Real estate is widely considered to be a smart investment due to its potential to generate passive income and build wealth over time. While the rewards are always appealing, it’s important to be aware of the risks and challenges that come with investing in real estate. Even experienced investors can make costly mistakes, so it’s crucial to understand the common pitfalls and how to avoid them.
We’ve been working with investors for many years. We’ve leased, managed, and maintained their rental properties. This experience has given us insight into the most common pitfalls of real estate investing. We’ve seen the same mistakes made over and over again.
To help you avoid those missteps and errors, we’re talking about some of the most common pitfalls in real estate investing. We’re also providing you with tips on how to avoid them.
Lack of Research into Properties and Markets
One of the most common pitfalls in real estate investing is the lack of research and due diligence. Investors might hear about a great deal or understand that there’s a market where they can get more for their money, and they’ll dive right in, without conducting any deep research, examining any data, or talking to any local experts.
It’s a recipe for disaster.
Before you invest, it’s essential to assess market conditions, take the temperature of the local economy, and get an idea of whether population in the area is growing or receding. When you find a property you may want to invest in, it’s a good idea to investigate the building’s history, take a look at its occupancy levels and review current lease agreements. You’ll have to weigh the benefits as well as the potential risks if you want to make a good decision.
Without proper research, you may find yourself stuck with a property that has major issues, such as structural damage or zoning restrictions. We have seen it happen to investors who thought they were knowledgeable and prepared. To avoid this pitfall, you’ll always want to conduct thorough research and due diligence before making any investment decisions.
Financing Pitfall: Overleveraging
Another common pitfall in real estate investing is overleveraging, or borrowing too much money to finance a property. When the economy is strong and the market is thriving, it’s easy to imagine that you can manage the debt that you’re taking on. But, when the market shifts and property values drop, you’re left owing a lot of money on a property that might not be as valuable as it was when you bought it.
It’s always tempting to take on a large loan to acquire what seems like an ideal investment property, but this can lead to financial trouble if the property doesn’t generate enough income to cover the debt payments.
Overleveraging can also make it difficult to obtain funding for future investments. To avoid overleveraging, be conservative with your borrowing and aim for a loan-to-value ratio that makes sense and doesn’t throw you into territory that’s too risky.
Expecting to Get Rich Quick
Real estate Investors who enter the Pocatello and Idaho Falls real estate markets with the idea that they’ll make millions flipping houses and driving up rent are in for a huge disappointment. There was a time where that was the best way to make money in real estate, and while you can still do it today, it’s not as easy as it once was. Nor is it as stable.
Residential real estate is not going to get you rich within months of your investment. With home values and purchase prices rising over the last few years, not to mention the higher costs around maintenance, you’re better off playing the long game.
If you want to be successful with your investment property, you should expect to hold and rent out your property for at least five or 10 years, maybe even longer if you really want to earn some serious money and long term wealth.
Rental units can likely cash flow for you right away, but you’re not going to be a millionaire weeks after buying one building. Smart investors understand that real value comes with what you earn after spending patience and time holding onto your properties. Don’t fall for the get-rich-quick real estate schemes. This isn’t that kind of business.
Not Establishing Investment Goals (Which Should Include a Contingency Plan)
Do you have written investment goals that explain why you’re investing in real estate and what you hope to accomplish?
If not, you’re falling into a common pitfall.
A number of investors show up just looking to buy something. Anything. Your investments should be more strategic than that. Get an idea of what you’re looking for and why. Plan where you want to be in one year, five years, and ten years. You need to know how you’ll measure success. Do you want to grow your portfolio?
Your goals need to be firm but flexible. There should be an exit plan. You’ll definitely need a contingency plan. Investing in real estate involves taking risks, and sometimes things don’t go as planned. It’s crucial to have a contingency plan in place to mitigate any potential losses or issues that may arise.
Not having a plan can result in costly mistakes, such as being forced to sell a property at a loss or losing rental income due to unexpected repairs. To avoid this, always have investment goals in place to which you are committed, and put together a contingency plan for various scenarios, such as market changes, vacancies, or unexpected repairs.
Self-Management of Investment Properties
Property management is a vital aspect of real estate investing.
Trying to do everything on your own is a huge pitfall. You have no idea what you don’t know, and when it comes to selecting an investment property and negotiating its terms, you need the data and advice that your property manager can provide. Once you’re renting out a home, you can have a better and more profitable investment experience if you’re working with a property manager.
You have to understand that by relying on professional property managers, you’ll significantly impact your property’s profitability and long-term success. Self-management is not only risky; it can also be expensive.
Many investors make the mistake of assuming they can handle property management themselves, only to find out it’s more time-consuming and complex than expected.
Forgetting to Budget for Costs
The costs that investors take on with a rental property are not always planned or expected. There are the expenses that are likely already in your budget; mortgage, taxes, insurance, repairs and maintenance to prepare the property or the units for rent. But, what about the variable costs? What about:
- Vacancy
- Turnover
- Emergency maintenance
- Late rent and potential eviction
- Property damage at the end of a tenancy
These are the costs that you can’t often see coming, and if you don’t have room in your budget for them, you could find yourself at a serious disadvantage.
Make sure that you do some budgeting that includes all these expenses you’re not anticipating. An eviction, for example, isn’t likely, but you should still have a reserve fund for potential legal issues and tenant claims.
Not Thinking Like a Tenant
A common pitfall that we see a lot of investors fall into is not taking your prospective tenant’s perspective into consideration. You should be thinking like a tenant when you identify an investment property, negotiate for that property, and close the deal. You should be thinking like a tenant when you’re considering what kind of renovations will be necessary to make the units habitable and attractive.
Think like a tenant when you’re deciding about pets and utilities and appliances.
The residents in your rental property keep you in business. You have to provide a great rental experience, or you’ll have no one renting from you.
As you’re deciding which property to buy, remember that you’re not living there yourself. You don’t have to love the bathroom floors and you don’t have to lament the lack of granite counters or stainless appliances. What do tenants really want?
They want a desirable location, close to good schools or within walking distance to the grocery store. They’re looking for an outdoor space or large closets that are great for storage. Think like a tenant thinks throughout the entire investment process, otherwise the disconnect between investor priorities and tenant priorities will be obvious. Tenants want a safe, well-maintained home that’s comfortable and priced right.
Real estate investing can be a lucrative and rewarding venture, but it’s important to understand the common pitfalls and how to avoid them. By conducting thorough research and due diligence, being conservative with borrowing, having a contingency plan in place, considering professional property management, and focusing on cash flow and the requirements of your tenants, you can minimize your risks and increase your chances of success.
As we advised, investing in real estate is a long-term game, so stay patient, persistent, and informed to achieve your financial goals.
We can help you. Please contact us at Jacob Grant Property Management and we’ll put together an investment plan that makes sense for you and your goals.
