The several success stories combined with the potential for making lofty returns make real estate quite a tantalizing asset. Many see it as a great way to build up a nest egg, generate cash flow, and use rental income pay off their mortgage.
However, taking the plunge into the asset class is not something to be taken lightly. It’s always important to conduct as much research and due diligence as possible before getting started to avoid making expensive mistakes. Experience is undoubtedly a great way to learn, but you can leverage the available resources to avoid the common mistakes in real estate investing
Avoid these 5 common mistakes when investing in real estate:
- Limiting your Scope to a Specific Market
When choosing where to invest, you may naturally feel more inclined towards your home market, perhaps due to its familiarity and a sense of safety. However, this doesn’t necessarily mean it’s the best option for you. Opportunity is borderless, and that’s something you need to keep in mind when making an investment.
For instance, it’s hard for a person living in an expansive metropolitan area like Los Angeles or New York to find a long-term rental property in the adjacent area that’s generating strong yields. But there are many other thriving markets across the country that are showing strong economic stability, with high housing demand and good returns. So, why would you eliminate such markets from contention?
- Not Knowing the Cash Flow
You need to understand the cash flow of the property before you commit your money to it. Just because a property can generate rental income doesn’t mean that it’ll be rented or that someone will be willing to pay a given price that generates a positive cash flow. In addition, if you don’t consider all the necessary repairs, vacancy rates, general maintenance, and renovation costs, you might end up with a negative cash flow. Avoid this mistake by:
- Knowing the current income coming from the property. If it hasn’t been rented before, find out the current rental rates in the area.
- Finding out the cost of taxes and insurance
- Determining the current vacancy rates in your area as well as your type of investment
- Calculating the costs of general maintenance and repairs
On the same line of thought, some people look at the numbers and assume they’ll do a better job managing the property. From the excitement, it’s easy to assume that you’ll have a higher occupancy rate or you can raise the rent. But when you start managing the property, you may find that the given numbers were accurate, and you may lose money in the process. So, never assume that a property will do better in your hands.
- Doing Everything by Yourself
Many investors do the mistake of taking on the first few deals as a part time opportunity aside from their primary profession without getting any outside help. Due to the lack of available time combined with the general inexperience to investing, it’s rather unsurprising how often this leads to failure.
For full-time professions, it can be a major challenge staying on top of every aspect involved in real estate investing. What chance does a new investor has if they have only dedicated a few hours of their time a week to study the property?
Entering into real estate investing without the right resources and focus can make even the best deal into a bad position. It’s best to first get a clear understanding of the scope of work required, and a professional assigned to complete each task. You should ideally manage the work proactively instead of reactively, as it allows you to build the right professional team to keep your investment objectives on track.
- Under-renovating or Over-renovating
The key to a successful deal is understanding the level of renovation the property needs before putting it on the market. As an investor, you should aim at renovating to a level to matches the local market conditions, keeping in mind that renovations differ from area to area, even on neighborhoods in the same city.
No matter the property’s condition, analyzing the scope of its renovation is a task that calls for great focus. It’s easy to find yourself in a difficult situation if you renovate beyond what the market dictates. For example, in case all the houses in an area have tiled countertops, using granite countertops on your property wouldn’t be the best investment, simply because it doesn’t cater to the typical owner or renter around that area. This could hurt your ROI by affecting your sale price or the rental rate.
You can avoid all this by simply consulting your local real estate professionals, including a property manager, real estate agent, contractor, etc. and ask for advice on the worthy improvements. If possible, tour other houses in the area or use various online resources to see the scope of your local competition. Due diligence before embarking on any renovation can protect you against wasting your time and money on wrong renovations and may even boost your returns.
- Not Having Patience and an Exit Strategy
Before anything else, you need to have a clear idea of what you intend to do with the property before you purchase it. This will keep you from wasting money and time moving forward. As an investor, patience is one of the most important virtues to have, especially in the real estate space. and no matter the type of investment you are involved in, you need to understand that it will take a lot of time and effort before your hard work pays off. Don’t assume that your real estate investment is a get-rich-scheme.
Still, just like any other investment, things don’t always go as planned. Having an exit strategy is vital if you want to cash out from an investment. Having a plan “B” in place will give you options to make money in case the original plan fails to pan out accordingly.
Whether you’re buying long term buy-and-hold properties or flipping houses, avoiding these 5 common mistakes successfully will make you more successful investing in real estate property listings in Philadelphia, and you’ll see why it’s such a great way to make money.