Taking the plunge into real estate investing can be daunting, but most new investors weigh the risk to reward. Doing ample research on the front end helps to instill confidence in the decision to buy an investment property but nevertheless, despite best efforts to fully prepare, investor missteps are possible along the way. Learning from these mistakes is the key to successful investing in the longer-term. Here, we’ll break down five of the most common mistakes and how to avoid them in your own investment journey.
Limiting yourself to a single market
Over- or under-renovating
Doing everything yourself
Not saving for maintenance and capital expenditures
To start, investors who don’t take the time to explore outside markets for optimal investing opportunity do themselves a major disservice. While staying in your home market may feel like the safest bet, it doesn’t necessarily mean that it represents the best opportunity for collecting the highest returns. By utilizing companies like Investability and RentRange, investors are able to access tools to help them succeed, including data, properties and professional resources to support various phases of the transaction.
Renovating is another area of the investment journey that can sometimes trip up new investors. It’s wise to do your research before getting started with any renovations to ensure you are doing the right renovations. Look at comparable properties and consult with your Realtor to gauge condition of other homes in the neighborhood. If you want to learn more about making the right renovations and how to avoid this common misstep, click here.
The third mistake common to new investors involves financing—more specifically, becoming overleveraged. The goal when buying an investment property, whether it’s a flip project or a longer-term buy-and-hold asset, is prosperity. No one buys a rental property to lose money; however, if an investor fails to accurately crunch the numbers before entering into a deal or gets upside down on their expenses, the opportunity can quickly go south.
While debt can work favorably for the investor by strengthening their buying power and helping to build equity on the property, overleveraging occurs when the property doesn’t generate enough cash to cover the costs. Read our post about financing to help ensure you don’t become overleveraged in your next investment deal.
Another fatal flaw new investors tend to fall victim to is doing everything themselves. The truth is, as a new investor, much of your success depends on having a solid core team to support your efforts. Purchasing your first investment is also a major investment in yourself and the lessons you learn will be carried throughout your investing career. Smart investors learn from their mistakes and create processes to mitigate against them in the future. We’ve discussed the importance of an A-team before (click here for an episode of The Investability Podcast if you’d like to learn more) so remember, don’t try to do everything yourself! Recruit the help of an agent or mentor to help you along the way.
Finally, investors should have a clear understanding of the expected maintenance and capital expenditures associated with the property and budget adequate savings. Normal maintenance costs are unavoidable, but other expenses to consider include vacancy costs, turn costs between tenants, taxes, HOA fees, etc. By planning ahead and anticipating what kind of repairs the property may need down the road, you can avoid being hit unexpectedly by a major expense without a reserve to cover it.
While mistakes are prone to happening, the best investors prepare beforehand by performing due diligence to help limit risks. They also learn from their mistakes and enact a plan to prevent repeating them in the future. Each investment is a learning opportunity! Take the plunge, buy that first property. Let us know how we can help you be successful.