Purchasing rental properties appeals to a lot of people as a promising path to prosperity. And it can be just that. However, it can carry a great deal of risk. In fact, thinking that it’s easy is probably the biggest initial mistake.
It’s important to approach income properties with a solid grasp of how things work, a fleshed-out investment strategy, and realistic expectations. Otherwise, you’re just setting yourself up to make these common real estate investment mistakes, and they can cost you a lot of money and time. And obviously you’re not getting in the game to lose.
So, take a look at these 10 missteps along the way to wealth-building with real estate investing. Then, make the conscious decision to do what it takes to avoid them, and you’ll be well on your way.
Mistakes Real Estate Investors Make
- Expecting to get rich overnight. Real estate investing is a long-term strategy for building wealth. It’s not a get-rich-quick scheme. It takes major investment, and usually big loans. While it can certainly be a lucrative path, it must be approached with thoughtfulness, abundant caution, and patience.
- Buying without a plan. Too many people buy a residential or commercial property without devising an investment strategy first. Finding a good deal or falling in love with a home is exciting, but purchasing and then trying to figure out what to do with the property can get you into trouble. Nail down your investment model, then seek out properties that suit it.
- Not doing the homework. Buying rental properties strikes some people as easy. They think they have a sense for it. But like anything else, success requires learning. Study real estate investment to get a good grasp of the fundamentals, best practices, and yes—common real estate investment mistakes. And then, there’s lots of homework to do about any property and area you consider investing in.
- Failing to build important relationships. Some real estate investors try to do too much on their own—usually in an attempt to bootstrap. But to be successful in the long run, you need strong relationships with other trusted professionals, including a real estate agent, tax advisor, financial planner, contractor, appraiser, home inspector, lender, and others.
- Overpaying. This is undoubtedly one of the most common real estate investment mistakes—and the most ruinous when it comes to making money from a residential or commercial property. If you pay too much for a piece of real estate, it won’t generate profits. All the calculations and projections have to be right.
- Inadequate planning for vacancy. Once you buy a property, you’re responsible for the mortgage, taxes, utilities, maintenance, insurance, HOA fees, lawn care, and so on. Are you prepared for the possibility that it may take months to get a tenant in there generating any cash flow?
- Underestimating renovation time and costs. Fixing up a property almost always takes longer and costs more than estimated. Sometimes even 50 percent longer and more expensive, or more. If you don’t plan for this, your financial calculations will be way off. Plus, this relates to the previous entry, affecting when cash starts coming in.
- Renovating and updating too little or too much. It’s a balancing act that must take the local market conditions, expectations of local renters, and your expectations into account. You get better at it with experience, and a trusted real estate agent, property manager, or other professional can help. Under-renovating can leave your property undesirable—and therefore unoccupied or generating too little rent; over-renovating can eat up funds you’ll never recoup.
- Not knowing enough about property managers. Many new real estate investors expect a property manager to make their lives a lot easier. But they often have no idea how these professionals work, and are also frequently surprised by how hard it can be to find one to take on a single home or commercial space. Plus, fees up to 8 or 10 percent of the monthly rent can drastically affect how the numbers work out.
- Considering too limited a market. The digital age makes it much easier and more practical to buy rental properties anywhere. It may seem more comfortable and safe to buy in your own region, but if the area doesn’t have the right market for your investment strategy, it’s not a good idea to lock yourself into it. If there are better markets out there, pursue them.