Top 10 Rookie Real Estate Investing Mistakes
If you’re brand new to real estate investing, it’s practically inevitable you will make mistakes. And guess what…that’s okay! The most important part of the process (the part that will net you the most profit) is learning from your mistakes. However, there are plenty of rookie mistakes we’ve noticed that you don’t need to make in the first place!
Check out these Top 10 Real Estate Investing Mistakes that rookies tend to make. By being aware of these common missteps, you can avoid potential disaster with your deals and start out with your best foot forward.
1. Starting Too Late (or Not at All!)
Most specifically with real estate investing, profit is all in the timing. You’ve seen the real estate market go from booming to bust in just a few months. Then, with little warning, it bounces back up again! The most important investment step to take is to start when the time is right. Do your homework on the most profitable cities and states for real estate deals. You can begin your search for the best properties there. Once you’ve found a property, then you can look for financing to fund your deal. We highly recommend The Investor's Edge, in our humble, unbiased opinion.
The Worst Mistake You Can Make… is to not start at all. The real estate market sees higher profits now than it has in years, so strike while the iron is hot!
2. Looking for Properties in the Wrong Location
One of the best ways to waste your time and money is to look for properties in all the wrong places. Many rookies randomly search for discounted properties without thought to risk factors or lending criteria. For example, they’ll find a property in a state only to discover later that many hard money lenders don’t directly fund deals in that state. Or, they’ll find what they think is a golden property, but it’s located on a major street, in a terrible neighborhood or near railroad tracks. Instead, research the most popular states in which you can find direct hard money funding. Then, when you refine your search, be sure to look for the more popular, safe neighborhoods not located on any major roads. You also want to avoid properties close to large commercial buildings.
The Worst Mistake You Can Make… is to use the MLS to find properties. Homes listed on the MLS have the highest competition and lowest profit margins. Instead, you want to search other discount listings, such as foreclosure, probate, short sale or auction listings.
3. Choosing the Wrong Property
Talk about a gigantic waste of time! You need to be wary of the types of properties to look for. Many hard money lenders won’t lend on duplex, four-plex or commercial properties. For the sake of saving yourself from a lot of grief, limit your search to single-family, unoccupied homes. Also, limit your search to homes which don’t require a ton of time and money for a proper rehab. Hard money loans are restricted to about five months. Ask yourself if the property can be upgraded in that amount of time, for less than $50k. When you’re just starting out in real estate investments, it’s best to start small.
The Worst Mistake You Can Make… is to choose a property without doing your homework. If the deal isn’t good, the best hard money lenders won’t fund it. They want to protect both you and themselves from a bad investment. So, you’ll want to search for properties within their lending criteria. They’ve been in the business for years and will know which properties are the most profitable.
4. Miscalculating Your Budget
When you start your next deal, it’s extremely important to not underestimate the potential costs involved. You want to put together an air-tight purchase, rehab and resale budget. Make sure this budget also accounts for unforeseeable circumstances, for quite a few can pop up at the last minute. The best thing to do is to work with your hard money lender and establish a budget based on their recommendations. Do Hard Money offers a phenomenal tool called the Advanced Deal Analyzer, which calculates your estimated costs and overall profit.
The Worst Mistake You Can Make… is to overestimate your income on your deal. This creates a negative cash flow which will damage your investment in the long run. It’s always best to have too much money to cover expenses than too little.
5. Not Taking Advantage of Investment Tools and Resources
If your hard money lender or realtor has any tools or resources to offer, TAKE THEM! Don’t even hesitate. Real estate investing has a definite learning curve and the more information you can find on it, the better. Fixing and flipping houses is a lot more complicated than HGTV portrays it. You need finding resources to learn where to search for the best deals. You also need marketing resources to learn how to sell your home quickly. Then, there’s what to rehab, how to calculate your budget, timing the project, negotiating with sellers… the list goes on. The point is, when you’re just starting out, you can’t afford to not take advantage of any knowledge out there.
The Worst Mistake You Can Make… is to think you know best. Unless you’ve flipped homes for over twenty years and own your own successful real estate business, it’s best to rely on the knowledge of experts. The trick to fix-and-flip success is to learn as much as you can about every facet of real estate investing. Then, apply what you know and learn quickly from mistakes.
6. Doing It All Yourself
In real estate investing, DIY = DIE. Your deal will drop dead fast if you try to do it all yourself. If you are brand new to investing, one of the smartest things you can do is to work with a business partner. If you lack the money or a good credit score, you can partner with someone with capital to make a deal happen. Then, you can split the proceeds when the property sells. You also need the skills and knowledge of other experts, such as realtors, contractors and hard money lenders. No successful flipper in the industry is a one-man band.
The Worst Mistake You Can Make… is to believe you can (and should) do it all to save money. You shouldn’t sacrifice quality workmanship for a few bucks. Leave the larger rehab projects to the professionals. Also, pick a good hard money lender and trust in their judgement and advice as you continue your fix-and-flip process. Learn as much as you can from them. You will apply what you learn in your next profitable deal to make it all the more lucrative.
7. Biting off More Than You Can Chew
Real estate investing is very much a learning-by-doing endeavor. One of the biggest mistakes rookies make is to try to do too much all at once. A fix-and-flip deal can be complicated and too much to handle for those just starting out. Instead, they might want to get their feet wet by investing in wholesaling deals first. Wholesaling saves you the headache of having to rehab and resell a property. Rather, you find a property and get it under contract and then sell it to another fix-and-flipper for a profit. You don’t get as big a return as with retail fix-and-flip deals, but you do learn more about the process. You also do it with less risk, less time and less energy.
The Worst Mistake You Can Make… is to try to invest all of your savings into one big project right away. The key to investment success is to make your money work for you, rather than adopting the “one and done” strategy. Start small and work your way up with your investment deals. The more you learn, the more you’ll be able to tackle further down the line.
8. Choosing the Wrong Strategy
You want to choose the best investment strategy reflecting the strength of the real estate market. Sometimes, it will make more sense to fix-and-flip and other times managing rental properties may prove more lucrative in the long run. Like we mentioned previously, you may choose to do a wholesale deal rather than a retail rehab. Whatever your strategy may be, it is essential first to clarify your financial goals. Are you looking to set up a lucrative business? Do you wish to save for retirement? Or do you just want to get out of debt? Whichever the case, you need to choose an investment strategy to best achieve your goals.
The Worst Mistake You Can Make… is to not ask yourself these questions nor choose any investment strategy. If you don’t have an end goal, you most likely won’t go through with an investment deal. This can end up costing you thousands of dollars. Work with your hard money lender or investment mentor to establish a strategy.
9. Letting Emotions Get the Better of You
This is one of the most crippling mistakes a new investor can make. We see far too many people get so emotionally caught up in a deal, they try to make it work even if it’s a bad deal. Finding a good property can take a long time, sometimes months to accomplish. After spending months trying to find a good deal, a person could see that the numbers don’t work or the profit isn’t worth it and still want to go through with it. Therefore, they lose a ton of time and money on a bad deal rather than start over from scratch to find a great deal.
The Worst Mistake You Can Make… is to let your emotions dictate your investments. More than anything, you need to trust in the numbers. If they make sense, the deal will be profitable. If not, you absolutely must cut your losses and move on. To make an excellent profit, it’s best to keep your emotions at bay and let logic rule your decisions.
10. Expecting Too Much Too Soon
This is absolutely essential to understand: fix-and-flip investments are NOT a get-rich-quick scheme. Yes, you can definitely make a good amount of money investing in real estate, but larger profits will come with time and experience. Don’t expect to make a killing your first deal – very few do. Instead, expect a modest return on your investment if the deal is good. Remember, any return on your investment is success. If it’s small, use what you can and funnel some of those earnings into another larger deal.
The Worst Mistake You Can Make… is to give up because large expectations weren’t met. We had one client who only gained a little over $15,000 on her first deal with us. Instead of getting frustrated, she got educated. She used a portion of that money as a down payment towards her next deal and she learned a lot more on that one. As a result, she gained $25,000 on her next deal – nearly double what she earned on the first.
The Investor's Edge is here to help you achieve high returns on your investments and avoid any unnecessary mistakes and common pitfalls. After reading this blog, you are already well on your way to investment success!
Learn how to flip properties with us by attending our next webinar.
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