Successful real estate investors have a lot of battle scars to show. While it can be a financially lucrative and rewarding industry, investors often make a handful of mistakes before learning how to deal with the many facets of property investment. In order to avoid making mistakes, it’s critical that you educate yourself as much as possible before making your first investment.
Top Mistakes New Investors Make
It’s impossible to foresee every potential mistake, but some are more common than others and can be avoided by learning from what others do – or fail to do. Here are some of the top mistakes new investors make and pitfalls you’ll want to avoid at all costs:
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- Underestimating the cost. Whether you’re buying to flip, hold, or use, you can’t afford to underestimate the cost of the investment. While you’ll likely account for the mortgage, taxes, insurance, and closing costs, it’s less likely that you’ll properly account for maintenance, renovation, and other expenses. As a rule of thumb, it’s best to tally up all of your projected expenses and then add 15 percent to this figure. Unless something drastic happens, this should cover you. And if you overestimate, that simply means you have more money in the bank than you originally planned for.
- Failing to diversify. Real estate investors often get too comfortable and find themselves highly specialized in a niche market. While there’s something to be said for specializing and becoming knowledgeable about a particular area or type of investment, it’s critical that you diversify to protect your assets. Duncan Rolph of Miracle Mile Advisors states, “People don’t realize they are putting all their eggs in a single basket and geography ends up being a big issue.” He points to natural disasters like hurricanes or tornadoes as things that could wipe out an entire portfolio.
- Not staying up to date. For investors investing in long-term holds – either for tax purposes or to rent – there’s always the issue of keeping the property up to date. As Accord Construction often sees when repairing or installing new roofs, far too many property owners put off repairs until it’s too late and costly. It’s critical that you take care of issues as they arise, as opposed to putting them off for some future date.
- DIY financial and legal tasks. Unless you’re an experienced accountant or lawyer, you shouldn’t attempt to handle important financial and legal tasks on your own. You need a lawyer and his or her services will be worth every penny you spend. They can help with things like contracts, liens, property transfers, filings, and more. Without an attorney, you may end up with expensive litigation, clouded titles, or any other slew of problems. There are far too many complexities involved with real estate investment to handle everything on your own.
Learn from Everything
The best real estate investors are the ones that use everything – good and bad – as a learning experience. Whether it’s your own successes and failures or those of your peers, you should apply the lessons you learn and strive to become better in the future. Chalk these mistakes up as things you’ll want to avoid and position yourself to be as successful as possible in the future.