After investing in real estate for the last 15+ years I’ve had my share of mistakes. Luckily they’ve only been small because I always had a plan and I always had more than one exit strategy. I’ve always invested for the long term so watching the latest fix and flip craze leave so many people, my friends, in dire straits has been extremely painful. At one point, as the market was going up, one of my mentors – someone I really looked up to told me I was being too conservative and was missing out on an opportunity of a lifetime. Recently I come to find out that all I missed out on is purchasing one of his ‘flips’ in a pre-foreclosure short sale.
Here’s a list of mistakes most beginner (and experienced) investors often make.
Speculate – Most new investors follow the herd, listen to the media and buy with the hope the property will appreciate. This is as much of a gamble as hand picking stocks or going to the Casino. Buy below market properties that cash flow.
Buy at Market Value – Beginners almost always buy property straight off the MLS for market value. You can find deals in any market and there are always distressed properties. Cherry pick from distressed properties at 70% or less of market value. These still can be found on the MLS but it takes a lot of searching and a good agent’s assistance.
Fall in love with a deal and get your emotions involved – Many beginners are guilty of this one. Their first few deals they spend minimal time finding a deal. As soon as a prospect is located, they fall in love and do anything to get that property. Emotions drive the decision, instead of making an informed business decision. I look at hundreds of properties before I find a keeper. Filter out the duds and cherry pick only the best deals.
Put too much down or too much of your own money – Real estate is an OPM or Other People’s Money industry. You should minimize how much of your own money is in a deal. And always make sure you have plenty of reserves to handle any not so pleasant surprises.
Only have one exit strategy – To minimize risk, it is imperative to have multiple exit strategies. If you cannot flip a property you can quickly end up upside down, behind in payments and lose the property and your credit. Instead, buy below market properties that cash flow. That way you can sell retail, wholesale, lease option, seller finance, refinance, even rent and hold.
Buy in Warzones – In today’s market you can find huge discounts in many areas with the glut of foreclosures. Do your due diligence. Buying a property for 20K worth 80K sounds like a slam dunk, but not if the property is vandalized multiple times during repairs, surrounded by 20 other foreclosed properties and there is next to zero interest from renters or buyers due to the location in or near a warzone. Make sure there is strong demand from renters and/or ownership in the area.
Do not consult an expert or build a team – Many people are do-it-yourselfers and cannot fathom the idea of another person giving them advice or handling tasks. Real estate can be very passive if you build a solid team and many experts are more than willing to give you advice that could significantly impact your success and experience as a beginner.
Many gurus make real estate investing sound so easy.
News flash, it is not.
Many beginners make one, if not all the above mistakes and this can lead to a miserable investing experience. Whether you are a beginner or an expert, it is always a great idea to get as many expert opinions as you can, they will make you aware of many potential mistakes and red flags. Play the numbers game and cherry pick from as many prospects that meet your criteria as possible. Always do extremely thorough due diligence and have multiple exit strategies. And finally, happy and profitable investing.
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