Did you know the average return on investments in U.S. real estate is eight percent? With the great hype, many people invest their savings in this sector. A CBC report indicates that millionaires consider real estate the best investment.
However, if you are a beginner in real estate investment, there are key risks to be aware of. You don’t want to drain savings into liabilities.
Please keep reading to learn about ten common real estate investor mistakes and how to avoid them.
1. Not Having an Overall Plan For Your Property
One common real estate investor mistake is buying without a plan. The first thing before making any investment is to set a clear goal for yourself and the investment. With the goal in mind, have a good strategy for accomplishing it.
How much money do you expect to make from the investment? For how long and at what frequency? What is the source of your finance?
How is the current real estate market? It is also important to have an exit strategy if things don’t go as planned. It would be best to have clear answers to these questions before spending any money.
It is easy to be drawn into a shiny new property. It becomes much easier to spot properties that won’t work out if you plan.
2. Lack of Due Diligence
Many investors don’t take enough research time to determine if a property is a good investment or not. Due diligence protects you from making costly mistakes.
Some of the reasons for not investing in research are that it is costly and time-consuming. Learn everything you possibly can about the property you are considering purchasing. For example, find out if the area is in a flood zone. Find out the real reason the owner is selling.
It is also critical to know if the property has any pending legal issues.
For each type of real estate investor, there are different research considerations. The investment could be for a new homeowner, land developer, or a future landlord.
3. Doing Everything on Your Own
Most people trying to get into the game are too eager to do everything they can on their own. Though it’s possible, working alone can be overwhelming and time-consuming. It can also lead to very expensive errors.
Many investors get themselves into trouble because they make poor decisions. Get professional help where necessary. This involves hiring qualified home inspectors, attorneys, real estate agents, etc.
The most successful investors have team members to help them grow their business.
4. Buying Strictly for Appreciation
Those who purchase properties strictly for appreciation purposes take significant risks. Some unforeseen developments may lead to property depreciation. It would be best if you had a backup plan in place.
If your goal is to make money, and you do not have any income coming in from the property, you could go through financial hardship if things go wrong.
When investing in real estate, understand your primary objective should not be price appreciation. Price appreciation is a secondary benefit.
5. Trusting Blindly
One of the biggest real estate investor mistakes is trusting blindly. When investing in real estate, don’t trust that everything will go well without verifying it yourself.
You will need to consider the following:
- Is the buyer’s intention pure?
- Why is this particular home being sold?
- Are there any hidden defects or problems with the property?
First-time investors are commonly at risk of investing blindly. They rely on the word of others when investing in property. This can be dangerous as you might end up spending more than is necessary.
6. Ignoring Paperwork
Some real estate investors don’t keep their paperwork in order. Proper documentation of your real estate transactions is essential for numerous tax and accounting purposes. Not to mention the challenge of proving ownership of your property if challenged by another party.
The sudden loss or destruction of the documents can lead to IRS audits and tax assessments. This can put you at risk of losing money on your investment.
The amount of paperwork involved can seem very overwhelming at times. Understanding the best ways to streamline this process will simplify the paperwork.
Investors need to collect all documentation associated with the property before closing on a deal. This is especially important when dealing with properties that involve mortgages. This type of property requires more documentation than other real estate investments.
Making sure that you have all of your paperwork squared away reduces fraud risks.
7. Underestimating the Costs
The National Association of Realtors estimates that, over the past century, real estate has been one of the safe investments in the US. That doesn’t mean real estate is an infallible investment. There are costs you might not expect.
Before you take the plunge and invest in a property, you should know what they are.
Understand that it’s not just the purchase price of a commercial property that affects investment. Consider other costs that occur during your property’s lifetime. This includes development costs, maintenance, and repairs.
There are costs involved with property ownership. These expenses will add up, and new investors often overlook them.
The significant expenses that you should be aware of before investing in real estate include:
- Closing Costs
- Appraisal Fees
- Title Insurance
- Settlement Fees
- Inspection Fees
- Home Owner Association Taxes (HOA)
- Loan Origination Fees
These are the most common expenses that you need to be aware of. Research extensively to avoid frustrations later in the investment process.
8. Rushing the Deal
Real estate investing is a numbers game. It’s a business of probability. The more deals you have on the table, the higher your odds of success.
Rushing into a deal without doing your due diligence may look like it will pay off in the short term. However, it can end up being your downfall when things don’t go as planned.
The risks of rushing into a real estate deal are high for both investors and clients. The investor gets an unexpected tenant or problem tenant. This can put your property at risk.
Here are some tips for avoiding the common pitfalls of rushing a deal:
- Do your due diligence and research
- Be prepared to walk away from a bad deal
- Have a plan before you start investing
- Don’t fall in love with anyone property
- Know what you can afford
Rushing the process prevents you from conducting sufficient research. This could cost you significantly.
9. Under Insuring Your Property
Most people underinsure one valuable asset, their home. Most homeowners do not realize how costly it can get to rebuild their homes. Remember, there are a lot of risks to your investment.
These risks could occur before, during, and after the completion of your project.
Compare the price of rebuilding a home to what you are paying in your monthly premiums. What happens if a fire breaks out or a flood inundates your home? You will have to pay for the damages out of pocket.
It is required by law to have enough coverage on your real estate property. This covers its replacement cost, minus any depreciation. Cover other risks such as; satisfactory liability, umbrella liability, etc.
A good insurance cover will take care of both unforeseen and unpredictable risks. Get an expert to evaluate the potential risks for your property and determine the ideal coverage.
10. Choosing the Wrong Financing
Bad financing rarely looks bad at first, especially to a beginner. Many beginners do not understand that an adjustable-rate mortgage or a no money down loan can have hidden costs. They will assume that they are getting a good deal.
Financing for real estate can seem like a daunting task. However, it can also be a very rewarding one. You could turn that rental income into an investment that pays for itself with the right financing.
However, if you choose the wrong financing option, it will cost you more money and time.
The four most commonly used options by investors are hard money loans, private mortgages, seller financing, and bank loans. These options all have their pros and cons. Learn more info about the pros and cons of each. It will help you choose the right financing.
Avoid Real Estate Investor Mistakes
It is essential to understand the nuances of a real estate investing strategy. However, there are still many common real estate investor mistakes.
Some investors try to do too much on their own. They don’t utilize the full benefits of a network of local real estate investors.
By avoiding these mistakes, you can significantly increase your chances of success as a real estate investor. If you are ready to start investing in real estate, we encourage you to visit our website today. We have resources that will help you find the right investment opportunity.