Real Estate Investing Pitfalls

You need the right real estate agent if you are investing in real estate. Most real estate agents do not understand the numbers behind an investment property.  Foreclosed properties may be a good place to look for investment properties. The following are some of the pitfalls by unsuccessful real estate investors.

Too Much Leverage

Leverage is a valuable tool in real estate investing, not knowing the difference between positive leverage and negative leverage may mean making payments on an investment instead of getting paid by an investment. Calculating the Debt Service Coverage Ratio (DSCR) for an investment is an important method of determining whether an investment will earn money or cost money. Find an agent that will help explain DSCR and how to avoid negative leverage.

Fall In Love With The Deal Not The Property

Investors fall into the trap of buying an investment property the same way they’d buy their home, using emotion instead of relying on numbers. It is important for investors to remember that every home is the right home for somebody; it may not be a good investment. The difference between investing and speculating is that investing relies on research and knowing the numbers; speculation relies on gut feelings. Find an agent has the necessary training and tools to properly evaluate real estate as an investment that will offer you the best returns.

Real Estate Is Not A Get Rich Quick Scheme

The residential real estate market experienced a period of rapid appreciation from 2002 to 2006, which was lost in the years following. Real estate appreciation over time has been slow and steady, and offers rewards to the patient investor who does the research and works to ensure property appreciation. In fact, real estate investments beat the S&P 500 in appreciation over the past 30 years – and that includes the recent crisis. Successful real estate investors know there is no short cuts, and is willing to put in the time and work to ensure good returns on their investments. “Get rich quick” schemes are just that: schemes.   There are no real get rich quick schemes, run if anyone tells you anything different. 

Understand Tax Benefits And Liabilities

Among the key advantages of real estate as an investment are the tax benefits. Understanding how to deduct for depreciation and passive activity loss can greatly increase the cash flow from a property. There are also ways to defer capital gains taxes that are unique to real estate, such as the 1031 exchange self directed IRAs and a defined benefit program for your corporation. Successful investors understand depreciation recapture and how to minimize taxes upon sale of real estate. Be sure to seek a qualified accountant for tax advice regarding real estate investment and real estate investment strategies.

Invest With A Clear Goal

Buying a property because it’s a good deal can be dangerous. Shifts in real estate market conditions, unexpected vacancy, or extended holding costs can quickly turn a profitable property into a money pit. Investors should always have a clear goal for a property, one that includes an understanding of a specific cap rate, cash flow, and expected return on investment, as well as exit strategies should you need to take action. Find an agent that understands strategies for different investment goals and can help guide you to what is best for you.  

Analyze Trends

We all know that no investments go up forever.  Keep your eyes wide open as to what is happening in the current real estate market trends.  You also need to look for trends to help you understand what may happen in the future.  What is happening in my community and how will it affect real estate.  Ask yourself, are there new companies coming to this commnit that will improve the value of real estate?  Are there companies in my community that are leaving and will hurt real estate values.  What is happening with interst rates.

At Myers & Myers Real Estate, we have invested in many residential rental properties and flips.  We own single family rental property and have helped many other investors achieve their real estate goals.