I was at a leadership conference this past week and was shown a TED video. The theme of the video was “What would you do if you knew you wouldn’t fail?” Simple but profound. Well the world doesn’t work quite that way, so let’s look at some of the most common mistakes made by new (and seasoned) real estate investors. With this knowledge I hope you can be more confident about taking risk and investing in real estate. Some people feel this may be the best time in recent history to invest.
1) Not having a plan. Lack of a good plan is the biggest mistake made by new investors. Many make the mistake of buying a property because they think it’s a “great deal” and then trying to see how it fits into their plan or creating a plan around the property, putting the cart before the horse so to speak. The Professional Real Estate Investor class five step process will help you avoid this mistake.
2) Thinking you can do it all on your own. Buying property is a complex process. If you plan on reselling it or renting it out, it becomes even more complex, making it necessary that you have a professional team. It’s imperative that you have some key team members in place before you start investing.
3) Thinking you’ll become a multi-millionaire Real Estate investor overnight. There is a reason they call it investing and not winning the lottery. It takes time, a good plan, and due diligence.
4) Not doing your research. Not doing your homework can cost you a lot of money. You must know the fundamentals and have the tools. I don’t want you to get paralyzed by analyzing, but you must have the right tools and team members to make an informed decision.
5) Shopping without financing. Being pre-qualified does several things for you: gives you a general idea of how much you can afford, allows sellers to take you and your offer seriously, limits how much risk you take and gives you the confidence to make a decision.
6) Falling in love with a property for all the wrong reasons. As an investor, the only good reason for falling in love with a property is the numbers, it fits your plan, it has more upside potential than issues and it will help you meet your goals. Don’t let emotion drive your decision. That’s what “HOME” buyers do, not professional real estate investors. You are buying numbers.
7) Paying too much. Once again, don’t let your ego or emotion drive what you pay for a property. If you use your tools and resources, you’ll know what the top dollar is that you can pay and still be getting a good investment. Don’t go over that amount – walk away, there is another deal out there waiting for you.
8) Miscalculating the numbers. In The Professional Real Estate Investor class we spend a lot of time on calculating profit and/or cash flow. We use specially created spreadsheets for our students and use simple formulas that will get you to a point of making a decision about a property. Then use your professional team and get the projections of cost and cash flow down to the penny. It can be very simple if you understand all the costs and have the right tools. One thing we don’t want is an asset turning into a liability.
9) Looking for the ONE big deal. A larger volume of deals helps increase the total profits and reduces the risk. A lot a new investors think that the more expensive the property the bigger the profit – sometimes that’s just wrong.
10) Not having a “Plan B”. Having more than one option for the property is the wisest strategy. This is how to be prepared for unforeseen fluctuations in the real estate market. Having an alternative plan helps cut down on losses and handle unexpected situations. In the Professional Real Estate Investor class there is a big focus on Plan “B”.
11) Not reading the fine print. Understand what’s really in any document before picking up a pen. Get the documents in advance, take your time reading them, and ask questions. Get copies of your closing and mortgage documents a few days ahead of closing. These are legally binding documents. It’s important to believe in the professionals you deal with but where does the buck stop? Be informed.
12) Underestimating the cost of rehab. As a simple rule of thumb, double the time and cost of rehab and if there is still a profit –you’re closer to ensuring any unforeseen issues where you might loss money.
The biggest mistakes I see are under estimating and being unprepared. Be prepared and over estimate.