Starting a real estate investing business is not an easy task. Otherwise, everyone would have been a real estate millionaire. There are so many mistakes which a first time real estate investor should be aware of, but luckily most of them are avoidable with good knowledge and some common sense. For anyone who is considering becoming a part of the real estate investing world, following is a list of the common mistakes which a first time real estate investor could easily make and solutions how to prevent them:
1. Buying too big
Real estate investing is largely learning by doing, so a first time real estate investor should by no means jump in with a large investment property. Buying a huge income property (e.g. a multi-family home) not only costs more money but is also harder and more expensive to manage.
Solution: It is advisable to start with a smaller, less luxurious property (an apartment or a single-family home) which you can afford to buy without going bankrupt and which will teach you all you need to know about being a landlord and managing a property. Once you’ve mastered the basic skills of the business, start growing by buying a new property every 2-3 years.
2. Buying too small
How big of a rental property a first time real estate investor can afford depends mostly on his/her budget and financing options. So, if you have saved a good amount of money, don’t hesitate to buy a slightly bigger investment property. After all, a larger property will make more money for you.
3. Underestimating your costs
A first time real estate investor should go for a positive cash flow rental property, just like any other investor. Cash flow is determined by costs and rental income, so it is crucially important to get as accurate an estimate of the costs as possible. A new investor might forget about the repair costs or undervalue the cost associated with finding a right tenant, which will bring down profitability.
Solution: Have a research-based, realistic estimate of the costs for purchasing, managing, and running an investment property.
4. Overestimating your income
At the same time, being too hopeful and enthusiastic, a first time real estate investor often tends to misjudge how much rental income he/she can expect to make from an income property. Once again, this will bring down your estimated cash flow and risk leaving you with a negative cash flow property.
Solution: When choosing your property, use Mashvisor’s investment property calculator which will provide you with an evidence-based estimate of the rental income you can expect from available properties, both for traditional and Airbnb renting.
5. Not doing enough research
Many individuals get tricked by the promises for quick profit and enter real estate investing without the necessary knowledge of the business and understanding of the local market. Like in any other business, a first time real estate investor should be prepared to deal with the specifics of real estate investing.
Solution: Read any possible source of information which you can get a hold of before buying a rental property. There are so many great resources out there – both online and offline (websites, blogs, books, magazines, newspapers, experts, etc.) – that it is a shame for a first time real estate investor to be underprepared.
Although new investors tend to not have too much money, they are the ones who are most likely to overpay – for the investment property itself as well as for any professionals and services that they use. The root cause of this mistake is the lack of adequate knowledge of the business. While you will naturally learn many of the rates as you practice the business of real estate investing, as a first time real estate investor you should not compromise your profitability just because you are new to the business.
Solution: Do a lot of proper research by reading sources and talking to people who have been in real estate investing for longer than you have. To make sure you are paying the right price for your property, perform a real estate market analysis and calculate the comps.
7. Choosing a bad location
Location is key in real estate investing as it determines the types of properties, property prices, the market (a buyer’s or a seller’s market), laws and regulations, the tenants’ pool, the availability of other rental properties, the rent, etc. While it might be easier for a first time real estate investor to go for his/her local market because of the knowledge he/she already has, a new investor should not exclude the option of an out-of-state real estate investing if the local market is not in the right state for investments right now.
Solution: Study well your local market to decide if now is the time to buy and manage an investment property there. If not, move to markets beyond the 20-mile radius where profitability is higher. Use Mashvisor to search through thousands of properties across the US.
8. Not using an investment property calculator
As mentioned above, budgeting is particularly tricky for a first time real estate investor and is something that will largely come with experience. A rental property calculator can thus be particularly useful for someone with little or no previous experience in real estate investing as it will provide you with estimates of the costs, financing options, the rental income, the profitability (cap rate and CoC return), and the occupancy rate – for traditional and Airbnb renting strategies.
Solution: Get a good investment property calculator like Mashvisor’s.
9. Entering in a bad partnership
Real estate partnerships can be very beneficial, especially for a first time real estate investor with limited financial resources and knowledge. However, they hide a lot of traps, so as a new investor, you should not be willing to jump into any partnership just for the sake of buying a bigger property or having someone to share the risk with.
Solution: Choose your partners carefully among proven professionals, experts, and people whom you can really trust.
10. Choosing the wrong rental strategy
Both traditional and Airbnb renting can be very profitable, depending on the specific market and context. Don’t choose one over the other for your first property just because you “feel” that’s the right strategy as you might end up losing money from a perfectly profitable property just because you went for the wrong strategy.
Solution: Which strategy is best in your market is part of the research you will have to conduct. Which strategy is most appropriate for your specific property is embedded in the investment property analysis. These are skills that any first time real estate investor needs to obtain.
11. Being in a hurry
A first time real estate investor might be too eager to close the deal in order to become a landlord and start making money. Buying a property when you are not fully prepared can be a serious mistake.
Solution: Buy the property and rent it out only after you have done enough research and explored all options.
12. Being too hesitant
Another type of first time real estate investor is the extremely hesitant one who will miss all the good deals because he/she is never sure of his/her choice. While being cautious is necessary, being too timid can cost you dearly in real estate investing.
Solution: Use the knowledge that you built through your research to boost your confidence in making the right investment decision.
13. Not working with professionals
While professionals like property managers cost money, they might also save you lots of time and efforts and enhance your income as a first time real estate investor. When you are still new, it might be very beneficial to hire at least some professionals to help you get started.
Solution: Find some reasonably priced professionals and learn as much as possible from working with them on your first real estate investing deal.
14. Forgetting real estate investing is a business
This can happen to anyone, but it is more likely to affect a first time real estate investor. Real estate investing is a business, and there is no place for emotions. You will have to learn to treat all your investment decisions as such from the beginning.
Solution: Before you make any real estate investment decision, ask yourself whether it makes sense from a financial point of view.
If you pay attention to the common mistakes listed above and remember the solutions for preventing them, you could soon be on the road to making money as a first time real estate investor.