Investing in real estate is glamorized on television and in the media. With “no money down” seminars and beautiful “reveals” on HGTV’s “Property Brothers,” you might be tempted to rush into the real estate market. Before spending a dime, learn to identify and avoid real estate investing mistakes.
1. Not Understanding Your Creative Finance or Adjustable-Rate Loan
Not knowing the limits of your loan payments can cost you thousands of dollars. Interest rates are at their lowest level in decades. If a seller offers a “creative finance” deal or the lender recommends an adjustable-rate mortgage, tread carefully. Depending on the terms of the loan, your payment might increase when interest rates rise, which is expected to happen throughout this year and beyond.
2. Ignoring the Downside of Your REIT Investment
Many investors enjoy the juicy dividend payments associated with investing in real estate investment companies or trusts. Yet, like all investments, the price you pay for a real estate investment trust will fluctuate. Be aware that both the dividend payment and value of your REIT investment can go up and down. As with any investment, it’s important to understand what you are buying before you invest in a REIT fund.
3. Forgetting That Investing in Property Is Highly Illiquid
Real estate investing isn’t the same as investing in the stock market. You can buy or sell a stock or fund online in minutes, with the click of a mouse — that’s not the case when investing in real estate. Large transaction costs are common in the real estate industry. Buying and selling rental properties or buying a home involves many steps and a lot of time.
4. Thinking That Flipping Houses Is a Quick Way to Make Money
Don’t believe what you see on HGTV: Flipping houses doesn’t happen in one hour. If you’re hankering to flip residential real estate, read some real estate investing books first. Buying a property at auction frequently requires an all-cash purchase, and you don’t even get to view the inside of the house. If you overpay, you won’t make a profit.
5. Underestimating Costs
Whether you’re seeking to buy rental properties, industrial real estate or even retail real estate, it’s easy for costs to get out of hand. Always overestimate — rather than underestimate — the costs. Real estate management is expensive and includes closing costs, fees, commissions, insurance, repairs, maintenance and carrying costs. When a tenant suddenly moves out, you face a month or more without rent.
6. Buying With Your Heart, Not Your Wallet
If there was a “Real Estate Investing for Beginners 101” class, it would start with rule No. 1: Don’t fall in love with the property. You might love the curb appeal, the neighborhood or the dreams of riches. Yet, before fantasizing about projected income, remember that investing in real estate is about the condition of the property, the price, the financing and the expenses. When figuring out how to invest in real estate, the first step is to learn how to critically evaluate the financials of the property with a cool head, not your emotions.
7. Not Confirming the Expenses From the Real Estate Investment Group
Imagine you’re buying a fourplex from a real estate investment company or an individual. The commercial real estate firm hands you a beautiful packet of income and expenses for the property. Included in the expense packet are gas, electric, repairs, maintenance, taxes, insurance and more. On the income side, you’ll have a list of the rent payments.
To avoid surprises, confirm and verify the numbers. Spend the time calling the tax office, the utility companies, the insurance broker and others to verify the expenses.
8. Not Prepping to Become a Landlord
Being a landlord is not a “get rich quick” scheme, and there’s more to this job than sitting back and collecting rent. Before getting into rental real estate ownership, realize that a landlord is on call 24/7.
When a pipe breaks at 3 a.m. on a snowy night, you’ve got to find and pay for the plumber. If the tenant is three weeks or three months late with the rent, you need to collect or evict. Know the full job description before becoming a landlord.
9. Overestimating the Rent
Expecting $1,200 per month rent and later realizing the apartment is only worth $900 per month will cost you thousands of dollars. While calculating the property income, do a market analysis of area rents. Zillow is a good resource. Even better, visit the competition. It is crucial to know real estate investing secrets before you make a purchase.
If you pay too much for your real estate investment, it’s difficult to make a profit. Check comparable property prices, scrutinize expenses and understand how to calculate a real estate capitalization rate to determine the right price to pay for your real estate investment.
Real estate investing is a tried-and-true way to wealth. But without adequate financial resources, knowledge and patience, you can fall prey to one or more of the worst real estate investing mistakes.
Keep Reading: Investing for Beginners — How to Invest in Real Estate