4 Worst Mistakes You Can Make When Investing in Real Estate
There are many people that try to invest in real estate only to stumble and fall along the way. While it is something that seems simple from the outside, once you get an insider’s look at it, real estate investing is complicated and requires quite a bit of research. Unfortunately, people aren’t always willing to do that and they find themselves in a situation they didn’t plan for and they have no way to get out of.
We have seen many mistakes that are avoidable and can even be turned around if you have the right people on your side. While there are certainly many more mistakes than these, here are the most common mistakes we have found newbies making when it comes to rental investments:
Bad Financing
Bad financing is first because it is the worst. Losing money is a sure way to put people off of investing in real estate for their rest of their lives. Getting bad financing is a death blow to many businesses and investors. So how do you know if you have bad financing? You have a high interest rate, an adjustable interest rate, a balloon payment, personal recourse, or a high monthly payment.
The first step is to try to get a residential bank mortgage so you can prevent some of those mistakes. You’ll get a fixed rate mortgage for 30 years, meaning there are amortizing payments and no balloons. However, there is some red tape and some fine print that you should read before you sign those.
What you should do with your finances depends heavily on what you have, what you are willing to part with, and what you can get. Make sure to team up with real estate professionals who can talk to you about what options you have.
Low Cash Flow
Another reason newbies fail is because they don’t have enough cash flow to complete what they need to. Think of cash like food – if you don’t have enough food, your body won’t run. If you don’t have enough cash, your investment can’t run.
Even worse, having low cash flow can hurt your wealth building in the long run.
To avoid this common mistake, ensure that you keep a nice pool of money for repair costs, don’t jump into multiple locations at once, and keep a firm grasp on rental rates.
Bad Locations
Not all real estate markets are created equal. Buying an investment property in San Francisco will likely work better than buying an investment property in the middle of nowhere. It is important that you study and look at the areas where you want to buy. Saying, “I want to buy an investment property in San Francisco,” isn’t enough. Where in San Francisco? What neighborhoods have a lot of traffic? Which schools are the best?
You also have to ask yourself how long tenants will stay in your property – some locations keep people for a long time, others are more transient.
Overestimating Rental or Resale Value
Probably the other huge mistake that people make most often is to underestimate what a house is worth for rent or for resale. While you might think that your house is worth X amount of money, you won’t get that much of a return once you put all of the work in and people aren’t buying it at the current price. Or you may think that getting X amount of rent will give you great cash flow, but that rent goes quickly when you cover the electricity bill, for example. Once you have someone locked into a rental agreement, it is difficult to change the amount of rent you charge.
Once again, you’ll have to do your research and talk to people in the field who know more than you do about renting or reselling.
The most important people to reach out to when you are trying to enter the real estate investing market are those who can help you see things clearly. They include financial professionals, contractors, and real estate professionals.