With any kind of investment, mistakes are more likely to happen than we’d like to admit. What happens when you make a big mistake with your investment property? Simple, negative cash flow.
In some scenarios it is possible that an investor is forced to break-even. However, if we take a closer look at the causes of negative cash flow, we would realize that an investor’s decisions are the main cause of not making profit. The most common mistakes investors make are avoidable.
1. Limited Options and Hasty Decisions
New investors might rush to buy a property before exploring all their options. This can result in losing out on a potentially undiscovered property that might have been a better fit to suit the profile of the investor. Negative cash flow is certainly a possibility when rushing into a purchase.
To prevent this type of common mistake, take your time and widen the scope of your search. There could be a hidden gem just around the corner.
2. Premature Property Sale
How many time have you heard about an investor selling too soon? When investors own properties, they think about the day they can make their money back. However, as we all know, real estate markets are volatile. Some owners notice the price of their property going up by a small margin and they rush into selling it to make that little profit. Unfortunately, holding on to the property longer could have led to bigger and better profits. Although, this scenario is somehow acceptable compared to when investors panic to sell their property if its value decreases. Selling for a loss is an instant negative cash flow registered on your investment.
3. Bad Property Management
Real estate, like any other investment, requires constant attention and managerial skills to make it successful. Managerial tasks of a real estate owner are not limited to paying bills and collecting the rent checks. Managing your investment property means that you have to deal with every tiny detail with the highest standards to avoid any vacancies throughout the year. Good management includes drafting contracts with tenants, renovations, property quality, and dealing with tenants. Inability to perform any of these tasks might result in negative cash flow for your investment because in the end, keeping your tenants happy and satisfied is your number one priority.
4. Lack of Information about the Investment
There aren’t many investors whose success stories begin with “I just went for it, didn’t know what I was doing.” The key to success in real estate investments is doing your research, studying the market, and analyzing the numbers involved. This can sound complicated, but in reality, it is just a step-by-step process to making a grand plan for spending your investment money.
For example, it is important to understand the nature of the location you are investing in. Will you be targeting tourists or locals? How much can money are other property owners making? Can you offer something different than them? These are all questions that are vital in your quest to understanding the chances of success for your investment.
Location, finances, taxes, and legalities are the main issues to fully grasp. These four areas constitute the basics of a real estate investment plan. Lack of knowledge in any of these will most definitely harm your chances of making profit and it could leave you in debt if you are breaking any laws for example. Not doing due diligence in your investment is a direct cause of negative cash flows for many first time real estate investors.
There is no shame in making mistakes. Investments are risky and prone to human error which can lead to negative cash flow. However, in real estate, the difference is that it’s not that hard to avoid these mistakes by being more informed and prepared for what is to come. Unlike with stocks, investors have a lot more control.