8 Mistakes That Real Estate Investors Should Avoid.
1. Failing to Make a Plan
The first thing to do is make a plan. The last thing you want to do is buy a house without knowing how it will generate income or gains. When there’s a hot real estate market, it can be hard to resist the buying frenzy. But you must take a step back and plan accordingly, including what to do if the market sours or your assumptions were wrong.
Before getting a mortgage or plunking down cash, you need to decide on an investment strategy. What type of house are you looking for? For example, are you looking for a single-family or multifamily property? Vacation rentals? Mixed-use, commercial, or office buildings? Figure out your purchase plan, then look for properties that fit that plan.
2. Skimping on Research
Before buying a car or a television set, most people compare different models, ask a lot of questions, and try to determine whether the purchase they are considering is worth the money. The due diligence that goes into purchasing a house should be even more rigorous.
3. Doing Everything on Your Own
Many buyers think that they either know it all or can close a real estate transaction on their own. While you might have completed several deals in the past that went well, the process may not go as smoothly in a down market—and there is no one you can turn to if you want to fix an unfavorable real estate deal.
Real estate investors should tap every possible resource and befriend experts who can help them make the right purchase. At a minimum, a list of potential experts should include a savvy real estate agent, a competent home inspector, a handyman, a good attorney, and an insurance representative.
4. Forgetting Real Estate Is Local
You need to learn about the local market to make purchase decisions that are likely to help you turn a profit. That means drilling down on land values, home values, levels of inventory, supply and demand issues, and more. Developing a feel for these parameters will help you decide whether or not to buy a particular property.
5. Overlooking Tenants’ Needs
If you intend to purchase property that you’ll rent, keep in mind who your renters are likely to be—for example, singles, young families, or college students. Families will want low crime rates and good schools, while singles may be looking for mass transit access and nearby nightlife. If your planned purchase will be a vacation rental, how near is it to the beach or other local attractions? Try to match your investment to the kinds of tenants most likely to rent in that area.
6. Getting Poor Financing
There are still a large number of exotic mortgage options, where the purpose of these mortgages is to allow buyers to get into certain homes that they might not otherwise have been able to afford using a more conventional, 30-year mortgage agreement.
This issue is somewhat tied to the point about doing research. Searching for the right house can be time-consuming and frustrating. When potential buyers find properties that meet their needs and wants, they are naturally anxious to have the seller accept their bid.
The problem with being anxious is that anxious buyers tend to overbid on properties. Overbidding on a house can have a waterfall effect of problems. You may end up overextending yourself and taking on too much debt, creating higher payments than you can afford. As a result, it may take years to recoup your investment.
To find out whether your dream investment has too high of a price tag, start by searching what other similar homes in the area have sold in recent months. A real estate broker should be able to provide this information with relative ease (particularly with their access to a multiple listing real estate agent database).
8. Underestimating Expenses
Every homeowner can attest to the fact that there is way more to owning a house than just making the mortgage payment. It’s no different, of course, for real estate investors. There are costs associated with yard upkeep and ensuring that appliances (such as the oven, washer, dryer, refrigerator, and furnace) are in working order, not to mention the cost of installing a new roof or making structural changes to the house. You also have to take into account insurance and property taxes.
The best advice is to make a list of all of the monthly costs associated with running and maintaining a house (based upon estimates) before actually making a bid on one. If you plan to have tenants, once those numbers are added up and you include the monthly rent, you can calculate a return on investment (ROI) for the rental that will give you a better idea of whether the income will cover your mortgage and maintenance costs. This will tell you whether you can afford the property.
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