How Can First-Time Real Estate Investors Avoid The Most Common Mistakes Of Their Trade?
New investors need to think twice and act cautiously before a sudden mistake can cost them big down the road. Listening to the advice of their agents and considering all the possible factors that go into making a transaction of this magnitude can save them some of the potential pitfalls faced by others before them, and prevent them from entering into a purchase that ends up being a dud.
Below, 13 members of Forbes Real Estate Council discuss how to easily avoid some of the most common mistakes that first-time real estate investors make.
1. Keep Underwriting Conservative
When underwriting real estate in any market, it is essential to anticipate market changes. Cap rates will fluctuate with time and predicting those changes can be costly. Assuming both a healthy economic vacancy reserve rate and exit cap rate similar to the entry will allow the investor to best position the property to be successful over the hold period. – Thomas Black, Napali Capital
2. Don’t Fall For Clever Marketing Promises
First-time investors often get into bad opportunities due to clever marketing promises. Investors who outsource should conduct due diligence on the manager. Look for one who has a good track record, has an experienced team, invests alongside you, offers fair fees and avoids conflicts of interest. If you select the right manager, you will also get the best risk-adjusted returns. – Dave Scherer,Origin Investments
3. Invest In A Preliminary Title Search
Prudent first-time real estate investors should investigate a property’s back story prior to investing. A preliminary title report can reveal if a potential investment may have significant hidden costs associated with clearing various title matters. Have a reputable title company prepare a report disclosing any existing liens and/or encumbrances, as well as any marketability of title issues. – Amy Niesen,Land Title Company of Alabama
4. Don’t Underestimate Your Property’s Expenses
Most real estate investors have a bad experience because they underestimate their rental property’s expenses. Most remember the mortgage payment. An easy way to examine all of your recurring operating expenses is with the acronym “VIMTUM”: vacancy, insurance, maintenance, taxes, utilities and management. If you manage your own property, you must itemize what your time is worth. – Keith Weinhold, Get Rich Education
5. Avoid Emotional Investing
Many first-time real estate investor clients are impulsive and emotional with their purchases. I advise my clients to be relatively detached from their investments emotionally, and focus on making a sound investment based on crucial factors like current rental rates, capital growth and long-term assessments of their needs. Take the emotions out of your investment and look at your long-term goal. – Alex Chieng, A & L Real Estate Team
6. Forget The Stats
I have seen way too many investors make the mistake of focusing on the stats and demographics of a particular area instead of finding the right team. It’s important to always remember that teamwork makes the dream work. Focus on that and you’ll avoid a major headache. – Engelo Rumora, List’n Sell Realty
7. Do Your Homework
We manage for a lot of investors who buy outside of their geographic region. Many times, their turnkey provider puts an unqualified tenant in at a higher rent, to push the ROI. This comes back to bite them every time. We see corners cut in construction, with hidden defects in main sewer lines and plumbing, that pop up down the road. Be sure to have a trusted adviser check the numbers and work. – Noel Christopher, Renters Warehouse
8. Budget For Unanticipated Repairs
Rehabs and repairs, especially on older homes, almost always cost more than originally estimated. This is frequently because of defects that are not revealed until work has begun. Investors should always budget for a rehab contingency of at least 20%, and not allow for “project creep” and enhancements as they might in their own home. – Alex Hemani, ALNA Companies
9. Always Have A Quick Exit Strategy
Most investors are so excited about finding their first fire sale deal that they forget to devise a quick exit strategy. If you are a new investor and asking yourself what that means, then I’m talking to you. Are you selling during the peak time to sell? Are you advertising your property while you are rehabbing to create a list of potential buyers? Hire a licensed real estate agent to help guide your quick exit. -Angela Yaun, Day Realty Group
10. Take It Seriously
The single biggest driver of failure for new real estate investors is that they don’t take it seriously. Investing is just like any other business: you have to have systems and processes, marketing to drive leads, sales to close deals, cash to stay in business and everything in between. It doesn’t have to be overcomplicated, but failure to treat it like a business is the beginning of the end. – Mike Hambright, FlipNerd.com
11. Avoid Buying At Foreclosure Auctions
Too often, would-be real estate investors watch a TV show and then head to the courthouse steps to bid on a property, buy it and renovate it, only to find out there are liens, or even an active first mortgage. Buying at auctions is an entire business model within real estate investing, and unless you have guidance from someone very experienced, this should be your last option to buy a property. – David Minor, VESADO
12. Keep Your Deposits Refundable
The biggest mistake is not taking action. Outside of that, mistakes are OK if the investor is moving forward and learning. One mistake I see is non-refundable deposits without diligence. This includes contract deadlines. When starting, do not do any non-refundable deposits and pay attention to contract deadlines to make sure your money is refundable if you purchase the property. – Kevin Amolsch, Pine Financial Group, Inc
13. Don’t Overpay For Assets
The mistake we see first-time buyers make most often is overpaying for the asset on the front end, thinking they will make up for it on a sale down the road. As the saying goes, “In real estate, you make your money on the buy, not on the sell.” You have to be patient and keep looking for an asset that you can buy right today, as opposed to betting on upside and appreciation down the road. – Sean Lyons, Triad Real Estate Partners, LLC
Source: forbes.com
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