There are basically two ways to make money in real estate:
– buying and selling properties for a profit
– profitably renting residential or commercial properties
In the best of all worlds, you’ll do both.
Now that the real estate market is showing signs of life, and actually booming in some markets, individual investors are once again diving into this market. There is risk and reward in real estate and being successful requires identifying both.
So whether you are using the “flipping” or the rental property models, don’t make these three investor mistakes:
1. Not Doing the Math
Real estate property investment is about realizing a financial return. Start out by having a solid understanding of the purchase, sale & operating costs involved with the property you are considering.
Before making an offer on property, do your due diligence on items such as the following:
• Mortgage rates, down-payment requirements and closing costs
• Comparable values in the neighborhood and average days on the market for property
• Insurance costs
• Purchase costs (inspections, commissions, etc.)
• Legal costs to buy / sell
• Tax implications, both positive and negative
• Estimated cost of repairs/updating prior to renting or flipping
• Management costs (yours or a private management company’s)
• General maintenance costs (lawn care, snow removal, utilities, etc.)
• Anticipated annual cost of repairs and maintenance
• Estimated vacancy period (be very realistic)
• Market leasing rates and terms for rentals
• Real estate taxes and anticipated increases
• Projected annual property appreciation rates (be conservative)
• Life expectancy of big ticket items such as roof replacements
• Real estate commission costs
Every property purchase and sale is different, so use this list as a starting point and add to it to match your particular property.
2. Caring too much about the property
No, I don’t mean you shouldn’t take good care of your investment properties – I simply mean you can’t fall in love with them.
When buying a personal residence, you are buying a house that you want to turn into a home. This usually means you have an emotional attachment to the property. That’s great.
When investing, you need to stay unemotional. Investment properties are about making rational financial decisions so that you will make a profit on the deal.
For instance, if you plan to buy, improve and re-sell a property, analyze the upgrades you want to make and be sure you will get a reasonable return on the investment in the time period you will actually own the property.
3. Forgetting that this is a business
Being a real estate investor isn’t a hobby or a get rich quick scheme. It’s a business, whether you do it full time or part time.
Cultivating this business will take time, energy and money on your part. And it entails financial risk.
Start out on a firm footing by creating a business plan. Preparing one will allow you to test your theory about how you expect to make a profit in this business.
Some of the questions to ask yourself are:
1. How much money can you afford to place at risk without jeopardizing your current financial position?
2. Do you know what the legal obligations of tenants and landlords are under housing laws?
3. What is your time horizon for achieving your goals?
4. What kind of help do you need (legal, accounting, maintenance, etc.)?
5. What kind of financial return are you expecting?
6. What is the tax impact of this for you?
7. Do you have the time to handle this all yourself or will you need outside help?
8. Want level of cash reserves will you need in case something goes wrong?
Don’t be Afraid, But Don’t Be Foolish
You can make money, sometimes a lot of money, with good real estate investments. But we’ve all recently seen that you can also lose a lot of money.
Real estate is an illiquid asset so try to be realistic about your financial risk and expected returns, work the numbers and do your homework before putting your hard earned money on the line.