Real estate investing can be a complicated process to get involved with, though with experience, it can be a rewarding method of generating positive cash flow.
Though real estate investing can be a great way to make money, there are many ways in which real estate investing can go wrong.
Because of this, we will cover 41 common mistakes that real estate investors make so that new investors can avoid falling victim to the results of these missteps.
NOT KNOWING ENOUGH ABOUT REAL ESTATE INVESTMENT
Despite what many people have heard, real estate investing is not simple. It requires time and work in to bring such a vision into reality. One serious mistake a new investor can make is getting into real estate investing without knowing enough about it.
FAILING TO MAKE A SOLID REAL ESTATE INVESTMENT PLAN
Before embarking on an investing journey, many potential investors jump in before they know what they want to do with their properties. It’s inadvisable to put money down on a home without first planning out how investing is going to work to fit an investor’s unique needs.
FAILING TO CREATE A SOUND INVESTMENT TEAM
Real estate investment is not a simple task, especially when trying to complete each complicated step alone. Many new investors make the mistake of getting started without first putting together an investment team that they can rely on for the more involved aspects of real estate investment.
WAITING TOO LONG TO INVEST OR GET STARTED
While it’s important to wait long enough to gain the knowledge needed to be a success, many new investors wait too long. Rather than getting informed and stepping into investment, they wait and wait, hoping that the perfect opportunity will present itself.
Unfortunately, perfect investment deals are not common. It’s important to take that first step into investing to build a portfolio.
OVERLOOKING THE NUMBERS
When an investor starts out, they often do so with either hopes too high or expectations too low. Both miscalculations lead them to overlooking the numbers associated with investing. Sometimes they will assume a property will be an excellent investment because they’ve overestimated number predictions. Other times, they will miss out on a potentially great opportunity because they’ve overlooked number predictions entirely.
In real estate investing, paying attention to numbers is crucial.
NOT DOING PROPER RESEARCH AND ANALYSIS
Sometimes, a new real estate investor will become so excited at the prospect of acquiring a new property that they fail to look into the important information surrounding the deal they’re about to make. They may fail to look into the neighborhood statistics, geographic information, and other potential research points that may interfere with the property bringing in a decent cash flow.
In real estate investment, asking plenty of questions is important for taking advantage of great deals.
QUESTIONS TO ASK:
- Is the property near an industrial site, or will construction be taking place frequently in the future?
- Is the property in a flood zone?
- Does the property have any pressing foundation issues?
- What upgrades have been made, and what needs replacing?
- What’s the reason behind selling the property?
- How much did the home last sell for, and when did the last sale occur?
- Are there issues associated with this area of town?
DUCKING DUE DILIGENCE
Because real estate investment deals move quickly, a common real estate investing mistake involves skipping some or all of the due diligence process. Due diligence is important in any investment deal, as it can protect investors from encountering issues along the way that will negatively affect the property’s cash flow capabilities.
NOT HAVING MUCH KNOWLEDGE ABOUT THE LOCAL REAL ESTATE MARKET
Not all real estate markets behave in the same way, and while a property may seem like a great deal compared with the investor’s local market, the same may not be true for the area the property resides in. Though being unaware of the local market is a single mistake, it can lead to many more real estate investment mistakes along the way.
NOT KNOWING ABOUT THE LOCAL LAWS
Real estate laws, including zoning and housing restriction laws may interfere with an investor’s plans, so it’s beneficial to be aware of what is and isn’t allowed in a given area. For example, if an investor is planning to turn a single large property into a multi-family unit, it may be a significant real estate mistake to attempt making changes without knowing the ins and outs of the law.
Instead of earning money on this investment, an investor may find himself/herself raking in fines for breaking local real estate laws.
Paperwork is compiled to carefully outline the responsibilities of buyers and sellers. One of the most common mistakes real estate investors make is skipping through some part of the paperwork process. It may seem like a reasonable way to save time and reduce paperwork fees, but skipping paperwork can leave an investor unaware of the new responsibilities they now hold.
Skipping paperwork can add to expenses incurred after the investor obtains a property.
GETTING THE DEAL’S PRICING MODEL WRONG
One of the key components of real estate investing includes buying a property at a reasonable price so that a profit can be made. One of the biggest mistakes real estate investors make is interpreting pricing models incorrectly. If the investor purchases a property for what they believe is a decent price, but they then find that replacement costs are significantly higher than they initially thought, the investor has likely made a mistake in their interpretation of the pricing model, which will end up costing them.
USING THE INCORRECT INPUTS FOR PROJECTIONS
When an investor is predicting the probable income they stand to receive on an investment property, it’s important to use correct monetary projections. For example, if the investor is considering rent increases over time, it’s necessary to be certain that they’re choosing the correct increase percentage. Otherwise completely different predictions will populate.
NOT FOLLOWING THE RULES OF MONEY
One common real estate investing mistake involves failure to set rules when it comes to how an investor spends money. Part of the development of these rules comes with having an experienced team available to advise on investing behaviors. Once an investor develops a set of rules, they must be adhered to. This way, the investor does not frequently use too much leverage or invest too many assets into a single project.
NOT BUYING PROPERTIES FOR CASH FLOW
It’s always a good idea to purchase a property because of its ability to generate cash flow. However, a common real estate investment mistake occurs when investors fail to purchase properties with cash flow in mind. Instead, they may try to predict a property’s appreciation or rely on some other factor that’s impossible to predict. Successful real estate investing relies on positive cash flow.
Owning an investment property comes with its share of expenses, and investors must be aware of what their properties are going to cost them beyond the mortgage payment. Home maintenance, taxes, insurance premiums, replacing items, updating appliances, and other standard upkeep can end up being costly. Though it’s necessary to keep investment properties in good condition, it’s also important to properly plan for the expenses associated with investment property ownership.
CHOOSING A WEAK LOCATION
Out of the many common real estate investment mistakes that new investors make, choosing a weak location is one of the most costly. Buying a property in an area that does not perform well can be detrimental when it comes to making money on the investment. If there is no demand for rentals in an area (due to there being no available jobs or amenities nearby) or no ability for locals to meet standard rent demands, a seemingly good deal is unlikely to pay off.
Location is extremely important when it comes to reaping any benefit from an investment property.
MISTIMING THE DEAL
Sometimes waiting for a good deal to come to fruition is an excellent way to make the most out of a deal. However, timing is difficult to place. One moment, a deal can become as good as it will ever be, and if an investor waits too long or not long enough, he or she will miss out on a great opportunity.
NOT CARING ABOUT THE NEEDS OF TENANTS
Many investors purchase properties intending to rent them out. While doing this is a great approach, it’s important to align with the needs of future tenants. If an investor is hoping to get families to rent their units, they’ll want to purchase in areas where families want to live. If investors want to provide low-income housing, they’ll need to be sure that they’re buying properties they can rent for a low price and still make a profit.
Failure to align with the needs of tenants is most definitely a misstep and it will often lead to problems in the future.
NOT PAYING ENOUGH ATTENTION TO THE REPAIRS AND MAINTENANCE
Part of owning a property involves investing in upkeep. One of the most frequent mistakes real estate investors make is failing to properly budget maintenance and repairs. Even properties in great condition will need some work done on them and failing to keep this in mind may lead to an investor neglecting his or her property.
MAKING UNNECESSARY IMPROVEMENTS
Fixing and flipping a house can be a great investment opportunity, but among the many mistakes real estate investors make when flipping, going all out on improvements is one of the most costly.
Though flipping involves some degree of rehabbing a property, each repair should be handled with care and fully planned out. After all, investors are still aiming to make a profit on the home and if they sink too much money into repairs and unnecessary improvements, it’s going to that much more difficult to gain decent returns.
NOT GETTING THE RIGHT REPLACEMENT COST ANALYSIS
Research and analytical issues are among the most frequent real estate investment mistakes being that analysis is often either misread or obtained from an inexperienced source. Either way, real estate investors need to avoid making these types of mistakes by ensuring that they’re receiving valid information about replacement costs, and that they’re interpreting that information correctly.
EXPECTING QUICK AND EASY RESULTS
Like anything else that’s profitable, real estate investing is not a quick and easy step toward wealth. Many new investors fall into this common real estate investing mistake by assuming that the whole process will be fast and easy. This is almost never the case and investors need to be aware of the work that goes into making a profit on an investment property before ever beginning the process.
This way, they will not be disappointed or assume they’re doing something wrong when they have not become wealthy overnight. It takes time and effort to yield decent results.
DOING EVERYTHING ON YOUR OWN
It’s one thing to be confident in one’s abilities, but it’s another to assume that an investor can complete every aspect of managing investment properties alone. It’s not a simple process and most times, investors can benefit from having a team of experts working alongside them.
Attempting to handle every part of real estate investing as a single person opens up a lot of room for mistakes, and mistakes make it to where an investor can easily get into a situation in which they lose money.
NOT CONSULTING WITH YOUR TEAM OF EXPERTS
Having a team that works alongside a real estate investor is an invaluable resource. However, many issues can still arise when investors fail to consult with their team. These individuals are available to help, but if their services are not being utilized, it’s almost as dangerous as trying to handle an entire investment journey alone.
Investors need to maintain communication with attorneys, coaches, tax professionals, and other representatives that have expertise in a given investment field.
HIRING THE CHEAPEST CONTRACTORS
Profits are incredibly important when it comes to real estate investing, and as such, many investors make common real estate investment mistakes when trying to negotiate contracting work.
Every investor wants to receive a good deal when shopping around for contractors but it’s important to remember that “you get what you pay for.”
CHOOSING THE WRONG REAL ESTATE AGENT
Working with a standard residential real estate agent may not be the best decision for a real estate investor. While it is a good idea to work with realtors, it’s also important to choose agents who are experienced in real estate investing.
Investors make real estate investing mistakes when they choose a realtor at random without vetting their choices. It’s important to carefully interview realtors an investor plans to work with to determine how experienced those agents are in working with investors rather than single-family buyers and sellers.
GETTING TOO ATTACHED
It’s exciting to acquire a new property, especially the first few times. A common real estate investing mistake occurs when an investor becomes too emotionally attached to a property.
This attachment can cause problems at any stage, from buying to renovating. When investors get too emotionally attached to a property, they may make the mistake of spending too much on the home involved.
Investing is about making profits on properties, and because of this, an investor has to be analytical and logical rather than thinking with his or her heart.
Everyone has advice to offer, and for a new real estate investor, it’s difficult to know which advice is worth listening to and which advice should be ignored. It’s important to examine real estate advice pieces based on their source, age, market, and many other demographic modifiers that can help lead to an informed decision about whether the advice is valid.
An investor must not make the mistake of trusting every piece of advice that comes his or her way. Not everyone who claims to have the answers actually does.
NOT THINKING BIG ENOUGH
It’s okay to make one real estate deal at a time when an investor is starting out, but for those who have experience and would like to make decent profits, it may be a mistake to not think big enough.
It’s important to be continuously improving, making purchases, improving properties, renting, selling, etc. Keeping the ball rolling is the best way to grow.
NOT FACTORING RISKS
Real estate is usually a safe way to grow wealth, compared with other methods. However, it isn’t foolproof. There are plenty of things that can go wrong along the way and one of the mistakes new real estate investors make occurs when they get too excited about the prospects of growing their wealth and fail to consider the risks involved with the deals they make.
OVERLOOK SMALL DETAILS
Investing in real estate can be a drawn out process, especially the first few times an investor embarks on a journey. While it’s highly desirable to complete the paperwork and buying process as quickly as possible, failing to slow down and pay close attention can easily lead to missing important information. Overlooking small but very important details is one of the most common mistakes real estate investors make. This simple issue can lead to a wide variety of problems along the way, but fortunately, this mistake is also one of the easiest to correct.
NOT TREATING THE PROPERTY AS A BUSINESS
While investing is a way to earn substantial income, income properties are more than just an extension of an investor’s income. A common real estate investing mistake occurs when investors fail to treat their properties as a business, rather than a money-generating hobby.
HAVING A ‘SHORT-TERM MINDSET’ ABOUT A PROPERTY
Some investors make the mistake of not thinking big enough, and others make the mistake of not thinking long-term enough. Real estate investing is not a short-term business, and it takes significant time for properties to generate a profit. Sometimes, investors fail to appreciate just how long it takes to create a successful investing business.
NOT KNOWING WHEN TO BE PATIENT AND WHEN TO BE AGGRESSIVE
It’s especially common at the beginning of an investor’s journey to be unsure about how to behave during a deal. It can be complicated to decide whether to jump on a deal or wait for improvement. This is a mistake that takes time to overcome, but time and experience will help investors rely on instinct and data to make educated decisions.
NOT HAVING MULTIPLE EXIT STRATEGIES
New investors often fail to plan out how they are going to back out of a deal when things do not go the way they originally planned. Not having at least one exit strategy (it’s wise to have several) can lead to the loss of money and a frustrating waste of time.
NOT MAKING A SOLID BACKUP PLAN
When an investor jumps into a deal, they often have a decently plotted Plan A. However, a common real estate investing mistake occurs when an investor does not have multiple backup plans. It’s a good idea to have a Plan B or even Plan C. Things do not always work out the way we want them to, so it’s wise to be prepared ahead of time.
ASSUMING THAT REAL ESTATE INVESTING WILL BRING INSTANT WEALTH
Real estate investing can generate significant wealth, but like anything worth doing, it takes time. Sometimes, real estate investors believe their plans will come to fruition quickly. Most of the time, people do not get rich overnight and it’s a mistake to rely on the idea that real estate investing will bring about instant wealth.
SPENDING TOO MUCH ON AN INVESTMENT
Paying close attention to research and analytical findings is important in deciding how much an investor should spend on a property. Because the end goal is to make a profit on the property, it’s a mistake for an investor to spend too much on an investment.
To avoid this mistake, investors should take time to examine market analysis, and consult with their team of professionals.
NOT PROTECTING ASSETS
Many new investors don’t think about protecting their assets through the creation of an LLC. Having a business entity can help investors protect themselves legally and financially. Neglecting to create an LLC can leave investors open to being sued if something goes wrong with one of their investment properties.
PURCHASING PROPERTY WITHOUT AMPLE RESERVES
New investors often make the mistake of purchasing a property without having a reserve fund available. Reserves are necessary, being that an investment property rarely begins performing right away. To give a property time to generate revenue, an investor needs to rely on funds they’ve saved in the meantime.
GENERAL HOME SELLING MISTAKES (MAX REAL ESTATE EXPOSURE)
In addition to the mistakes mentioned above, the additional general mistakes an investor may run into are numerous. For example, real estate investors commonly experience the following issues during their investment journeys:
- Having no flexibility when negotiating
- Neglecting their real estate marketing approach
- Selling an investment home before rehabbing is complete
- Jumping into real estate investing before the investor feels ready
- Pricing a rehabbed home or rental property incorrectly.
Real estate investing can be a rewarding way to make significant profits, as well as allowing an investor to be his or her own boss. However, in order to be a success, investors need to protect themselves from falling victim to the above-mentioned mistakes.