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If you’re reading this article, you already know and understand how one can make a lot of money in real estate. More important are the ways not to lose money in this game. Here is a list of the biggest mistakes commonly made by typical investors:
- Listening to people who don’t invest in real estate – When you look at the Forbes billionaire list, the majority of these folks have made their money in real estate.
- Listening to people who want to charge you $5,000+ to teach you how to invest in real estate – Save your time and your money. These “gurus” won’t teach you anything you can’t learn on your own on the Internet. There is a wealth of information out there that is either free (like our webinars) or at a minimal charge. I say “gurus” and not gurus because most of them are like my MBA professors, teaching something they don’t actually do.
- Newbie mistake – Thinking you know it all – no matter how much real estate you’ve read about, heard about, or watched, find a seasoned investor who can mentor you. If you do your first couple of deals with him/her (even if that means less than a 50% split), you will learn much faster and significantly reduce the learning curve.
- Being easily discouraged – Investing in real estate has its ups and downs. It’s about progress, not perfection. Keep a positive attitude and be patient: nobody gets rich over night. If you want that to happen, play lotto.
- Buying strictly for appreciation – Whether it was a rental property or a fix n’ flip, this is how many people lost their shirts (and pants) in 2007-2009. They were betting that prices would continue to go up. You should invest for strong cash flow first (Net 7-12%); and if you do it right, you will also get some equity when you buy. That is a win-win situation for an investor.
- Underestimating the repairs needed on an investment property – It can be very difficult to assess the amount of repairs a house will need. This is exactly why you need to build a solid team in the area in which you are investing. On this team should be three very good general contractors. You can use Angie’s list to vet out the best. It is important to get a bid from all three to make sure nothing is overlooked. I would then add an additional 10-20% to estimated costs to cover unforeseen repairs or upgrades. The more you do this, the better you will become at it.
- Don’t over-improve a rental – This is a very common mistake among young investors. Don’t make a house much nicer than other homes in the neighborhood. It will cost you more money and the return on investment isn’t worth it. You never want to have the nicest property on the block: the home won’t appraise as much.
- Buying old homes without experience – The older a home, the more repairs and maintenance it will likely need. When calculating your cap rate, make sure to allot a higher percentage for your maintenance reserve. A flip’s profits can be eaten away by hidden costs such as electrical, plumbing, foundation, chimney, etc.
- Using cheap or bad contractors – You will always get what you pay for and a contractor can make or break your investment. Use sites like Angie’s list to find the best ones in the area in which the property is located.
- Not having enough money to complete a flip or hold a rental property – If you underestimate your repairs, you could run out of money and into major trouble. If you can’t cover all the costs for a flip, then you might be better off borrowing from a private lender.
- Not putting an agreement in writing – If you’re partnering with friends and/or family to buy a property together, make sure you put everything in writing as disagreements will occur; and at some point, someone will want to take their money out.
- Overpricing a property – When investors run over budget or tries to squeeze too much out of a flip by pricing it too high, they run into trouble. They do this if the flip costs more than they thought, took longer than they thought, or they are making less money than they thought. Pricing a home too high makes the situation even worse. It increases the days on the market and makes others believe there is something wrong with the property.
We will all make mistakes when it comes to real estate investing. The key is only to make them once and minimize their risk and damage. I have underestimated repairs before and it has cost me money. Don’t be afraid to invest in real estate because of things that can go wrong or people who discourage you. Make a plan, do your homework, listen to the right advice, and start making money.