As someone who has been in real estate 15 years and only just started investing I can share with you some personal mistakes as well as seeing mistakes that others have made. Here's the list of the 11 Mistakes Beginner Investors Make.
1. Not Having A Clear Strategy
Most people when asked would say they want to invest. Who doesn't want to have their money work for them!? However very few have a clear strategy. Do they want long term cash flow? Do they want homes they would live in or is do are the numbers the only thing that matters? What type of income or profit are they looking for? Most have never even scratched the surface.
2. Not Interviewing Contractors
I'm not talking about the guy comes to your prospective property and tells you a quote, I mean driving to see the homes they've done and talking with their customers. No one does this, not even seasoned guys. Yet, the saying in real estate investing is if you have a good contractor wait 6 months (then you'll have a bad one). The number 1 complaint from clients and myself is all related to the contractor. Coincidence at the lack of interview process and this complaint... I think not.
3. Not Networking With Other Investors
This one is kind of no-brainer but most investors miss this. The very best thing an investor can do is "hang" with other investors. You can learn so much and fast forward your progress. Most newbie investors see other investors as competitors. Most investor are willing to share with each other.
4. Trying To Stretch The Market
Most new investors assume that their home is better. I've seen many new investors try to get $5k or $10K more (on lower end homes) and then spend the rest of the time chasing the market. Price it right in the beginning and get it sold. Worse still are investors that think their idea is going to be the winner. The money is made in consistency. Just like a baseball player trying to stretch a triple into a home run, an investors is going to find out the hard way that it's a bad idea.
Similar to this line of thinking is answer the question of whether to upgrade the home in particular way or not. That's why the next tip is so useful.
5. Not Hiring An Agent
I'm completely biased here but no where in real estate is an agent more valuable then in investing. They can help with the purchase and the sale as well as suggestions on what buyers want. While I could possibly be convinced that you don't need a real estate agent that is actively involved in the purchase, you absolutely want an honest real estate agent that is involved in the home sale. If you need a reminder, here's the mistake that For Sale By Owner's make.
Even I call and hire agents when I'm outside my known area, even though I have a license. This is just one tip that is a must. As an added bonus, if you're friendly with agents they might even refer you opportunities.
6. Not Inspecting the Property
A big mistake that newbie real estate investors will make is assuming that a general contractor is an inspector. Nope. A good due diligence on a home is going to include that bid from the contractor (or contractors) and at least one look from a good inspector.
7. Not Securing The Property After Purchase
Sometimes you purchase a property and are not ready to work on it. It happened to me. I bought a property and was excited but wasn't ready so I just let it sit. After 3 months of sitting and no activity on it, no drive bys, etc. I had a home that had been vandalized and full of mold.
8. Not Realizing The Time-Value Of Money
The single biggest mistake after all of these is not realizing the time-value of money. This one hits close to home but if you are flipping and you let it drag on, you could still "turn a profit" but you could wreck your entire year's goals in losing focus on time. When it comes to flipping a property many beginner investors will want to go for the big profits, while the savvy veterans are trying to churn them out.
An example will explain this better. Let's say you had $100,000 to flip properties and it takes you 6 months to make $50,000 profit on your flip. That means you can do this 2 times, for an annual profit of $100,000. Not bad, doubled your money in 1 year. Let's say the same investor is able to make $30,000 flipping but can do it four times in one year. His total annual profit comes to $120,000. This is an oversimplified example but it proves my point.
9. Not Understanding Pricing
Those in real estate know that getting the price right is about 90% of the problem when it comes to selling a home. If you nail it, you could have multiple offers and go even over asking. However, if you miss it, not only are you losing precious time, but you're end up chasing the market and often have to sell for less than what the market is.
10. Not Knowing the Days On Market
This is a key term that I think many real estate investors settle on simply getting advice from from an agent here but don't go deeper. Zillow is not your friend. If you're investing in real estate in Atlanta, you need to know what the absorption rate is and what your price banding means to your days on market, to the neighborhood. A semi-rural suburban neighborhood like, Bethlehem might have a completely different median price and days on market than Atlanta. Zillow is your worst enemy when doing this kind of research.
11. Not Being Present (Mentally & Physically)
If you're just starting to invest in real estate you might be tempted to buy the guru's educational material and invest in unknown markets due to the crazy high returns. If you live in Atlanta, like I do, it makes no sense for me to buy real estate in Detroit. At least not as my first investment. You should be close enough to check on the property in my opinion and/or have someon you trust completely to do this.
