For many first-time real estate investors, taking the leap and buying an investment property is one of the scariest things they’ll ever do. After all, there is a lot at risk if things go south.
I asked real estate experts and successful investors a simple question:
If you could list 3 common mistakes made by first-time real estate investors, which 3 would you list?
I wanted to know plain and simple which three mistakes most often derailed first-time real estate investors when getting started in their investment careers.
Read on to discover the three most common mistakes made by first-time investors, as listed by 20 of the industry’s top real estate experts and investors.
Bill Gassett, Top 5 Real Estate Agent in Southborough Massachusetts
As far as mistakes go from real estate investors, I have seen some of the same things repeated more than once.
The most common issue I see is when an investor buys a rehab and underestimate the costs involved in bringing the property into what would be considered appropriate for the market and neighborhood. I have seen numerous cases where the investor actually loses money because they have either overpaid or not done enough home work on what it will actually take to renovate the property correctly.
The second mistake is buying a home that would be considered at the top of the market for a particular town and/or neighborhood. You never want to be the “cream of the crop” property when you are an investor. Middle of the market to the lower end is always a better place to be as the properties that are above you bring up your value.
The third mistake I have seen but not quite as often is an investor buying a property that has some form of functional obsolescence that makes it difficult to sell. Usually these are structural issues that cannot really be changed. For example having to walk through a formal dining room to get to a bedroom in an older home. These are all things that can squash an investors plan of making the money they thought they would!
Marco Santarelli, Investor, Author, Founder of Norada Real Estate
Here are three common mistakes that I would put at the top of your page:
Investing in your local market only. Although your local market might offer you the best opportunities, the reality is that more often than not the best deals are found in other markets, often out-of-state.
Speculating on appreciation. Appreciation is nice but if your property doesn’t make sense the day you buy it then you are probably speculating.
Buying with financing (all cash). Leverage is one of the greatest benefits of investment real estate. It increases you cash-on-cash returns and allows you to buy more property.
Brandon Turner, Investor, VP Marketing at BiggerPockets
The biggest mistakes I see new investors make are:
Not Doing the Math. They simple rely on “gut feeling” when making a decision, which tends to lead to problems and bad investments. The math is not tough, and doesn’t take a lot of time, but can mean the difference between success and failure.
“Shiny Object Syndrome” – where the new investor bounces back and forth between new ideas constantly, never focusing. I believe you can succeed in any niche of real estate, so it’s important to pick something and stick with it.
Not Asking for Help – People think they need to do everything on their own, or that there is some kind of competition that stops them from asking others for advice. People would find greater success (and avoid mistakes) if they only asked for more help!
Maya Paveza, Real Estate Coach, Investor and Strategist
My first instinct answer is the following, there are SO many more mistakes.
1. Rookie Mistake: Pick a REALTOR you are related to, or know, but might only work part-time or has never worked with investors. Do your due diligence in finding the right REALTOR to work with. Ask for references, check references and schedule a consultation with them prior to beginning your working relationship. Make sure they have experience in the investment process. A rookie mistake can cost you a LOT. When I train agents to work with investors I make sure the agents know about “due diligence” inspections and options for special insurance to cover lost rental income, and even system failures. It’s not an everyday real estate transaction, it’s a long term relationship. Take your time, if you are not sure then sign a short term Exclusive Buyer Agency Agreement. But committ to a single agent so you don’t waste your time, and their time. Show dedication to them and amazing things might happen, Agents who are active enough in that area may have notice before a new property hits the market, and if you are committed to your agent you will be top of mind when they get that call. They will also have leases they can share with you, and references to others you might need in the process of purchasing and owning investment properties.
2. Rookies Mistake: Purchasing an investment property with a regular mortgage product. Oops! You can buy a few this way, but at some point you need a commercial loan or a line of credit. It’s much easier to draw upon and a faster way to go when you have to act quickly, especially if in a competitive situation perhaps with a cash buyer. After acquiring a few properties use the equity (which you should have if you are investing properly) to secure a commercial line of credit which can act as cash when need be.
Have your finances ready. Better to have a commercial loan ready to go, and a company set up to protect your personal assets from your investments. There are a lot of risks for investors who own properties, especially those that are rental units. Lost rental income insurance coverage is available, and a home warranty is a great option. Have a GREAT accountant who is familiar with real estate investments and the timeline, you want to avoid showing too much gain and need to know when to turn a property over and acquire a new one.
3. Rookie Mistake: No hiring a property manager or management firm because of the bottom line effect.
You are running a business when you own investment properties, you aren’t playing guys this is the fastest way to build wealth. Cheaping out in this aspect will be the difference between true success and an expensive hobby. Consider it an additional stream of revenue while values increase. Your time is worth money, you need to really value it properly and not become your own handy man or bill collector.
Be sure to read, research and learn about the rental process in your ara, what you should be looking for, what rents are in your area, as your REALTOR ot introduce you to a reputable, and proven, property manager, it’s well worth the expense to have someone else handle the potential issues, maintenance and even licensing required in some area. A client once had a call on Christmas Eve that there had been a fire at one of his properties, he was a few hours away but because he had secured a relationship with a reputable property manager they were notified by the fire department and handled all the arrangements to secure the property, meet the insurance adjuster and act on behalf of the owner without their needing to leave their family gathering. I got the call after it all had occurred, and my client was extremely grateful I had introduced him to his property manager.
Learn the market, trust your REALTOR. They do this everyday, and if you chose the right one you won’t have to worry about the potential ROI of the property you purchase because your agent should be able to easily demonstrate that information via market analysis and statistics.
Ben Leybovich, Real Estate Investor, Entrepreneur and Speaker
Assuming you need money to invest in RE.
Assuming the bricks and mortar are the only value centers in a transaction – there are many others.
Confusing knowledge with wisdom – they are not one and the same, and we need both!
Joshua Dorkin, Founder and CEO at BiggerPockets
Overpay b/c of lack of understanding of how to evaluate deals
financially unprepared to support REI
Michael Blank, Expert Apartment Building Investor
I’ll answer the question for apartment building investing:
Mistake # 1: Not having enough cash: either to complete due diligence and get to closing, and running out of cash while owning the building. You need a reserve in case something happens. Sometimes you get into a deal and discover that half the tenants aren’t actually paying rent, or your boiler blows up etc. Once you have a handle on it and it’s stable, you can pull out some of the reserve fund and substitute that with funding the reserve out of cash flow (the rule of thumb is $250 per door per year).
Mistake # 2: Not verifying the actual rents collected. In fact, I just wrote a BiggerPockets article on this here.
Mistake # 3: Not being clear or not sticking to your underwriting guidelines. Before starting to make offers, know exactly what returns you’re looking for. In other words, how will you recognize a good investment when you see it? How do you know it’s good? I look at the IRR (the returns) for the investors – everything else is secondary. So # 1, what are your investment return requirements. Then # 2, make sure you’re underwriting the deal conservatively. Use a 10% vacancy factor, take into account bad debt (i.e uncollected rent) if your property is affected by this. Use a rule of thumb for expenses of 50% of income, and if landlord is paying utilities, increase that to 55% or even 60%.
Seth Williams, Founder of REtipster.com
Don’t pay for improvements and services that don’t add value.
There will always be opportunities to pay for improvements for your properties or added services in your business. These things can certainly help your operation run smoother and allow your properties to generate more revenue with shorter turnaround (both of which will be very important to the long term help of your investment portfolio).
On the same coin, we all have to sift through MANY temptations that entice us to spend our hard earned cash on things that look flashy and appealing, but just don’t add much to the bottom line. Use great discernment when it comes to the things you spend money on (especially in the beginning, when money isn’t “growing on trees” just yet). Choose your battles wisely and only invest your cash in the things that will effectively bring your business to the next level.
Don’t buy properties that cost more than they make.
Let’s face it – in order for a property to be an actual “investment”, it needs to generate a profit.
In other words, after all of your expenses are paid – how much money will you actually be able to KEEP at the end of each year? It comes as a surprise to many new investors that t’s harder than it looks to pull this off. There are an endless number of things that can (and will) eat away at your revenue and become obstacles to you making (and keeping) money. If you want to avoid the trap of owning a property that costs more than it makes – be sure to do through due diligence before you buy it and leave no stone unturned in the process. It may be tedious work that requires great patience, but you’ll thank yourself for a lifetime as a result of laying the groundwork properly.
Don’t hesitate to pay for the right expertise.
It’s the same reason I take my car to a mechanic when it needs fixing, the same reason I go to a doctor when I’m sick, and the same reason I don’t dare to pick up a hammer to fix my own properties… because I don’t have the right set of skills to do it myself.
Mark Ferguson, Realtor, Investor and Author
Buying a rental property for appreciation and ignoring negative cash flow.
Buying a fix and flip and not calculating all the costs or trying to save money by doing all the work themselves.
Spending $20,000 on a real estate guru to teach them how to invest.
There are many programs out there that use low priced or free seminars to get investors in the door and then up charge them for more and more services until they finally bring out the big guns with a30k or 20k program that walks them through how to invest with financing. In the end they are mostly worthless and you could have bought a house with that money.
Joe Manausa, Real Estate Blogger, Broker and Investor
From the hip…
No clearly defined goal – If you are going to invest in real estate, you should have an ROI/IRR goal. Your money will have to be removed from its existing use and put into real estate, so what is your minimum required return on investment?
Not understanding active vs. passive – buy and flip is a job, not an investment. You have to take an active role in this type of “investment” so yo should not compare it with other passive investments.
Looking at properties vs. looking at numbers – investing in real estate requires you to find a property that will meet your financial needs. Too often, new investors go and look at properties that they have yet to financially qualify as feasible investments. Do the numbers first.
Tracy Royce, Short Sale Realtor, Investor and Foreclosure Expert
3 common mistakes made by first time real estate investors is not sticking with it, chasing rabbits, and getting emotional over a deal. I tell anyone who starts, you’re probably going to get a paycheck 6 months from the day you start working diligently on lead generation. So many people drop off after a few weeks/months, and lose hope.
Secondly, when they start getting calls/lead flow, they chase “rabbits” that aren’t ever going to be an actual deal for one reason or another. If someone’s motivated, you’ll know. Don’t waste your time on the majority of leads that aren’t ever going to convert.
Lastly, don’t over improve a house, or buy based on emotion. Let the numbers talk and show you if there’s a deal. You can buy a lot of houses, overpay, overimprove and lose your ass pretty quickly, so your emotions need to take a back seat. It’s not worth buying a bunch of property just so you can brag to your friends you’re in real estate investing. It’s a business; think like an owner from day 1 and you’ll already be ahead of the crowd.”
Don Campbell, Best Selling Real Estate Author, Investor and Senior Market Analyst
The three most common mistakes of real estate investors:
Not understanding the economic fundamentals of their target market. What is driving the market, (speculation or long term economics), is it sustainable and is it attracting the type of tenants I want for instance those with increasing income and strong job prospects.
Buying a property because it is ‘cheap.’ Too many investors buy property without understanding value. Price is not value. Just because it is cheaper than it used to be, or it is cheaper than in other cities doesn’t mean it is a good deal. What matters is Yield – what long-term income stream are you buying when you close on the property. Is it higher than you can get in other areas or investments? Is this yield sustainable or is it just a short term shortage blip.
Not planning a ‘sustainability fund’ when they purchase properties. We often call this the sleep at night fund. It is made up of 3 months of mortgage payment equivalent in readily available cash reserve, for EACH property. This money becomes the buffer for unforeseen repairs, vacancies and other issues. Without this sitting on the sidelines, the investor is simply adding too much unnecessary financial risk to their portfolio. With it, they can go on vacation, sleep at night or just get on with their life with fewer “What if” worries. Treat investing in real estate like the business that it is.
Lynn Pineda, Expert Realtor
Investing in Real Estate for the first time is a very exciting adventure for first time Investors with the hopes for great returns on their investments. Proper planning and preparation is key in anything we do and the same holds true for investing in Real Estate. Likely the most common mistakes made by first time Investors are the following:
Not completing your local Real Estate market research
This is a big deal if you haven’t done your research when deciding on a Real Estate property to purchase. You want to make sure you’re buying in an area where you can anticipate price appreciations and/or steady demands for rentals, if you’re renting opposed to fixing and selling a property. Making the wrong investment due to lack of research is a hard lesson to learn when you end up losing money.
Not budgeting properly for owning Real Estate
It’s so easy to get all wrapped up in the excitement of a first time property purchase that you fail to consider the expenses that go along with property ownership. You need to budget for utilities, repairs and down times, if renting. Will you have the money to fix the A/C when it breaks? What about the month or two you miss out on with no Tenant, when the prior Tenant moved out and you couldn’t immediately find a new Tenant?
Taking shortcuts on any needed repairs or remodeling
Shoddy repairs and/or remodeling will not benefit an Investor. Have you quality contractors in place before you purchase an investment property. Taking short cuts to save a buck will not bring Buyers wanting to buy your property when you’re ready to sell or you won’t have Tenants interested in paying you top dollar for a rental unit. Quality will always pay.
Raphael St. James, Expert Realtor
Not sticking to a plan or the numbers to fulfill your goal (Paying too much, not having enough capital for unexpected repairs, etc.)
Being too short-sighted on immediate returns and not the long-term end goal.
Buying off of impulse or emotion instead of the parameters of the property (cap rate, etc.)
Ilyce Glink, Award-winning real estate & personal finance expert
Timing Issues. Too many people sign a year-long rental agreement and then decide to buy.
Not understanding where you are in the cycle of life. Don’t buy a 1b/1ba and then find a long-term partner or get married and have a baby. You’ll be squished.
Not educating yourself. Read up on the process. (Buy my books, 100 Questions Every First-time Home Buyer Should Ask and Buy Close Move In!) Get educated. It’s the single biggest purchase you’ll ever make. Don’t wing it and don’t rely on people who have never been through the process.
Andrew Fortune, Expert Realtor
1.) Not being realistic about the learning curve. – First time investors are usually pumped full of info from blogs, seminars, and books. Most of the info that they receive will convince them that anyone can be successful investing in real estate. In reality, the chances of a first time investor doing well on their first few deals are slim to none. There will always be an unexpected expense and/or problems that will eat into profits. If you are prepared to make a few mistakes, you will learn from them and adapt with each deal. If you are not prepared to make mistakes, these unforeseen problems will crush your motivation to try it again.
2.) Remodeling for Personal Taste and Not What’s Currently Selling – First time investors have something to prove when they enter the business. One of the ways they express their abilities is through the design choices that they make throughout the remodel process. Unless the investor is looking at homes on a regular basis and noticing what materials are currently selling homes, chances are high that they will over spend on materials, or pick materials that are not desirable to the masses. Tip: Hang out with local home builders who build plenty of homes and use the materials that they use. These builders have years worth of experience dealing with choosing materials that sell homes fast for minimal cost.
3.) Getting Caught Up in the Small Stuff – As an investor, your first home remodel is exciting. It becomes personal. Once emotions and personal feelings get involved, the chances are high that small details will become more noticeable and important. Small cosmetic flaws will start to pop out everywhere you look the longer you are in the property working on it. It takes experience to know what to spend time on and what to avoid. First time investors are known for overdoing their first few rehabs because they get caught up on the small cosmetic issues that home buyers usually never notice when they look at a home. Some examples might be painting inside closets, remodeling under bathroom cabinets, or changing out light fixtures in the garage. Just stick to the main selling points and get the job done on time with minimal cost.
Debbie Drummond, Expert Realtor
#1. The most common issue we see is first time investors who buy with emotion. We’ve seen in-experienced investors who pass up great opportunities because something about the home doesn’t “Wow” them. It may be an investment but they are drawn to homes they could picture themselves living in.
An experienced investor will look at how quick homes in the neighborhood rent and how much rental income it will produce. They’ll leave the “Wow” factor for their own home and focus on the numbers for the investment property. Experienced investors are more likely to buy site unseen based on the numbers and thorough inspections.
#2. Many first time investors see the world thru rose colored glasses. They expect to get the property rented right away, rent checks to arrive on time and not have major issues.
They don’t allow for management fees, occasional repairs and the cost of having a property sit vacant. The expenses involved in evicting a tenant who doesn’t pay can add up. It’s always a good idea to have additional funds out away to cover the unexpected.
#3. First time investors sometimes neglect making little improvements which will help the property rent quick. Most of our investors will spend $5-$10K, depending on size and condition of the property. The extra investment adds updated light fixtures, new flooring, paint and desertscaped back yards, etc. Many of our investors buy used appliances from a local store.
Tenants see stainless appliances, nice flooring and the property rents quick for a good price. The first time investor lists the home for rent with minimal improvement and it sits on the market until they lower the price to get a tenant.
Kyle Hiscock, Real Estate Expert
I’d be happy to give the top 3 mistakes made by real estate investors.
Misjudging cash flow – An investor who purchases an investment expecting to have a positive cash flow of $10,000 after all expenses only to find out after owning for a year the cash flow is $5,000.
Thinking they will get rich fast – Investors purchasing one investment home believing they will get rich quick. Building an investment portfolio takes years and years to do. It doesn’t happen after just one property!
Overpaying for properties – This is a huge no-no. In experienced investors sometimes will stretch when buying an investment because they have the “itch.” This often leads to a poor cash flow and poor investment. It’s important for investors to stick to the numbers and not overpay for properties if the numbers don’t work!
Karen Highland, Real Estate Expert
When considering an investment property purchase, the investor must know going into the project, whether they are going to buy, rehab and flip, or whether they are going to keep the home and rent it out. There are two different approaches, depending on each of these plans. Sometimes first-time investors are not clear on their goals and may change their minds when they get into the renovations on a home. The problem is, then they may have already over-invested, or underinvested.
For example, if the investor plans to renovate and flip the home, then they need to do their research and learn what buyers in that price range and in that neighborhood expect in a home. If the comparable homes are fitted with granite counters and upgraded appliance packages, hardwoods and upgraded bathroom features, then they need to have that cost figured in to the project. If they get into the renovation and find that they are short on finances, then skimping on these features will make the home less desirable to buyers in that market.
If the investor plans to own the home and rent it out for a while, then fitting the home with upgraded features is an expense that they may regret. Renters tend to be hard on a home, no matter if the finishes are less expensive, or more expensive. The wear and tear on expensive upgrades will be more costly to fix and replace down the road, compared to less expensive finishes.
Knowing whether the final product will sell for a profit depends on knowing the comps. Knowing whether it will rent well, depends on the same knowledge, but switching from one plan to the other can end in a disaster. If they find that the home doesn’t sell, or that it doesn’t rent for the money that will cover the cost that they put into it, then they have an entirely new set of problems to deal with.
Richard Silver, Real Estate Expert
Think long term…
Decide whether income will trump capital appreciation… Or vice versa…what are your goals…
What value can you add with minimal cost??
All of this goes with knowing the market and rules affecting landlords and tenants…
Written By: Jacob Grant Property Management | August 19, 2014 | link to fill article here.