5 Most Common Real Estate Investing Mistakes [And How to Avoid Them]
Beginner real estate investors can be forgiven for making mistakes. As the old saying goes, “if you’ve never failed, you’ve never tried”. And, in the world of real estate, it takes time and experience to become a seasoned expert.
However, rather than learning from your own mistakes, we encourage you to learn from those of others.
The best way you can avoid making real estate investing mistakes is to learn from other investors who’ve made them so you can identify what went wrong, and ensure this doesn’t happen to you.
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With that in mind, stay tuned for our picks of the five most common mistakes in real estate investing, complete with our tips on how to avoid them.
1. No Exit Strategy
Although the name suggests this is something you’d think about at the end of a real estate investment, it should actually be the first thing you think about.
A real estate exit strategy will determine how successful your investment ultimately is, as well as providing you with a range of options to best manage different scenarios you may find yourself in. Not having one in place is among the most common mistakes first-time investors make.
Real estate exit strategies will allow you to be flexible and change course if you’re short on cash. They’ll also minimize your losses in the unlikely event that something goes wrong, by securing as much of your original investment as possible.
Here at We Lend, one of the first questions we ask our borrowers is about their exit strategy. And if they don’t have one in place, we won’t offer them a loan.
When it comes to choosing exit strategies, no one method works for everyone. From wholesaling to fix and flipping, buying and holding, and selling and doing a 1031 tax-deferred exchange, there are several to choose from.
Check out our blog on the five of the most popular real estate investment exit strategies here
2. Insufficient Research or Planning
There’s nothing worse than going into a real estate investment deal blind — that is, without having done your research or formulated a plan.
If you skip this step and act on impulse, you could end up with a property that you don’t know what to do with. While experienced investors may relish this challenge, this is not something you want early on. Therefore, we recommend you carry out a substantial amount of due diligence prior to purchase.
For instance, you’ll need to explore the ins and outs of the local market. Find out whether there are any planned construction projects that could affect the profitability of your investment in the long term. What about resources for tenants/future buyers? Does the area have good schools, amenities, and green space if it’s located in a city? Ask what the main problems are in the area, and assess if these could have a detrimental impact on future values.
If you’ve done your due diligence and can’t find a fault, it’s time to pull the trigger on your investment property.
3. Not Asking for Help
Next up, one of the biggest mistakes in real estate investing is for a first-time investor to enter into a deal on their own, without consulting experts or peers on their decision.
Rookie investors can be prone to having tunnel vision and trusting their own instinct. Granted, it can serve you well. However, you need the experience to hone those instincts!
Therefore, if you’re starting out as a real estate investor, it’s important to build a network and seek out the advice of others. Here are some practical things you can do:
- Join a local real estate group
- Ask for advice from a real estate agent or mortgage broker
- Find yourself a good attorney
- Enlist the help of an experienced contractor
- Speak to an experienced private lender
If you’d rather work with someone on your first real estate investments, take a look at our guide on joint ventures in real estate
When making a real estate investment, you’ll need to think very carefully about what type of loan you apply for and how to qualify for it.
There are many different loans you can apply for when making a real estate investment.
For example, if you’re looking to access funds that tie you over until you secure permanent financing for an investment, a bridge loan could be useful. However, in order to secure one, you’ll need to have existing real estate to borrow against.
If you don’t have access to the equity you require to secure a real estate investment and need the funds quickly, your best bet could be to apply for a private real estate loan.
Another option is to take the traditional route and apply for a conventional loan - such as a mortgage - which you’ll pay back over up to 30 years. This requires you to get in touch with banks or conventional mortgage lenders.
That being said, traditional loans have more red tape to jump through and are often ill-suited to the fast-paced world of real estate investment.
Not sure what loan is best for you? Contact us and speak to one of our experienced loan advisors.
5. Underestimating Costs and Not Sticking to Budget
If you’re carrying out a fix and flip, you want to keep a close eye on your renovation budget and also keep some leeway for unexpected expenses.
This is because one of the most common house flipping mistakes is underestimating how much repairs will cost. Doing this can extend your renovation window and affect your overall profits when you eventually sell it.
However, there are steps you can take to avoid this risk. Find a trusted contractor and get them to provide a quote on how much the renovation work will cost. Not only will this give you a specific price that you can work into your budget, you’ll also get an estimate of how long it will take.
In addition, it’s a good idea to focus on renovations that maximize your property’s ARV, typically kitchens and bathrooms. You’re not renovating it for you to live in, you’re renovating it to make money. Therefore, go with the most cost-effective renovations and rooms.
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When it comes to real estate investing, it’s best to go with your head over your heart, especially if you tend to be an impulsive person.
Making real estate investing mistakes is common for those first-time investors who don’t stop to think everything through, right up to the last little details.
But don’t worry! As long as you have an exit strategy in mind and carry out careful planning, solicit helpful advice, the right loan, and have a strong grasp of your budget, real estate investing is an extremely profitable business to be involved in.