The 5 Biggest Real Estate Investing Mistakes of the 21st Century
05 11 2017
For wealth-minded individuals searching for alternatives to traditional investment types, real estate investing often appears very attractive. They’re not wrong – real estate property investments can provide great returns through different forms ranging from long-term rental properties to flipping houses – but that doesn’t mean real estate comes without a degree of risk.
Just like investing in any traditional or alternative investment opportunity, there is always risk involved. Whether you are new to real estate or a veteran in the business, there are a number of scenarios that can cause you grief in the 21st century if you aren’t prepared.
Mistake 1: Skipping Your Homework
Most people do their research before they buy a cellphone, a car or a new mattress. Typically, they ask a lot of questions, compare the different models and try to decide if this purchase is worth the money and the risk. The same thorough research should absolutely be applied to commercial real estate investing.
For example, did you know the term “real estate investor” can actually mean a lot of different approaches to wealth growth? Are you going to be a personal homeowner, a landlord, a flipper or a land developer? Make sure you understand the responsibility each investor has and the risk they take on. Anyone interested in investing, whatever the type, should select the profile the works the best for them and their needs.
Don’t skip your homework. Always consider the history of the house or property. Educating yourself before you put you and/or your family at risk is as simple as researching online, going to the library, and speaking to a financial advisor on the best real estate investment options for you and your portfolio.
Mistake 2: Overpaying
Trying to find the right home can be a frustrating and time-consuming process. For some prospective buyers, this leads to anxiety about finding the perfect home – so when they do, they overbid or overpay for the house. Overbidding on a house can have a waterfall effect of problems. Buyers can up overextending themselves, taking on too much debt and having higher payments they can’t afford.
Avoiding this mistake is also tied to doing your research. Take a look at the real estate market and the area you would like to purchase in, and see what other similar homes have sold for. Any real estate agent should be able to provide this information and answer your questions about the neighborhood. Talk with someone before you put in an offer.
Mistake 3: Underestimating the Cost of Repairs
It is hard to estimate the amount of repairs a house will need, whether it’s a flip or a rental property, but it’s inevitable: You will need to make repairs at some point. Many investors and prospective buyers underestimate the cost it will take to revamp a house.
Overestimate. It’s better to add an extra $5,000 to your repairs estimate than to be blindsided by how much the kitchen renovation might cost. Understand the costs that go into fixing or sprucing up a home, so you can ensure your budget isn’t one you’ll quickly run over, leading to a number of problems.
Mistake 4: Neglecting To Do Your Due Diligence
The length of the due diligence period varies, but is typically 10 days. This time period, immediately after the contract becomes binding, is crucial in determining if the home is the right fit for the buyer. For the seller, this time period usually means inspections and possible further purchase negotiations.
There are a few important things you should consider doing during your due diligence period:
- Obtain a professional third-party property inspection
- Consider the repair estimates
- Evaluate zoning and local ordinances
- Get a professional third-party opinion of value and rental compensation
For a fast closing, some real estate investors make offers with a fast closing, removing the due diligence period entirely. While this may mean a lower price, it will also mean no time to get a home inspection or second opinion about renovations. Having a due diligence period is helpful, especially to the novice investor.
Mistake 5: Not Asking For Help
Many investors think they know it all and don’t think about asking experts or even friends for help. Even if you are an experienced buyer who has completed several deals in the past, there are always unique risks to every opportunity.
This is where your insurance agent, financial advisor, a real estate broker, or a good attorney can come in handy. Ask them questions, seek their advice in the areas they are best suited for and use them as a resource every step of the way.
Bottom Line to Investing in Real Estate
Real estate is a popular alternative investment, but in the fast-changing landscape of 2017, many investors and lenders alike make mistakes that accentuate the risks involved. Experience and education help to make your financial endeavors more worthwhile. Don’t forget to do your research, and make sure to talk to your financial advisor about the options available to you – and ask for help whenever you need it.
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