10 Investor Mistakes
Real estate has become an investment that everyone seems to think will be the ticket to easy wealth. Why shouldn’t investors be snapping up property? After all, mortgage rates are low and the housing market in some parts of the country is still hot.
If you want to go into property investment, you need to do it with your eyes open. Following are the 10 most common mistakes made by new real estate investors:
1. Falling in love with the property. You need to stop thinking like a homeowner and start thinking like a business owner.
2. Not performing your due diligence. This is more than just an inspection of the property, although that’s essential. It’s also a thorough investigation of your area’s current rental market. What are the vacancy rates and average rents for comparable properties? What’s the average age of the rental housing stock? How is the neighbourhood zoned? What are the government regulations about rental properties?
3. Forgetting the rule of home improvements. It will always take 3 times the money and twice as long as you estimate to get a property ready to rent. You need to build that extra cost into your expenses.
4. No cash reserves. Ask anyone in real estate long term (or any other business, for that matter), and they will tell you the two most important words for survival are: cash flow. In order to stay in real estate long term, you need cash reserves.
Buying real estate with a small or zero deposit is easy; handling negative cash flow, repairs, and other expenses in the meantime is the trick. In fact, if you can handle the bad times, you will always come out on top.
Lack of cash reserves puts unnecessary pressure on you to do substandard repairs, accept less qualified tenants and give into tenants’ demands for fear of vacancy. When you have a sufficient cash reserve, you act rationally.
5. Not pre screening tenants. New Landlords can get very excited about prospective tenants who show up, take one look at the place, hand them a cash deposit and want to move in that weekend. Don’t do it! When selecting renters make them fill out an application and check their credit, employment and rental history before you take a dollar from them. It’s much more expensive to evict a bad tenant than to have a property sit vacant for a couple of months.
6. Investing blind. Real estate is one of the few investments in which risk is directly proportional to knowledge. True, it has a higher learning curve than investing in the stock market, but there's no proof that having knowledge of the stock market reduces risk.
I read a comment on a real estate discussion group on the Internet. In response to an inquiry as to whether a particular seminar or training program was worth the money, someone answered, "Why waste your money on that stuff? Just use your money as a deposit and learn as you go."
This is probably the worst advice you could ever give a beginner. Money for deals is easy to find if you can find good deals. But, you won't know what a good deal is without having first invested in your education!
The more knowledge of investing techniques, financing, acquisition, negotiating and, of course, your local marketplace, the less risky your investments will be. A bargain real estate purchase will generally always be a safe investment; a bargain stock purchase isn't. After all, who says the company you bought into will be in business next year?
7. Investing long-distance. Unless your rental property is in a spot you love to visit regularly, such as a lake or the beach, keep your rentals very close to home. Otherwise, you'll eat up your profits by driving back and forth to manage the property or by paying someone to make repairs for you.
8. Paying too much for the property. If you're embarrassed to make a low-ball offer to a seller, don't invest in real estate. You can never know a sellers circumstances and an offer you think will be unacceptable may be very acceptable to the seller. Don’t assume anything.
9. Not studying the competition. Why does the guy across the street rent his property the same day someone moves out and yours sits vacant for months? He might not be very picky about whom he rents to, but he also might have lower rents or have gone to a little extra effort to present the property.
10. Being underinsured. Insurance on rental property goes beyond insuring the building against fire or natural disaster. You need to look at comprehensive landlord insurance. There are too many horror stories about destroyed rental properties to not take out this type of insurance. Most major insurance companies now offer this product, which will not only cover you for damage to the property but also loss of rent.