12 Common Mistakes Made by New Real Estate Investors
Renters Warehouse Blog
Rental property can be an excellent investment, and one of the best sources of passive income for investors far and wide. Rents have steadily continued to increase over time, with the average monthly rent surpassing $2,000 in June 2022, according to Zillow. And with housing prices continuing to increase over the long run as well, real estate is also a great way to hedge against inflation.
But while there are plenty of opportunities to make money with real estate, as a new investor, you’ll want to make sure you’ve taken steps to set yourself up for success from the start. With careful goal-setting and planning, thorough market research, and diligence in researching anything that you’re not clear about, you’ll be able to sidestep many common issues that first-time investors often run into, allowing you to get off to the best start possible and helping you to ensure that your capital is working for you.
To help you find success with your investments, here’s a look at some of the most common mistakes that are often made by new investors.
Not Having a Clear Plan
You know what they say, “Failing to plan is planning to fail.” One of the biggest mistakes new real estate investors make is neglecting to create a clear investment strategy from the start. Creating a clear road map is the best way to achieve your goals. For instance, you’ll need a clear plan for what type of returns you’d like to get, and what type of properties you should invest in to meet your goals. You’ll also want to decide whether you are investing primarily for cash flow or long-term appreciation, as this will help to guide your investment decisions too, allowing you to choose a market that has the best potential. You’ll also want to work out the logistics, for instance, you’ll want to decide whether you need long-term or short term-rentals and whether you’re going to manage the property yourself or outsource the work to a property manager.
Failing to Conduct Research
Before putting any money into real estate investments, take time to educate yourself. As a beginner, you need to understand the ins and outs of investing before you invest. If you’re planning to manage the rentals yourself, you’ll also want to make sure you brush up on what your responsibilities are as a landlord, and make sure you have a plan in place for how you will do tenant sourcing and screening, application processing, routine maintenance, inspections, and more. It’s also a good idea to surround yourself with professionals who you can turn to if you get stuck.
One key thing you need to learn as a new investor is how to identify a good market before putting any money into a property. In addition, you need to keep up with the tax regulations and landlord-tenant legislation, which is continually changing as well.
Read this article to learn more about stress-free investing.
Not Doing Your Due Diligence
If you plan to invest in real estate, you must do your due diligence. You don’t want to make a significant financial commitment before knowing whether it’s a sound investment. Once a potential property catches your eye, you need to verify the details and assess the viability of the investment. Additionally, you need to confirm whether the property is as described and whether you’ll need to do any renovations or maintenance on the unit.
Some areas that you’ll want to pay attention to include the following:
Visit the property to check the condition of the house to see whether it needs any repairs
Check whether the property already has tenants
Check on the property on different days to see if you can learn more about the neighborhood
Get a formal inspection done by a licensed professional
Confirm whether the property is located in a problematic area such as a flood zone
Consider asking why the house is being sold
Consider the property’s proximity to key amenities including good schools and employment opportunities
Research the crime in the area
Get a formal appraisal done
Another temptation for new real estate investors is to rush things, and risk cutting corners in the process. But while it’s important to move quickly when you spot a deal, you’ll want to avoid rushing things. It will take time to research and find the ideal investment property. If you rush this or don’t do proper due diligence, you could end up paying over the odds for the property, you could waste more time with repairs or other work that you missed.
Once you have your property and are ready to start renting it out, you’ll want to make sure you source and screen tenants carefully as well, there’s nothing worse than rushing an applicant through the application process just to fill a vacancy. Instead, make sure you take the time to thoroughly screen each applicant fairly so that only qualified tenants gain access to your rental.
Overspending On the Investment
Sometimes new investors make the mistake of paying too much for a property.
This can be tempting if you have spent a lot of time looking for a property. You might be tempted to lock in the deal as soon as you meet the first seller. However, this mindset could eat into your profits. Overbidding on the house could also end up with you taking on unnecessary debt and having to make bigger mortgage payments that will reduce your cash flow. You need to run the numbers before making your investment to ensure that you’ll be generating revenue that’s in line with your big-picture goals. To get an idea about whether the pricing is fair, you can search for other similar homes in the neighborhood.
Underestimating the Expenses
According to data from the National Association of Realtors, in September 2022, the national median cost for new homes was $384,800. Apart from the purchase costs, you’ll need to pay for other expenses such as ongoing repairs and maintenance. Often, you’ll need to make at least a few upgrades to get a property rental-ready before you can rent it as well.
If you are investing in a fix-and-flip, keeping an eye on the renovation budget is essential. One of the most common mistakes new real estate investors make is underestimating how much the house repairs will cost. Once this happens, the investor has to extend the renovation window, which eventually affects the overall profits.
However, you can avoid this risk by talking to trusted contractors and getting a specific quote on how much everything will cost. This will allow you to work on a detailed budget and get an estimate of how long the entire project will take. Additionally, there are other extra costs like property taxes and insurance to keep in mind. Make a list of monthly costs before bidding on a property, and avoid going over.
Most first-time real estate investors feel that they can handle everything alone. But just because you can do everything yourself, doesn’t mean that you should. Experienced investors know that outsourcing many tasks to experts helps to free them up to focus on other more pressing things.
Here are some of the people you may want to consider having on your team:
Experienced contractor: Before investing in a property, you need a reliable contractor to help you when problems arise. When choosing a contractor, consider getting someone who understands a little bit of everything.
A real estate agent or mortgage broker: Consider enlisting the services of a real estate agent or a mortgage broker to find suitable properties to invest in. These professionals have a lot more information on the state of the market and can often point you in the right direction.
An attorney: Real estate investors also need an attorney to look at contracts and draw up lease agreements. Find a good attorney to make your investment process much easier.
A real estate group: You can also join a real estate group in your town or city. Check social media pages like Facebook for such groups to get information from other investors.
A property manager: A property manager is an excellent person to have on your team. They can take on much of the management of the property for you, which makes life easier. This also frees you up so you can start looking for your next investment property.
See: Tips for Success From Experienced Investors.
Buying Property in the Wrong Location
Another major mistake by beginner investors is buying property in the wrong location. Most investors will purchase a property close to their home or in a location where everyone seems to be investing. While some locations might become profitable, others may present problems for investors. For instance, it might be challenging to find tenants if you buy a home that’s in an area that’s too remote.
Confirm that there are no issues that will harm your project or affect the long-term profitability of your investment. Ask neighbors about their experience in the area. Additionally, you may want to consider casting a wider net and investing in properties that are outside of your local area, or even state. Being a long-distance landlord is easier today than ever before, thanks to the fact that you no longer need to put boots on the ground in order to run a profitable investment.
Failing to Save For Repairs
If you are buying an older property, there’s a high chance that the unit will need repairs at some point. You’ll also need to do routine maintenance on newer properties. However, sometimes new investors can fail to budget for this.
Emergencies are always unexpected so you need to assume that they will happen at some point and save for them. Neglecting maintenance is never a good idea as it can quickly escalate issues and lead to bigger problems.
Set up a separate budget to handle such repairs on your property. It’s a good idea to budget 1% of the property’s value for repairs each year.
Forgetting That You Can Negotiate
Depending on what market you’re in, once you’ve found a potential property, you could consider negotiating the price. Of course, this is one step that works best with properties that have been on the market for a while. Sellers may be more willing to negotiate if their property isn’t selling.
Neglecting to Get Insurance
If you have a mortgage on the property, then the mortgage provider will almost certainly insist you have landlord insurance if you’re going to rent it out. But don’t make the mistake of thinking that regular homeowners insurance is good enough for a rental. You need landlord insurance and ideally, a policy that covers property damage and offers liability protection. Additionally, you should remember to get additional coverage, such as flood insurance, if your location calls for it.
Not Diversifying Their Investments
You might not have enough cash flow to invest in multiple properties as a beginner. However, some investors make the mistake of not diversifying at all. For instance, some investors may purchase all of their rentals in one city, or just buy one multi-family building and call it a day. But while this approach does make it easier to monitor all of the properties, a lack of diversification can put you at risk. If the local economy experiences a temporary downturn, for instance, all of the properties could be at risk. Vacancy rates could increase or housing values could slump temporarily –this could present a problem if you were planning to sell during that time. However, diversifying allows you to spread the risk so that if something were to happen on a local level, your other properties would still be fine, helping to minimize the impact and cushion your portfolio.
Real estate investment can provide a steady source of income. However, as a new investor, it’s easy to make a few mistakes along the way. Being aware of the most common and problematic ones can help you to avoid a world of problems and can help you to get off to the best start possible with your investments—helping to set you up for long-term success, and financial freedom, as a real estate investor.
If you’re thinking of beginning your investment journey, be sure to head over to Renters Warehouse and search our available inventory of rental homes on the market. You’ll also want to claim your FREE guide: How to Find and Buy the Perfect Investment Property—see what to look for when searching for your first rental property.
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