10 Mistakes U.S. Real Estate Investors Make
FAS CPA & Consultants
Investing in real estate can be a very profitable business, but there’s a lot of knowledge an investor must acquire before he or she embarks on such venture. Otherwise, they could be setting themselves for a big failure with a lot of financial implications. Today we are going to look at the 10 most common mistakes real estate investors make and how best to avoid them.
Not having a clear plan
Many people are tempted by the success stories of affluent real estate investors and they decide to try the same route. What most don’t understand, however, is that in order to make a successful investment in property, you will have to have well thought through and detailed plan. The main 4 questions you need to ask yourself and think about are:
⇒ When, how, why, in what are you investing.
The answers of these are the foundation point of your real estate investment plan. Then you need to set action points:
⇒ What you need to do.
⇒ What you need help with.
⇒ How will you get that help.
⇒ What are your desired objectives.
You must commit to following this plan throughout the whole investment process and review it regularly to see if it is relevant and effective.
Having unrealistic expectation
Once you have created a plan, you must make sure that your expectations are realistic and the objectives you set are achievable. For example, if you believe you will get rich fast, you may soon find that this won’t happen. Some real estate reality shows sell truly compelling dreams of huge and quick profits, but that’s what they really are – just dreams. There are a lot of things that are left unsaid and you will be able to find them all out if you avoid making the following mistake.
Slacking on due diligence
Do an extensive research on the property, area, special features, required documentation, extra costs before you dive head-first into buying it. This will save you unpleasant surprises at a later stage and will result negatively on your financial situation. To protect yourself, you also need to get well familiar with the current market trends and look for insights of how these may change in the near future. Doing your due diligence properly will also save you from making the next fatal mistake.
Getting a bad financing deal
Provided you are not using your own cash to invest in real estate, you will need a loan or a mortgage. It is crucial for a successful investment to be executed with good financing. This means that when choosing a particular financing option you have to be very careful of the following:
⇒ High interest rates.
⇒ Variable interest rates.
⇒ High monthly payments.
⇒ Balloon payment.
⇒ Personal recourse.
High-interest rates may significantly decrease your investment profit and high monthly payments can cause you to run low on cash. It’s always best to keep to fixed interest rates where possible to minimize the risk of increasing the interest you are paying out.
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Not having a sustainability fund in place
For a good investment portfolio, it is essential to make sure you have enough money to hold a property when you decide to invest in it. The best strategy for that is to have a sustainability fund to cover you in case something unexpected happens, for example, market change, extra costs or delays. These are all things that occur quite often and it is not always possible to predict them. So rather than feeling sorry later, the wise thing to do would be to get that fund in place before you invest.
Not looking for properties outside of your local market
This is a really big mistake because you could be missing on a golden opportunity for huge profits. Living in a particular area doesn’t guarantee that you understand its market value or know how the properties will change in the future. Even if the neighborhood is really great and there’s a potential for good outcomes of the investment, it doesn’t mean that the right conditions for this to happen are in place at that specific time. It may be a better idea to look for other markets elsewhere, whether still in the country or even internationally to weigh your options and opportunities.
Investing in real estate for the wrong reasons
Some investors pick properties based on emotions, personally preferred location or looks of the place. These are all important factors when you are choosing a home, but not necessarily what an investor should be focusing on when buying for business purposes. It is essential, however, to know whether the property has a good market value, the type of people living in the neighborhood, what would be the return on asset and other calculative measures because this is what determines whether you will make a profit or a loss on your investment.
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Buying only for appreciation purposes
Speaking of buying for the wrong reasons, investing in a property solely for appreciation purposes, is one of them. Real estate investment is at its boom at the moment, but this doesn’t mean you should be buying properties because everyone else is and the market is regularly increasing. You can never know when a crash can occur and if you only bought a house, expecting to bank on high appreciation rates you may be left empty-handed. Adopting such practices is hardly real estate investment, it is more of gambling and taking a risk without knowing key market drivers.
Misjudging repair and other costs
A great real estate investment strategy is to buy an old or badly maintained property at a low value, refurbish it, make it modern and resell at a triple or quadruple price. It does happen, but only if you get your repair costs right. People often misjudge the expenses when it comes to renovation and refurbishment. This is why it is very important to have a detailed plan on what needs to be done for the property and get full quotes from reliable contractors to determine how much you will spend to turn an abandoned house into a beautiful and fully functional residence.
Not Having a CPA, Attorney and Real Estate Professional
Remember mistake #1? In your initial plan, you need to figure out what are the things you would be able to do yourself and what would be best to outsource to someone else. Unless you have been a real estate investor for a very long time, you won’t be able to fully explore and understand the market without a specialized real estate professional. An experienced investment adviser would be able to spot hidden costs and trends that would remain invisible to you, despite all the research you do. This can get you in a lot of trouble later on, so it is best to trust a certified professional with an impressive client portfolio and flawless reputation. In addition, you will need an attorney to help you with the legal side and closings of the properties. Finally, a good CPA is key to help you set up a tax strategy to minimize your tax liability. You will need these team of professionals much before you start investing. So before going to the market make sure your back is covered.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intended for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
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