The obvious formula for success in real estate investing is to find properties in the right areas at the right price. However, there’s another way to look at this.
The real key to success is to avoid mistakes. Don’t pay too much, go in on the wrong property, or overlook red flags because you really want to make a deal.
Most losing deals are the result of an investor making a mistake somewhere during the process.
The Biggest Mistakes Beginner Investors Make
Here are the most common blunders for new investors:
Underestimating expenses
The truth is most investors see potential investments through rose-tinted glasses as they imagine all the possibilities and the profit potential.
What often ends up happening is that investors don’t calculate all the expenses. There’s a lot more expenses than you may think. Just to name a few, there’s insurance, maintenance, HOA fees, property taxes, repairs, mortgage interest, utilities and of course, depreciation.
Pro Lesson to Handle Unexpected Expenses
We recommend building a buffer into your budget when selecting ALL investment opportunities. 10% – 20% depending on the risk profile of your market and properties in general. This allows you to stay afloat if you have any unforeseen emergencies or expenses that arise.
Neglecting due diligence
Many investors don’t properly vet deals. They’ll look at the core parts of the deal, such as if they believe the property is a good price, and won’t look at anything else.
Truly successful investors spend many hours and days researching every aspect of a deal, as it’s possible to lose $100k or more on a deal gone south.
Pro Lesson to Due Diligence
We recommend extensive due diligence on the following:
- Property inspection: Check structural integrity, maintenance, and code compliance
- Market analysis: Check comps in the neighborhood (recent similar sales in the area), general market trends and in depth research on the area (local job growth, infrastructure development, population trends, etc.)
- Financial due diligence: Operating expenses of the property, potential and realistic rental income, and financing terms available
- Legal due diligence: Title search, zoning and land use restrictions, and environmental concerns
- Proximity and amenities: Research on the schools, city, industries, etc.
As you can see, this is quite a bit of due diligence for each property, but once you get this down to a system and a list of checkboxes that need to be ticked, you can make sure the vast majority of your investments are profitable short and long term.
To do this due diligence faster and even have most of the work done for you, try out our app for free!
Overleveraging
Overleveraged means that you’ve borrowed so much money that you can no longer continue forward with your investments.
For example, this could mean that you’ve borrowed a few million dollars for several rental properties, but then the rental market goes down. Perhaps instead of making some money each month, now you’re losing it. Perhaps with the downturn, you can’t sell the properties without incurring a hug eloss.
Obviously being overleveraged is incredibly stressful, costs you new opportunities (because you don’t available capital), and can in the end lead you to bankruptcy.
Pro Lesson to Avoid Overleveraging
You want to keep 80% or less of the property’s value through a loan, which is an 80% LTV (loan to value ratio). For commercial properties, we recommend 70-75%. Mortgage brokers and financial advisors can help with creating a plan for you in further detail. In fact, most lenders will have certain parameters and requirements for what amount of debt you can carry on a property.
Neglecting Exit Strategies
A major error that investors make is not preparing for multiple exit possibilities. Their idea is to buy in at a good price and think the rest will take care of itself. The problem with this thinking is that there are always unforeseen challenges.
Perhaps the market changes, a factory is built across the street and decreases property values, or a storm damages the roof of the property. Most investors don’t have a clear plan and vision for multiple possibilities.
Pro Lesson to Create Exit Strategies
A good rule of thumb is to make an outcome possibilities sheet. A list of decisions you would make based on different possibilities in the market and area. Have a clear vision and timeline for your investment.
Conclusion
Some of these may sound obvious, but you’d be shocked at how many investors completely skip over these. Take a look at failed investment opportunities from other investors and you’ll see that in most cases, it’s one or more of these mistakes that were made.
The good news is, most of the “heavy lifting” and path to success is done for you if you avoid these major pitfalls.
We invite you to analyze investment opportunities within the Areezo app as we’ve developed streamlined systems and automatic analysis of these criteria, all at your fingertips, without having to do any of the work.
Disclaimer
While this comprehensive guide aims to provide valuable insights and tips for successfully flipping houses, it is essential to recognize that real estate investment involves inherent risks. Readers are advised to consult with qualified professionals, such as real estate agents, financial advisors, or legal experts, to obtain personalized advice and make informed decisions. The information provided in this guide should not be construed as financial or legal advice, and the author and publisher disclaim any liability for actions taken based on the content herein. Additionally, any references to statistics or surveys are based on available data as of March 10, 2024, and may be subject to updates or revisions.
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