Always dreamed of making money investing in residential real estate?
Many investors have done just that so it’s definitely possible to be financially successful at it. Increase your chances of building your net worth through real estate investing by avoiding these rookie missteps.
Thinking It’s an Easy Way to Make Money
It’s not a get rich quick scheme. Successful real estate investors put in long and sometimes aggravating hours finding and then managing their property portfolio. If you’re up for committing the necessary time, taking some financial risk and having periodic property management aggravation, then real estate investing may be a good option for you.
Real estate success comes from making informed decisions, practicing good due diligence about the properties you purchase and always running the numbers thoroughly to make sure the financial reward outweighs the risks you are taking on.
Paying Too High a Price
Investors are human and can fall prey to getting caught up in the moment and paying too much for a property, especially in “hot” property markets. But you’re doing this to make a solid financial return, so take a deep breath and make sure that great deal will really pay off for you.
There is a direct relationship between the purchase price and how much it will cost you to carry the property every month. Real estate wealth is built through the use of leverage, so there will probably be a mortgage. The more expensive that is to carry, the more cash flow you’ll need to generate from tenants so make sure the rent you need to charge your tenants is actually supported by the local leasing market.
Paying too much for a property will also reduce your profit when you sell it so make an offer and negotiate only after you’ve studied the market thoroughly. Don’t rely on someone else telling you it’s a good deal.
Not Understanding the Risks
Real estate investments come with various types of risk. They are illiquid so it ties up your money for an extended time and property owners are liable for what happens on the property. So some of the questions to ask yourself are:
- How much money can you afford to place at risk without jeopardizing your current financial position?
- Do you know what the legal obligations of tenants and landlords are under federal, state and local housing laws?
- Do you have the proper insurance to insulate you from property related liability costs?
- Have you consulted an attorney to set the purchase up in a way that helps insulates you from potential liabilities?
- Do you have available financial resources to handle slow rental periods without defaulting on the mortgage?
There are many other questions to sift through so be sure to create a business plan before proceeding. It will help you avoid mistakes when you are caught up in the property acquisition process. And a business plan will allow you to benchmark how well this investment is doing relative to your financial expectations, both short and long term.
You can make money, sometimes a lot of money, with good real estate investments. To do so, be realistic about financial risks and rewards, work the numbers and do your homework before putting money on the line.