8 BIG Mistakes To Avoid When Investing in Real Estate
Making mistakes is a natural part of the human process, and it cannot be helped in some cases. However, when it comes to real estate investment, avoiding as many mistakes, mishaps or downfalls is ideal. Simply by understanding some of the common mistakes that can ensnare investors when it comes to real estate you can save yourself a lot of time, trouble and money. Read on below to learn about the top 8 mistakes you should try to avoid when making investments in real estate, and follow CADMEN Properties for more tips like this.
Failing to Plan
Failing to plan is equivalent to planning to fail because one of the last things you want to do is to purchase a property without having an understanding or idea of how it will generate financial gains. When the real estate market is booming, as it is now, it can be hard not to get caught up in the whirlwind, but stick to your plan and you will be able to weather the frenzy and come out on top. There is always the possibility that the market will turn bad or that some forecasts, predictions and assumptions you made might be wrong, and especially in these cases, a plan can benefit you accordingly. Before taking the plunge with a mortgage or putting down cash, you should have an investment strategy and figure out your plan for purchase before looking into real estate that fits those perimeters. Consider some of the following questions when creating a plan and deciding on an investment strategy:
What type of house are you looking for?
Looking into single-family or multi-family properties?
Vacation rentals and vacation properties?
Commercial, office, or multi-use buildings?
2. Not Doing Sufficient Research
When making a significant purchase such as a car, electronic device, appliance or property it is a best practice to do in-depth, targeted and quality research. This can ensure you have all the key facts in mind when developing plans and making important decisions moving forwards. The due diligence that is necessary when researching potential properties is rigorous and should not be skimped out on or taken lightly. Additionally, there are other considerations for the different types of real estate investors from those looking to develop land, flip houses, rent them out or live in them. It makes sense to ask many questions about any property you are considering but do not forget to also conduct research about the surrounding area. For instance, a nice home that is right down the street from a college dormitory may not be ideal for someone looking for a family home but may appeal to a future landlord looking for a multi-unit house to rent out to students.
This list of questions includes what investors should ask before considering properties:
Is this property near a commercial site, or major construction? Including anything coming soon
What are the city's plans for this area and the surrounding areas?
Has the area changed much or is it expected to see major changes within the next few years? Such as demographics and household types.
Is this property situated in a problematic area or a flooding zone, such as ones known for rodent or termite issues?
Does the property have any foundation or permit issues that need to be dealt with?
What things in this property will need to be replaced such as major appliances?
What is the main reason that this property is now on the market?
How much did the previous investors purchase this property for and in what year?
Are there any problem areas in this neighbourhood or location?
What is the proximity of this property to basic necessities, such as grocery stores, medical care facilities, and employers?
3. Taking It On All Alone
Well, a lot of buyers may think that they know it all or that they can close a deal by themselves, but the reality is that even if you have had successful deals in the past, the process may not always go as swimmingly. In cases where there is a down market and you want to fix a difficult real estate deal, there will be no one for you to turn to. Isn't it better to have support be there for you and assist you along the way?
As a real estate investor, you should try and take advantage of every resource available to you including making friends with other skilled experts in the field. When it comes to making the right purchase decision you can rely on these resources and experts to feel confident in your choice. At the minimum you should the following people in your resource network:
Skilled real estate agent
Reliable home inspector
Trustworthy handyman
Experienced attorney
Good insurance representative
This expert group of people should have the knowledge to alert you of any potential issues within the property or the neighbourhood. In the case of attorneys, they can give you warnings of any errors or problems that may be in the title or easements which may cause issues in the future. Each of these people will be able to provide you with a unique perspective and an expert opinion to make the best decision when purchasing properties or making investments.
4. Not Remembering Local Real Estate
If you want to turn a profit in real estate, it is key not to underestimate the local real estate market. Learn about local offerings to help you make smart purchase decisions that will create income. This includes looking into the following:
Supply and demand issues
Home values
Land values
Levels of inventory and beyond
It is important to develop a sense of these parameters to ensure that you will be able to choose whether or not a certain property is a good investment decision or not to add to your portfolio.
5. Overlooking The Requirements of Tenants
If you are looking to buy a property and then rent it out you should keep some things in mind including who your possible tenants might be. This includes college students, young families and single working people. These different groups will be looking for different things in their rental choices, for example, a family will be looking for good schools in local areas and low crime rates whilst a single working adult might be looking for public transit access and nightlife nearby. However, if you were planning to purchase a property to use it as a vacation rental you will need to make sure it is close to attractions such as nearby beaches or local landmarks. When making a purchase decision try to keep your potential renters in mind from that area and try to cater to that.
6. Poor Financing
There is a significant variety of alternative mortgage options available to investors that have the purpose of allowing you to buy a certain home that you have otherwise not been able to with a traditional 30-year mortgage term. However, a lot of investors who are able to secure mortgages such as adjustable-rate mortgages or interns-only loans may have to pay up later on as interest rates increase. To avoid this pitfall ensure that you have financial flexibility so that you can make payments when rates increase or have a plan b to transition your mortgage into a fixed-rate mortgage that is more conventional in the future as needed. As such, it would be ideal, to begin with, for a traditional fixed-rate mortgage or to pay in cash for your investment property to avoid these issues later down the line.
7. Paying Too Much
This point is tied to making sure that you do all your due diligence when it comes to doing research. We understand that looking for the right property that fits your need can be frustrating and time-consuming, so when potential investors discover properties that fit their checklists they tend to be anxious to have their offer accepted, instead of evaluating the price properly. This can often lead to overbidding on properties that are not worth that amount. When it comes to overpaying for a property, this can lead to a flow of new problems in the future including overextending yourself, your team, your resources and your budget by taking on more debt and making higher payments than can be reasonably afforded.
To discover if your ideal investment property is priced out of your range you can start by investigating to see what other similar properties in the area have sold recently. If you need help with gathering this information your trusted real estate broker can provide you with relatively easy as they have access to multiple real estate agents’ databases.
However, failing this you can easily research the prices of other similar properties, such as on databases and through local listings. Unless there is something additional to the property that makes it unique and would boost its value over time, it is best to keep your bids on properties consistent with those in the local area on other similar houses.
Do not worry that this property will slip through your fingers and overbid on it, there will be other chances to purchase other properties that fit your needs for a good price. You just need to have patience, due diligence and wherewithal throughout the searching process.
8. Underestimating Potential Expenses
Any homeowner or real estate investor can tell you that there is much more to owning a home or property than making the allotted mortgage payments including account insurance and property taxes. There are significant costs associated with the upkeep of both the external areas of the property such as the yard, roofing and structural integrity of the home. In addition to this there will need to be payments made to ensure the maintenance of all major appliances including the:
Oven/stove
Dishwasher
Clothes washer and dryer
Furnace/AC
Refrigerator/freezer
It is a best practice to create a list of the monthly expenses associated with the maintenance and upkeep of the property based on estimates before making a real bid for a piece of property. If you plan on renting out the property to tenants you can calculate your return on investment by adding those numbers to the monthly rent to give you a clearer idea of whether you can afford the mortgage and maintenance fees. This will help you to determine if you can afford the property including the income from renters.
If you are looking to flip a property, determining expenses is still critical because your profits will be tied directly to how long it takes for you to purchase, renovate and sell the house. Whatever the specific case is for you, creating such a list is a best practice for any investor. It can also behoove you to research any cancellation fees related to insurance or utilities, prepayment penalties and short-term financing costs. These can arise from the short order flipping and reselling of a property.
The truth is that if real estate investment was quick and easy, a lot more people would be into it. But a lot of the problems that investors end up running into could have been avoided with proper due diligence and good planning. Follow CADMEN Properties for more practical real estate investment advice.