The road to wealth is often lined with real estate. Owning properties can lead to passive income that lasts a lifetime, but it isn't always paved with gold bricks—especially at first.
Investing in real estate can be a path filled with potholes and pitfalls. It can be frustrating and filled with mistakes that are often as costly as they are infuriating.
Here's a look at 10 of the most common profit-killing mistakes people make when they're investing in real estate (and advice for avoiding them):
1) Losing out by limiting your options
Patience is a virtue, especially when it comes to investing in real estate. Unfortunately, many investors are in a hurry to start making money, so they limit their options, look at too few properties, make decisions too quickly and settle for less-than-optimal deals.
Limiting your options can cause you to settle for a mediocre deal and lose out on both short- and long-term profits.
Avoid this mistake by being intentional about your efforts to look at a variety of properties in a variety of locations. Take your time and find the best deal possible.
2) Falling in love for all the wrong reasons
Some investors fall in love with properties for all the wrong reasons. Believe it or not, many decide to buy based on factors that have nothing to do with the building's ability to deliver profits—its color, its charm or the fact that it was built in the year they were born.
Falling in love with features that have little to nothing to do with profits isn't prudent.
Avoid this mistake by making sure you invest based on the things that are most likely to deliver cash flow, such as cost, ability to rent and the property's true value.
3) Putting all your eggs in publicly-listed properties
It's easy for an investor to get excited about publicly-listed properties. After all, they sell for whatever the market will bear. But it's not a good idea to put all of your investment eggs in the basket that holds publicly-listed properties.
Great deals don't last long, especially when they're publicly listed, because buyers typically end up bidding up one another.
Avoid this mistake by looking for properties that aren't publicly listed. You can find them by building relationships with lenders, brokers and others who are connected to an area's real estate market.
4) Mismanaging your expectations
Keeping your expectations in check can be considerably more difficult these days than it was before reality television. Shows such as "Flip or Flop" make it seem incredibly easy to make a profit by flipping a house.
But you can't typically flip a house in 30 minutes. And you usually can't do it without paying holding costs, commissions and fees.
In reality, many people lose money flipping houses. You can avoid this mistake by remembering to manage your expectations and make every decision like your investment property involves low margins and high risks—because it does.
5) Doing away with due diligence
Due diligence is an insurance policy that costs you next to nothing, but doing away with it could cost you everything.
Doing your due diligence protects you against surprises by identifying those that can be expected and allowing you to anticipate those that you simply can't see coming.
When you analyze the numbers, evaluate the neighborhood, anticipate future costs and understand the local community, you will be better prepared to make wise decisions—whether that involves walking away or walking through the door of your new property.
Avoid the mistake of doing away with due diligence by committing to the process, partnering with people who can help you and seeing it through all the way to the end.
6) Taking the traditional route to financing
Nothing can kill a deal quite like a traditional mortgage broker. Commercial mortgage lenders have seemingly endless requirements, timelines based on bureaucracy and high, "hard-money" interest rates that can kill any profits you could make down the road.
You can avoid this mistake by providing your own financing. Whole value life insurance is one route that allows you to take control of your own financing and make sure you enjoy long-term profits.
7) Looking for life on easy street
Here's a dirty little secret that a lot of novice real estate investors don't know: Owning property is a lot of work—especially when it involves plumbing emergencies, problem tenants and cash flow concerns.
In other words, investment properties won't immediately put you on easy street.
Initially, you are probably going to have to invest more than money in your property. You're going to need to know laws, statutes and ordinances. You're going to have to do your own research or connect with experts. In many cases, you may have to roll up your sleeves and do the physical work to maintain and repair your properties.
You can avoid this common mistake by making sure you have the time, energy and inclination to invest in real estate. In other words, you should ask yourself if you want to be an active investor or if you would rather put your money in places that allow you to earn passive income.
8) Managing the property
On the surface, it might sound strange to hear that you shouldn't manage your own properties. But when you take a deeper look at all that goes into managing an investment property, it makes an awful lot of sense.
Managing a property isn't simply about collecting a rent check on the first of every month. It's about vetting applicants, ensuring that contracts are airtight and dealing with tenants—their rights, responsibilities and requests. It's a lot of pressure that can lead to costly mistakes and mismanagement.
While some people are able to successfully manage rental properties (especially if they only own one property), many others find that it is easier to avoid mismanaging their properties by hiring a professional property management company.
9) Selling too soon
Selling is a decision that should not be made lightly. It is also a decision you should control. But that's not always the case.
Many forms of financing and many partnerships require properties to be liquidated within a specified period of time (or held long-term). Bridge loans and mortgages with balloon payments can also cause you to have to sell before you want to.
Avoid this mistake by keeping control of key decisions. Try to finance properties yourself (using cash value from a life insurance policy, for example) so you are not forced to sell a cash flow-generating property too soon or hang onto a valuable property too long.
10) Ignoring the needs of your investors
Having partners can really pay off. They can allow you to expand your real estate investments, keep cash flowing and help you build wealth.
However, if you ignore their needs, you risk losing their support.
Avoid this mistake by:
- Creating cash flow for investors as soon as possible. Investors and private lenders do not like having to wait to make money.
- Delivering attractive and dependable returns on their investments. If you can consistently deliver high rates of return, you will consistently keep your investors happy.
- Protecting your investors' principle by never losing money. "Never lose money." It's the first rule of investing in real estate.
- Paying people on a regular basis. The most reliable way to keep your partners and investors happy is to deliver reliable monthly checks or bank deposits.
- Offering incentives that are based on the property's equity. Most real estate deals offer cash flow to private investors. If you really want to keep your partners happy and engaged for the long haul, you could consider providing them bonuses that are based on the home's equity as well as your investor's longevity.
Are you ready to take the road less traveled?
Most people are only interested in passive investments, such as stocks, bonds and their retirement accounts. A smaller number of people want to take a more active role in building their wealth, so they follow the path towards real estate investing.
If you are ready to take the road less traveled and start building wealth by investing in real estate, connect with us today. We can help you avoid the 10 common mistakes listed above and start actively working to create passive income that lasts a lifetime.
Sent from the Land of Possibilities!