Real estate investors, just like people who are looking to buy homes for their own use, face a difficult uphill battle in a consistently slow market. There’s certainly a lot of potential for returns in building a portfolio and selling properties, but making money from it is never easy. A lot of would-be investors manage to shoot themselves in the foot when they’re first starting out by making a number of newbie’s blunders. Here, I’ve listed some of the most common mistakes new investors tend to make, and advice on how you can avoid them.
Before you make any large purchase, such as a new TV or a car, you’ll compare a lot of different models, ask the sales staff a lot of questions, and generally determine whether or not what you’re going to buy is worth the money. The diligence you’ll need to apply when looking at properties for sale needs to be even more rigorous. There are also specific considerations for each type of investor. Flippers, landlords and land developers will all look for very different values when weighing up their options. You’ll need to find out about crime and commercial growth in the area, whether the property has any permit issues that need to be addressed, what new features the house has and whether anything will need to be replaced, why the homeowner is selling and many more details. You can’t hope to make a return on any kind of investment without carrying out proper research, so find out what you should be looking at and put this at the top of your to-do list.
Having Bad Financing
Though it’s leveled out a lot since the recession in the late noughties, there are still a wide range of different mortgage options available. The purpose of these is allowing buyers to access certain homes they wouldn’t have been able to afford with a more conventional mortgage agreement. Unfortunately, many buyers who are able to secure variable and adjustable loans or interest-only loans will pay a heavy price when these interest rates rise. The point here is that all investors should make sure they have enough wiggling room to meet those payments if and when rates go up. They should also have some kind of back-up plan to convert to a more traditional, fixed-rate mortgage at some point in the future. The way you choose to finance your property investments is going to have just as much of an impact on your overall success as any other factor. Make sure you’re examining all your options, and avoiding any financing products that may come back to bite you.
Doing it All Alone
A lot of new investors think that they know all there is to know about the property market simply by reading. It’s important not to go in thinking that you can close a real estate sale all by yourself. You may have even conducted a few deals in the past successfully, but the process may not go as smoothly as you remembered in a down market. If you do it all on your own steam, there will be no one that you can turn to if you decide you want to patch up a deal that’s gone sour. New real estate investors should make sure they’re tapping into every resource they have available, and surround themselves with experienced experts who will be able to help them make a good purchase. Ideally, you’ll have a savvy estate agent, a good property attorney, an insurance representative and an experienced home inspector. These kinds of professionals will be able to keep you posted about any unforeseen flaws in the property or the neighborhood, as well as pointing out defects in the title or easements that could sting you later. Obviously, you may not have all these people in your phone book ready to give you a hand at a moment’s notice. However, you should make some time for networking, and finding at least some professionals who you can lean on for sound advice.
This mistake is closely tied to the mistake of neglecting to do research. As I’m sure you know, finding a property that meets your criteria can be a long and frustrating process. When a buyer finally finds a property that meets their wants and needs, they’ll naturally want to get the seller to accept their bid as quickly as possible. The problem with raring to buy is that it can become easy to over-bid on a property. Doing this can lead to a chain reaction of problems. Buyers can wind up over-stretching their finances, taking too much debt, and burdening themselves with higher payments than they can realistically afford. This, in turn, can mean that it may take the investor many years to recoup their investment. To determine whether you’re overpaying, start off by looking into what other, similar properties are going for in the area, as recently as possible. Any good broker should be able to give you this information with ease. If you’re using a realtor’s service, you can simply look at comparable homes in a local paper. Unless the home has some really unique features that will up the value, make sure your bids are consistent with similar local properties.
There’s a lot more to owning a home or other property than simply keeping on top of mortgage payments. Unlike renting a property, there are a range of expenses such as tending the lawn, painting worn-out walls, and keeping all the appliances running. This is all before you consider expenses like making structural changes, repairs to the masonry and roof, and other details like property taxes and insurance. These are all expenses which a lot of first-time investors are known to forget about when they’re looking into properties. This is also tied up in why many first-time homebuyers tend to be both cash poor and house poor. Make sure that you’re drawing up some educated guesses as to the monthly costs of running and maintaining the home.