It has been said by many people that investing in real estate is the key to building wealth. Andrew Carnegie, billionaire industrialist, stated it best, “Ninety percent of all millionaires become so through owning real estate.” However, how do you start, what are the mistakes to avoid, and where should you get your information from? This article will focus on the top five mistakes people make when beginning to invest in real estate.
1. Starting Too Soon
All too often, I see people who get too eager to invest in real estate and don’t quite understand what they are getting into or how to invest properly. They want to tell others, and themselves, that they are an “investor.” This title is not more important than the ability to purchase properties with enough money to create margins large enough to both create cash flow and cover professional management.
Those who pursue low or zero down single-family or residential multi-family will always struggle to make their investments work. This is because they are typically over-leveraged and end up sacrificing their time to do most of the managing themselves. This may work for the first couple of small investments but it is not a scalable strategy. We all know time is money, and when you buy yourself a job as a building manager, that prevents you from producing income by other means.
2. Bad Location
The one thing that you can not change is the location of your investment. You can hire the best designers, pay for the greatest building upgrades and have the best curb appeal, but if your location is terrible you will always struggle with vacancies and low rent. When shopping real estate you need to understand the market you are in, the location and proximity of the property, and the history of the area. A prime location will always demand the best rent and provide the lowest vacancies. Specifically look for the cleanliness and upkeep of the area, surrounding properties and surrounding businesses.
3. Not Running the Numbers Yourself
Trust but verify, that is the name of the game. Don't solely rely on the word of a seller or a real estate agent when it comes to the financials. They are trying to sell a property and move onto their next investment with the most money possible.
The first aspect of this step is to know how to run the numbers. This involves learning how to read a financial statement and do basic real estate math. This alone will save you hundreds of thousands, if not millions of dollars. Invest in yourself before you invest anywhere else.
The second aspect is to verify everything yourself, even if you have a positive history with working with someone. Take responsibility for yourself, your investment and the outcome, good or bad.
Repairs are one subject that often doesn't get accounted for correctly when completing the due diligence of a property. Much like we said before, trust but verify.
Buildings age and need maintenance, a lot of investors try to delay repairs and pass the cost off to the new buyers. It is highly recommended to inspect all properties with a team of qualified contractors in order to get a realistic estimate on the repairs needed before completing purchase of the property.
5. Too Much Emotion in Investment
One of the biggest reasons people move to quickly on real estate is that they don't look at enough of it. If your not looking at hundreds of properties, analyzing deals and constantly looking at numbers, you won't know a good deal from a bad on. Real estate is an investment, and should be treated as such. It should be based off of real numbers and the potential return it provides for you. Once you start basing it off anything else you will lose. Don't get attached to a building, a design or let your emotions drive your decision. There is something to be said about loving the building you are purchasing, but make sure that is not the only reason you are purchasing something. A pretty light fixture and a bay window won’t help you pay your mortgage.
There are many other pitfalls to avoid when making real estate investments, but these are the five core mistakes to avoid. Being informed, thorough, and logical throughout the buying process is critical to the success of your investment and preventing foreclosure, loan payment default, and other bad news for your bank account and credit.
For more information about investing in properties, please call Matthew Lindsay at 907-302-1011, and I will be happy to help you reach your investment goals!