While real estate is generally considered to be a low risk investment, mistakes can end up costing you time and money.
Whether your goal is to generate passive income through real estate investments or to participate in a potentially lucrative development project, it pays to be aware of some common mistakes you should avoid while learning how to invest in real estate.
Real Estate Investing Mistakes
1. Lack of Effective Planning and Research
There's more to successful real estate investing than having money and an idea. Understanding the current local property market, choosing a high potential property, and navigating the mortgage process requires a great deal of research and planning.
Don't rush into purchasing your first property. Take time to build your knowledge base and connect with experts who can support you as you work toward becoming a successful investor. When you find a property with strong upside, carry out your due diligence, including:
- Getting a home inspection
- Having the property appraised.
- Conducting a title search.
- Exploring the neighborhood (on nights and weekends as well).
- Checking for nearby developments that could impact local property values.
2. Not Having a Solid Exit Strategy
Buying properties can be exciting for real estate investors. It's crucial to know exactly how you'll make a profit, though. If something goes wrong, having an exit strategy in place could save you time and money. If you can't figure out how you could potentially extract yourself from an investment property without losing money, it may be wise to forgo the purchase.
3. Overlooking Renters’ Priorities and Preferences
If you plan to invest in rental property, it's crucial to keep potential tenants in mind while shopping for your building. Match your property attributes to the type of renters you'd like to attract.
- Young families may prefer homes in low-crime areas near highly rated schools.
- Young professionals may prefer a more urban setting close to public transportation, good restaurants, and nightlife.
- Potential short-term renters looking for vacation rentals prefer locations close to area attractions.
4. Not Identifying Goals Before Searching for a Property
Before you go shopping for an investment property, answer some questions to help clarify your objectives:
- How long would you like to keep the property?
- Are you looking for cash flow, appreciation, or both?
- Do you want to manage the property on your own or hire a property manager?
- What's your budget (including closing costs, renovations, and marketing)?
- What are your goals for return on investment?
When you understand your goals, you can effectively identify deal-breakers and focus on finding a property that will help you reach your objectives.
5. Treating Real Estate Investing Like a Hobby Instead of a Business
Beginners may see their real estate investments as a side project or hobby. However, unless you see it as a business, the chances that you'll make money as a real estate investor are slim. Understand your potential returns, identify your goals, and keep accurate books so you can take advantage of tax breaks.
Real estate can be time-consuming, and beginners may not understand how much of a commitment is required to be successful. There's also a steep learning curve for people who don't have experience buying and managing real estate, which makes success more difficult to achieve at first.
6. Getting the Wrong Financing
There are several ways to finance a real estate investment. Some financing methods offer lower upfront payments, better interest rates, or longer loan terms.
Explore your options make sure you’re comfortable with the upfront cost and monthly payment. Pay special attention to any lump-sum “balloon payments” required by the loan. You may need to refinance or sell the property before reaching that due date if you cannot afford that payment.
7. Failing to Negotiate
Investors who pay too much for a property often do so because they've finally found a property that meets their needs, and they don't want to risk losing the opportunity and having to start the search over.
Invest in representation by a real estate professional who can estimate the fair market value, independent of the listing price and guide you on how hard to negotiate to get what you want out of the deal.
8. Underestimating Additional Costs
In addition to the down payment, you’ll need to cover closing costs, renovation costs, and the cost of marketing the property for rent or resale.
If you plan to hold the asset, you’ll need to plan for ongoing maintenance costs as well as an emergency fund for the inevitable unexpected repairs that will need to be made at some point. Additionally, insurance premiums and income taxes will likely rise year-over-year, potentially causing your mortgage payment to increase, even if you have a fixed interest rate loan.
9. Waiting for the “Perfect Time” to Buy
Timing the market is just as much about luck as it is about strategy. The good news is that you don’t have to purchase at the bottom of the market cycle or sell at the top to have a successful real estate investment. There are deals to be found at any time under any market conditions.
10. Failing to Build a Team of Trusted Experts
It's impossible for a new real estate investor to know as much about the potential pitfalls of the business as a tax strategist, real estate attorney, and real estate sponsor with a track record of successful real estate investments. You'll need more than the power of Google to manage powerful assets like real estate. Build your team and consult with them before, during, and after every transaction.
Avoid Real Estate Investing Mistakes by Investing with Gatsby Investment
Educating yourself about the potential pitfalls of real estate investing is a great way to avoid some of the most common problems faced by new investors.
But if you’re looking for an easy, risk-mitigated way to start investing in real estate, consider joining real estate syndication project. Syndication allows multiple investors to participate in a real estate deal together. The project is professionally managed from start to finish, saving you time, minimizing your risk, and allowing you to leverage a comparatively small investment amount into a substantial real estate deal.
When you invest through Gatsby Investment, you can own real estate for as little as $25,000. With a proven track record of returns and full control over which deals you participate in, this real estate syndication structure provides exposure to the real estate sector while helping you avoid common real estate investing mistakes.