Does the buzz on real estate investing ever really stop? If you want to grow your wealth and explore the path of passive income, real estate is very likely part of that equation. However, there are PLENTY of people who lose money in real estate.
Just as when you start a blog, invest in the stock market, or purchase a franchise, there are always risks. However, there is one particular mistake that new real estate investors consistently make.
Here’s what not to do.
#1 Mistake New Real Estate Investors Make (Don’t Do This!)
The number one mistake that we see top real estate investors make is focusing only the positives of the investment.
Seeing only green can be incredibly costly.
New real estate investors almost always underestimate the costs of owning, renting, and maintaining a property.
I know you think you have done all of the work and put together the numbers for the project over and over again. It can’t fail, right?
It’s good to prepare and have your numbers in place, but those numbers do not showcase the unexpected.
Those numbers don’t show things like:
- A busted pipe in the upstairs bathroom floods the floor below
- The increase in property taxes after a real estate transaction is filed with the county
- Four months with no tenant? (Wait, that can happen?)
- An economic downturn or fees on a loan that does not have a set rate
If you want to avoid this mistake, here are a few things you can do:
Underestimate the Profit, Overestimate the Expense
This is one of the simplest tips for investing in real estate but one that many new investors ignore.
To put it simply, if you were offered $1,000 and accepted and then were told it’s only $700, it would be disappointing.
On the flip side, if you were offered $700 and it turned out to be $1,000, that’s a reason to celebrate.
When investing in real estate, give yourself a reason to celebrate, underestimate the profits, and overestimate the expenses.
Take The Emotion Out Of It
I get it – you are excited about making your first dive into the world of real estate. It’s exciting, and before you know it, your real estate investment could turn into an entirely new lifestyle for you. However, you cannot make business decisions for emotional reasons.
Don’t get emotionally tied to a property, and don’t worry about the people selling the property to you or those buying it. Do everything by the book, stay emotionally disconnected from it, and make the business transaction.
It may seem harsh, but that’s how business can be.
Know The Local Market
Don’t try to dive into something in an area that you do not know and understand. Choose a market that you are comfortable with and ensure that you are ready to put the time into helping this property thrive in that local market.
Also, knowing the local market makes it considerably easier to estimate the total costs of projects that the home or property may need.
Don’t Be Afraid To Ask The Professionals
If you have a great real estate agent, they will give you ideas on expenses and how much you can expect. If anything sounds too good to be true, it likely is.
If you have a friend that lives in the area or a partner that has done real estate transactions before, be sure to ask about out-of-pocket expenses and what you can expect. Not only do you need to be sure you don’t overpay for the property, but you need to make sure there is potential to make money long-term.
Stick To The Plan
Finally, develop a strict plan and budget and stick to it.
Smart real estate investors always have reserves that they can pull from. When a hot water heater breaks, that comes from the reserves. Leaving yourself these reserves will make real estate investment much more profitable and stress-free.
There is no denying that there is a lot of money to be made in real estate. However, you can easily blow these numbers out of proportion and end up incredibly disappointed in your investment. Be modest about how much you think the investment is worth, take steps to stick to a budget and plan, and do a TON of research before you invest in your first real estate investment property.