5 Common Mistakes You Want To Avoid When Investing In Real Estate
Things I wish someone had told me before I started to invest
The real estate market is a huge market with the biggest profit in returns. According to the 2019 survey of global prices by Deutsche Bank, the top 5 cities with the most expensive rent in 2019 are Hong Kong, San Francisco (U.S.A), New York (U.S.A), Zurich (Switzerland), and Paris (France). If you own a mid-range 2-bedroom apartment in Hong Kong, you can rent it out monthly for $3,685.
But investing in real estate is far from buying your first property and walking away with the profit. Before getting into the playing field, there are 5 common mistakes that you should avoid to fast track your way to success.
№1. Investing without knowing specifically what you want
Wanting to invest in real estate doesn’t need a lot of thinking. Who doesn’t want to become a property owner and create a sizable cash flow from it regularly? But the more difficult questions are:
- What type of property do I want to own?
- Where do I want to live or manage my property?
- Will I manage the properties myself?What do I need the investment for? Is it for short-term or long-term needs?
- Do I have enough money that I can set aside regularly for a mortgage loan?
- Am I qualified to take out a loan?
Investing in the real estate market requires due diligence — proper research is a crucial thing for making an ideal decision that will bring you profit. These are highly important questions that will help you complete your research. Each of these could contain more sub-questions but these are generally the main ones you should start with. You need to make sure you know enough information about the specific property such as:
LOCATION
The first thing you want to know before you make a purchase is the neighborhood where the property is located. If you buy a property that is within the shady neighborhood or near the all-night-every-day party house, your property will have a lower value. It’s best to scout the neighborhood and gather facts if the area is generally safe against crimes or if it’s a flood-proof area.
DEVELOPER
Remember — when you buy the property, you’ll have a long-term relationship with your developer. Preferably, choose an established developer with a track record of success, and good quality feedback.
Make sure you check the license of the company you are planning to deal with. Check their reputation online, as well as through the word of mouth. Ask about the buying experience of your friends or their friends. Better yet, visit the developer’s office and ask them questions so you can gauge whether the company deserves your money and time.
ANTICIPATE THE EXPENSES
Make sure you talk to realtors about all the expenses you need to cash out, e.g. downpayment, schedule of mortgage payments, property taxes, insurance, maintenance costs, etc. As much as possible, ask them to write down the expenses on paper to avoid being blindsided.
KNOW YOUR RIGHTS
Being a smart investor is not all about just knowing the market information, but also knowing one’s rights as a real estate investor. This will attract you to people in good faith that you can work with. As a real estate investor, you have the right to own, possess, use, enjoy, dispose of, and recover your investments.
It’s important to familiarize yourself, if not know extensively, what the state laws are depending on where you’ll buy your property. This will give you an advantage on the playing field.
№2. Dropping market research streak after owning a property
If you’re buying a real estate property to live in, it’s understandable if you want to stop scouting for recent updates in the market. But for real estate investors, it’s not a one-time thing. If you want to generate more cash flow, you should always be on the lookout for potential acquisitions or risks.
For one, laws and regulations will change. In turn, this can affect your maintenance costs and your daily operations. Another thing is that acquiring real estate investments is a waiting game. Sometimes, good deals depend on good timing. When that timing comes, be quick to send an offer right away — provided you already did all the investment research and you’re just waiting for the right price.
№3. Running over the budget
Part of knowing what you want is deciding on the type of property you’re going to buy. Whether it’s commercial or residential, condominium or townhouse, apartment or single-family home, the bottom line question is — how can you afford what you want?
Too many times, investors go over the budget because of poor planning. Avoid ending up in a situation where you have to borrow money to complete the contract or pay for something. Like in the case of every investment, you must have a proper plan by running the numbers. How long are you willing to pay your investment and where do you get the money for it? You must know how much you can afford to spend to determine the range of your buying power.
More than the property’s market price, take into account taxes, insurance, small repairs, utility bills, and other potential expenses — put them all on paper. If you are a flipper and you plan to sell the house quickly after you buy it, do make sure you define all the expenses before the purchase to avoid problems. Sum everything up to get the final cost. From there, you can explore your financing options through commercial banks, government loans, private lenders, developer financing, and more.
№4. Saving costs by not hiring and delegating work to skilled professionals
You can’t succeed alone. After doing sufficient research by yourself, you’ve got to trust other people to work with you. Don’t think that you’re saving money by not hiring and taking all the work to yourself. You may be only slowing down progress or setting yourself for unnecessary failure.
Real estate is not a cheap investment by any means. But then again, part of your investment does not go on the property itself, but on people that will help you get your returns efficiently. So consider reliable and skilled professionals such as:
- Home appraisers to estimate your property’s current market value
- Contractors to estimate and work on needed construction and repairs
- Wholesalers and real estate agents to find and make good deals for you
- Accountants to keep your financial statements in check
- Realtor attorneys to keep you updated on real estate laws
- Architects and engineers to improve the design and structure of your property
- Property manager to handle your daily operations for you
Also, don’t mistake foregoing insurance on your properties. Insurance is a must, especially if you buy older homes that require renovation and home improvement projects. In case your property suffers a vandalistic attack or even worse, a natural disaster, you are liable to pay for every single repair or home improvement project if your property is not insured. So, invest a bit of money to sleep peacefully. Besides, no one would buy an uninsured property.
№5. Failing to plan an exit, contingency, or backup strategy.
When you invest, your end goal is either to make a profit or minimize your losses. Before buying a property, these two goals should always be kept in mind. Planning to make a real estate exit strategy will maximize your returns.
There can be several reasons why you want to exit from a real estate investment. In the worst-case scenario, you want to minimize losses before it creates an unstoppable leak in your investment wallet. Or in case of death, you should prepare ease of transfer of your assets to your heirs to keep your hard-earned money within the family circle. But most of the time, you’ll make use of exit strategies to liquidate your profits.
Some examples of exit strategies are cash-out refinancing, rent-to-own leasing, wholesaling, and flipping.
The Summary
If the real estate investment business was easy, everyone would do it for sure. But in reality — it is easy as long as you plan, save money and know what you are doing. The biggest mistake is buying just because you have extra money to spend.
Make a plan, a vision, and work towards it. Hire professional agents that you can talk openly to and present your ideas so you could get professional advice about your plan. The easiest money is to give money, especially when you have it a lot, but the hardest thing is to know how to use that cash to earn more of it!
