. Real estate is no different. A mentor is someone you work with, someone you trust, someone who agrees with your business philosophy. Having a good mentor to lead and guide you will pay off in big profits. Don’t ever be afraid to ask advice, there’s no need to learn on your own. Know when to seek out an expert and follow their expertise. Bringing in someone with more expertise will prevent you from making big mistakes. I promise, you will pay for your education one way or another - you either pay coaches or you pay with your mistakes. Going it alone can be very, very costly. Surround yourself with like-minded individuals who can lead you down the path to success.
Obviously, there are more mistakes to be made when investing, but we consider these 10 to be crucial mis-steps to avoid. Hopefully, you can learn here from others so you don't need to repeat these.
Do you find this helpful? What can you add to the list?