In the world of real estate investment, the thrill of financial gains often stands in tandem with the risk of substantial losses.
While the prospect of making big money fast is exciting, the path to success can be filled with potential pitfalls. Seemingly small missteps can become critical errors that have the power to drain your finances, erode your gains, and transform what should have been financial freedom into a costly nightmare.
But fear not! By understanding these pitfalls and learning from the experiences of seasoned investors, you’ll be better equipped to navigate the complex landscape of real estate and safeguard your investment from potential setbacks.
Mistake #1: Picking The Wrong Mortgage Type
Kamal Pillai, a real estate agent at The Canadian Home Realty, shared that many investors struggle to understand the market’s current situation and end up choosing the wrong type of mortgage, which can hurt a property’s profitability.
To avoid this, Pillai recommended conducting in-depth research before signing the dotted line on the mortgage terms and conditions papers. If you plan to sell the property shortly after buying, he suggested going for a variable-rate mortgage. Also, with interest rates going up, he advised picking a variable rate instead of a fixed-rate mortgage.
Mistake #2: Falling Into The Overpayment Trap
According to Pillai, while real estate investment offers a fantastic opportunity to accumulate wealth gradually, it can lose its allure if you overspend on the property.
“Many times, investors get into a bidding war and end up overpaying for a property,” he said. “By paying too much, you limit your potential profits and can even end up losing money on the investment.”
To avoid this mistake, Pillai advised thorough research to gauge the current property values in your chosen area of investment. He underscored the importance of not getting carried away by the excitement of a purchase, which might lead to paying far beyond the property’s true value.
Mistake #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 even just buying a home, involves many steps and a lot of time.
Mistake #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.
Flippers need to be careful when it comes to accurately calculating renovation expenses, gauging market demand, and accounting for possible delays. This caution is essential to prevent getting trapped with an unsold property and disappearing profits.
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 before you decide. And if you overpay, you won’t make a profit.
Mistake #5: Underestimating Costs
“Underestimating expenses such as property maintenance and unexpected repair can quickly eat into your investment profits,” said Pillai.
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.
“I’m currently under contract for a three-unit property built in 1910 that is entirely knob and tube wiring,” said Andrzej Lipski of Next Door Properties. “It’s going to cost me over $35,000 to rewire that property.”
Lipski said that it’s critical for investors to conduct property inspections, title searches and assessment.
Additionally, it’s best to always overestimate — rather than underestimate — the costs. Real estate management is expensive and includes closing costs, fees, commissions, insurance, repairs, maintenance and carrying costs. And when a tenant suddenly moves out, you will generally face a month or more without rent.
Mistake #6: Not Having an Exit Strategy
According to Lipski, one mistake to steer clear of in real estate investment is not having a clear plan for when you want to exit the investment. He explained that investment properties are not all the same — some are meant for renovating, raising rents and selling, while others are meant for long-term holding.
Lipski suggested that sometimes, getting the property to a stable condition can lead to better returns, especially in a market where property values are rising.
He also pointed out that if you refinance or sell the property, the money you get can be used to buy more investment properties, which could help you grow your wealth faster compared to just holding onto one property for a long time.
Mistake #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 these expenses before signing on the dotted line.
Mistake #8: Not Prepping To Become a Landlord
“A lot of new people are getting into the real estate game because of promises of passive wealth popularized by podcasts and Instagram investors,” said Lipski. “It’s not that easy.”
Being a landlord is not a “get rich quick” scheme, and there’s more to the 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 you start taking on tenants.
Mistake #9: Overestimating the Rent
Expecting $1,200 per month in rent and later realizing the apartment is only worth $900 per month will cost you thousands of dollars.
While calculating the property income, use a real estate resource like Zillow to do a market analysis of area rents. Even better, visit the competition. You’ll get a better idea of what a realistic rent price looks like.
Barbara Friedberg contributed to the reporting for this article.
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