Some of the most successful investors in the U.S. have been in the business for years and understand the industry well. Over time, the experience you gain by investing will take you far and generate more rental income profit. However, real estate investing can be tricky to maneuver as a new investor with little experience. The more you know before you begin, the better off you’ll be.
If you’re green and eager to start investing, it’s important to keep in mind that it’s an industry that requires a lot of preparation and planning. As a first-time real estate investor, you’ll want to learn the basics of doing business, explore proper training, ask lots of questions, and speak to experienced investors to be ready moving forward. Making mistakes is part of life, and you will make some as part of your investment career.
Fortunately, there are some things that you can do to avoid several mistakes. Once you’ve made up your mind to get into the world of real estate investing, avoiding mistakes could save you time, money, and frustrations. Let’s look at some of the rookie mistakes you should avoid when investing in real estate.
Ignoring the Numbers
Real estate investing has probably created more millionaires than most other businesses. At the same time, however, investing can also be perilous for an uninformed investor. One mistake that inexperienced investors tend to make is underestimating or completely missing the costs involved. As a result, they become overly optimistic about their numbers and add bad rental property investments to their portfolio. You mustn’t ignore the numbers and financial realities of a deal. If you’re going to get into real estate investing, numbers should be your best friend.
It’s important that you do a cash flow calculation to understand the income you’ll get from rental property or any other kind of investment. Every investment you look at isn’t going to be a home run. You might find that some properties aren’t worth it even if you make money off of them. It’s crucial to run the numbers on every opportunity before making a down payment or bid. The numbers you use will be the backbone of every deal and should serve as your roadmap for investing.
Following the numbers is a great way to get a clear direction as an investor. When deciding on a deal, you should also play around with the numbers to see where your best possible outcome might be, where your breakeven will be, and where you won’t make money. Whether you get into commercial real estate or residential rental property, the numbers will help you understand what you can afford to do and still make a profitable deal.
Not Researching the Market
Often, new investors spend a lot of time researching ways to find a cheaper mortgage or generate more rental income. Far too many rookie investors think it’s most important to find ways to save money. On the other hand, however, it’s probably more important to spend time evaluating the real estate market. Understanding what a property is worth and what you may get from it will depend on the local market.
Successful investors understand the importance of spending time researching and getting to know local markets. Depending on the property’s location, the local market will significantly impact your investment decision. Markets change with each sale made or foreclosure filed. Often, the property value of a single-family home or other building will not be the same today as six months ago. You don’t want to have a mortgage payment on bad property investments.
As an investor, you need to stay on top of what is going on in local markets. Well-informed investors will make better offers and see greater returns from real estate properties. You can leverage online real estate websites, comparable sales data in the area, and local real estate agents to understand which way your market is moving. Researching and getting to know the market is a great way to set yourself up for success and boost potential monthly income.
Going Over Budget
While you may not have a large budget as a first-time real estate investor, you must operate within your money rules. A mistake that many rookie investors make is overpaying for an investment property and other services. The biggest reason for this mistake is usually a lack of experience and knowledge about the industry. Although you’ll eventually learn and pick up important pointers over time, a first-time real estate investor shouldn’t compromise the property’s projected profitability just because they’re new in the field. To avoid this mistake, you need to set hard money rules about your budget and stick to them.
As discussed, you need to pay attention to the numbers and understand the market before investing. Outside of this, however, the way to success is to avoid going over budget. There are many costly elements to consider when investing, and several of these elements can eat up your budget quickly. It will be harder to get ahead if you consistently go over budget. Whatever your budget and money rules are, work with your real estate agent, hard money lenders, and your team to follow them.
Not Establishing Goals
The majority of successful businesses have goals and plans to guide decisions and operations. These can be long-term operational goals or short-term financial goals. As a new investor, it can be easy to get wrapped up in chasing the next deal. In digging up deals, however, you will find that some of them may fall outside your comfort zone or offer more of a risk than you need to take. If you have an investment strategy in place, you will make every decision with a purpose. Well-informed investment goals can serve as a guiding light for making decisions or when the business gets difficult. Failing to establish your investing goals is like building a house without plans. Without goals, you may not have a clear path toward success.
As a new investor, you don’t have as much experience and will probably make mistakes. However, following the numbers, researching the market, sticking to your budget, and setting good goals will be the key to making fewer mistakes and the largest profit.
About the Author:
Annie Dickerson and her partner Julie Lam are founders of Goodegg Investments — an award-winning real estate private equity firm — and creators of the Real Estate Accelerator Mentorship Program. They are authors of the book Investing For Good and hosts of the popular Life & Money Show podcast: good egg investments