Real estate investing is a great way to build wealth – as long as you do it correctly. As with anything in life, doing it the wrong way can cause problems. Here are the top 4 mistakes new investors make when buying real estate. More importantly, you’ll learn what to do instead.
Mistake #1 Failing To Do Enough Research
Some new investors believe others when they are told that a property is a good deal. Others fall in love with a property when they see it. Still, others are told that they need to act fast or the deal will be gone. In each of these cases, the new investor buys the property without doing research. Without the right research, you can end up with a property that is not right for you.
Instead, do your research:
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Know the condition of the property with a walkthrough and inspection
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Know the prices of homes in the area
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Know the client base for the area – who are the potential renters or buyers?
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Understand the market in the area
Mistake #2 Failing to Know The Cash Flow
Sometimes new investors like a property and buy it without understanding the cash flow of the property. Just because a property can be rented, doesn’t mean that it will be rented or that it will be rented at a price that creates a positive cash flow. Additionally, if you don’t consider repairs, general maintenance, renovation, and vacancy rates, you could easily end up with negative cash flow.
To avoid this mistake, you will need to calculate the cash flow.
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Know the income currently coming in for the property. If it hasn’t been rented before, know the current rent rates.
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Determine the current vacancy rate for the area and your type of real estate investment.
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Calculate the cost of needed renovations.
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Calculate the costs of repairs and general maintenance.
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Know the cost of insurance and taxes.
Be sure to be conservative in your projections of both income and expenses. Overestimating income or underestimating expenses can easily turn your cash flow negative.
Mistake #3 Paying Too Much Money
If you buy property for too much money, your ROI will not be as high as it could be. In some cases, you could end up with negative cash flow. When this happens, you won’t have the money for proper maintenance, which will reduce the value of your property. This, in turn, makes your ROI even worse.
To avoid this downward spiral, you should:
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Do a comparative market analysis on other properties in the area to understand the prices in the neighborhood
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Understand the market forecast for the area including job growth, interest rate projects, taxes, and inflation.
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Be patient. Not every deal is the right deal. Don’t buy a property simply because you are in a hurry to get started.
Mistake #4 Making Future Assumptions
Some investors see the numbers but assume they can do a better job on the property. For instance, they feel they can raise the rents or have a higher occupancy rate. However, when they buy the property, they find that the numbers they were given were accurate, and they lose money.
Do not assume that the property will do better under your management. It may. However, it also may not. Always buy a property solely on the numbers you see before you.
By avoiding this four common mistakes, you will find that real estate investing is a great way to maximize your money. To learn more about finding the right deal at the right price, give me a call. I’d love to help you on your investment journey.