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There is a first time for everything. Starting out in anything for the first time is always hard, and sometimes even frightening. The anxiety of not doing something right the first time can be overwhelming. The unknown is scary because we don’t know what to expect, and real estate investment is no exception to this rule.If you have been toying with the idea of making your first real estate investment, you may have heard that is the the most difficult one yet. Your first deal is always the most difficult because you don’t know enough about the ins and outs of the industry yet. This is normal. How could you possibly know if you have never done it before? As with most things in life, the hardest part is taking the first step. In the real world, most people don’t ever get started and move forward in their dream direction because they are always waiting for that sign to tell them that they are 100 percent ready to start. Frankly speaking, you can never be 100 percent ready. Nothing is going to be perfect in life, let alone your first real estate investment deal. There is an ever evolving learning curve, and it’sup to you to equip yourself with the tools to learn and progress as you go.
We want to equip you with the knowledge to avoid some of the most common mistakes that people make on their first real estate investment. There will always be road blocks and mistakes along the way, but you can prevent the worst from happening by keeping a mental note of the following checklist in mind. You cannot direct the wind, but you can adjust the sails so that you don’t make any lethal and disastrous mistakes. Mental and practical preparation is the key to succeeding in your first real estate investment. Read on to find out what some of the most deadly mistakes are. If you know the mistakes, you can make the necessary decisions to avoid falling in to rookie traps.
Mistake#1: Bad Location
Real estate investment is really excitement, especially if it is your first one.With that being said, it’s very easy to get carried away by the excitement of it all and cloud your judgement. Although you may now be able to afford making your first real estate investment in the market, it’s important to remember that logic and common sense comes first. The first deal isn’t always the best day, and neither is the cheapest deal - especially if the property is not in a good location that will be profitable for you. As experts in the field, we cannot stress enough how crucial it is to properly analyze the location of a real estate property option before investment. Location is everything in real estate, and choosing the wrong location could be your ultimate downfall. Real estate value revolves around location. Whether you are investing in residential or commercial real estate, location is a necessary component to the success or failure of your investment. The people, as well as business who will rent or buy from you will decided whether to do so, first,upon the location of your property. Of course, other factors will help determine if they choose to rent or buy from you but their interest always begins with location. Even if the property is phenomenal, it doesn’t necessarily mean the returns will be optimal if said property is situated in a poor location that’s not right for your market.
Choosing a property that does not boast a prime location could result in very low returns to no returns at all - which is something that all investors fear and want to avoid. If you are looking to resell your property int he future, your property may not sell for lengthy periods of time if you are not careful with choosing the location. We cannot emphasize enough the importance of property location, which is why it’s so important that as an investor, you take the time to do research in all of the best and the worst locations in your areas of interest before investment. We aren’t saying that investors cannot make money in bad locations, but it will be a challenging road ahead of you, especially if you are a brand new beginner in the real estate game. This is the reason why beginners should avoid bad locations at all costs.
During the search and negotiation journey, you will find yourself conflicted by various types of deals. Maybe you come face to face with a property that is priced lower, below the market value of competing properties with excellent seller financing terms. This all sounds sweet and dandy right? Here’s the catch: the location is awful! What do you do? What would you do? You have to put your thinking cap on and really weigh out the good and the bad. From a professional standpoint, we would not advise anyone (especially rookies) to invest in this deal simply due to an awful location. Think about it. If you are in a poor location, how will you consistently attract good tenants to ensure steady cash flow? You may be able to make some money from time to time, but it will definitely be challenging and a constant uphill battle. Now, who wants that kind of work?
A good location can be beneficial in many ways. Let’s say you buy a property in an absolutely prime location, but you make them is take of paying for it way above the market price. You may have lost money on the purchase, but the fact that the property is in a solid A+ location could still bail you on of your original mistake of paying too high of a price, by attracting a steady stream of quality tenants.
Mistake#2: Bad Financing Options
One of the most deadly mistakes you can make in real estate investment is bad financing. Real estate investors can lose grand sums of money and even go out of business from bad financing options, more than any other mistakes on this list. Real estate investment is all about money and cash flow, so if you don’t even understand good financing decisions from bad financing decisions, the results can be lethal for your business. Let’s dig deeper in to what we mean by bad financing:
1. High interest rate
2. Adjustable interestrate
3. High monthly payment
4. Balloon payment
5. Personal recourse
Typically, most first-time real estate investors will turn to financing options. People may not want to spend all of their cash on the first real estate investment, or they don’t have enough - in which case, financing options is usually the go-to for most.The problem is that people don’t always choose wisely, either because they have no knowledge of how to or have been misled to choose bad options. Choosing the wrong financing options can be catastrophic for your first real estate investment deal and for your whole business even. It’s crucial to choose wisely when it comes to your financing route. There are many types of financing options, but no matter what type of financing you use, be sure to negotiate hard and avoid the worst mistakes.
For example, if you decide to opt for a loan, it would be wise to not opt for one with a very high interest rate or the requirement for substantial personal recourse. Even if you may be able to earn fairly lucrative returns from your real estate investment, it’s always better to stay away from any intimidating or burdening financing options.
Mistake#3: Miscalculating Resale Or Rent Value
As a real estate investor, one of your primary jobs is to understand how your renters and buyers make purchasing decisions, and then to translate that to a value. You need to determine the property’s full value potential, so that you will have an easier time making decisions that can earn a profit. Understanding resale and rent value of the markets is not easy, a tall. Everyone knows it’s an important job, but truly understanding the trends of the market is not something that comes overnight.Calculating resale and rent value is a skill that you must commit to learning and continue to refine every day for the rest of your real estate investment career.
Most beginners are not knowledgeable in this area on their first deal, so here are some great guidelines to help you get started on becoming an expert:
• Reduce your target market to a relatively small, and manageable area.
• Study all of the transactions in your market daily using real estate industry targeted tools, as well as market reports and blogs. If you want to be an expert in a field, you must keep yourself educated continuously. This is how you keep your competitive edge in an otherwise over saturated market.
• Hire professionals for assistance. If you don’t understand resale value, you can find a competent and reputable real estate agent, agency and/or appraiser to help you. These people’s sole job is to understand the real estate market. If you want to understand factors like rental values, look for property managers with multiple units in your area.
• Take courses and/or continued education on the real estate industry and of your market.
Mistake#4: Underestimating Repair Costs
It is inevitable that you will underestimate repair costs when you first start out. You have no knowledge of how things work yet so it’s understandable that you will hit some road bumps here and there as you progress. What you want to do is avoid enormous cost overruns that could cause you to run out of cash or face other serious problems.
You can avoid lethal mistakes by learning either a good repair estimating system or by getting help from other more knowledgeable investors and veterans of the industry. Don’t be afraid to network and ask people for help. The real estate industry is all about who you know, and the bigger your network is, the more chances you will have to make your business prosper.
You can network by attending local real estate industry events, meet-ups, seminars,and/or even online through forums and blogs.
Mistake#5: Running Out Of Cash
Your investment properties will only survive if you have consistent cash flow. It works like fuel to a car, and gas to a stove. If you run out of ammo, you are pretty much out of the race. If you run out of cash, even the best investment property will drain your pockets dry.
Whatever you do, you want to avoid running low or running completely out of cash. So how does an investor run out of cash? Well, there are a couple of ways:
1. Underestimating repair costs
2. Underestimating future capital expenses on a rental property - capital expenses are basically high-cost items like repairs for heating-air system, or anything that involves a huge overhaul on the property. These things require time, and money to be fixed. If these costs hit you unexpectedly, it can become a landslide of a problem that’s quite difficult to deal with.
Repairs are one of the biggest factors that stop people from ever investing in to real estate. It’s also one of the biggest drawbacks of real estate investment because it’s so easy to miscalculate repair costs and underestimate how much cash is needed to make certain repairs on a property so that it is livable, rentable, and/or saleable. Maintenance costs can be a burden as well and sometimes will end up costing more than what you are earning from your property.
With that being said, you should make it your mission to thoroughly assess maintenance and repair costs so that you can make an informed decision regarding whether a prospective investment is a good option or not.
Liquidity is another important aspect to remember here. You should avoid investment all of your money in to your first real estate investment, for the sole reason that you don’t want to end up broke. The concept seems simple enough, but a lot of first time investors make this common mistake by getting so excited about investment that they end up repeatedly taking out loans and borrowing money from friends and family just to cover their daily expenditures. Instead, you should make sure you have enough cash to survive, even through emergencies, without having to take out expensive loans or sell the property because stacking debt.
Mistake#6: Getting Too Emotionally Involved
In any business, one should never get too personal and let their emotions steer and dictate their business decisions. It’s never a good idea to invest in a real estate property simply due to emotions alone. A lot of people will purchase properties because it was a home that grew up in or once lived in. There’s a certain element of emotional attachment that drives them to make the purchase, without actually accessing the property from a detached perspective.This can be dangerous because your emotions can easily mislead you to making investments that are neither profitable nor logical. The goal of an investment is to yield high returns, not to indulge in sentimental values. Therefore,choose a property which makes sense for you from a financial standpoint to avoid bleeding money left and right.
If you learn to understand these concepts, you can avoid deadly mistakes from your first real estate investment experience. As investors, it’s important to equip yourself with all the knowledge you can, hope for the very best but always plan for the worst. For more information, you can always contact our team at Engel & Volkers. We would love to hear from you on any comments and feedback. Are there any other lethal mistakes that you believe first time real estate investors should avoid?
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