Gonzalo Daniel Bauza
4 Pricey Real Estate Mistakes That Investors Make
Actualizado: 15 abr 2019
Real estate can be an incredibly valuable investment—if you know how to do it properly.
Unfortunately, many investors make the same critical mistakes. And those mistakes will directly impact your ROI.
Don’t jump into the market unprepared. Here are four expensive real estate mistakes many inexperienced investors make, and what you should do instead.
4 real estate mistakes that investors make:
1. Lack of Research
Let’s say you’re trying to buy a car.
You wouldn’t just walk to a dealership and buy a car. You would take time to investigate your options. You would compare models, shop around for available deals, ask questions, check out the car yourself. It’s a big investment, after all. You want to make sure you choose the right one.
Why would an investment property be any different?
If anything, the due diligence you conduct on a potential investment property should be even more thorough—at least as thorough as the due diligence you would perform on a house you planned to personally live in.
For example: what can you find out about the neighborhood? What sort of neighborhood is it? Is it a generally stable neighborhood? What kind of businesses are here? Is the neighborhood being gentrified (which would increase your property value)? Is there a student population?
Never mind all the questions you should ask about the property itself.
It will slow the process down, but if you don’t take the time to answer these questions, you could find yourself stranded with a money pit.
2. Not Understanding Debt
Another common and equally critical mistake: not understanding how debt works in real estate investing.
In general, real estate investors use debt for one of two reasons:
To improve potential returns or to expand buying power
Both are worthwhile reasons. Investors get in trouble when they leap into debt blindly, without fully understanding the risks and consequences attached to debt.
A common mistake among amateur investors is taking on expensive debt to buy a dream property only to find that the interest rate on that debt is higher than the investment yield. Congratulations: you’re in a negative cash flow situation.
3. Underestimating Expenses
Investment properties are an amazing way to earn passive income. But many new investors get so excited about the potential profits that they forget a basic fact.
When you invest in a property, you’re a landlord. And that means you’re saddled with a whole host of expenses to keep the property usable and attractive to potential tenants.
This includes things like:
Ongoing capital expenditures
Accounting and bookkeeping fees
Tenant screening costs
Insurance Emergency expenses
And those are just the built-in expenses. You should also build space into your budget to save for potential vacancies and possible future legal fees.
4. Over- or Under-Renovating
Finally, many new investors make the mistake of over- or under-renovating a property before they attempt to put it on the market.
Regardless of the state of the property or your personal tastes, the property must be renovated to meet the standards of the neighborhood before it can successfully go on the market. This requires a careful eye and an ability to spot the right property.
You can make a great deal of money flipping properties, but you have to know how to tell the difference between a flipper and a money pit. A flipper is a property that wouldn’t sell because of apparent issues but, on closer inspection, has problems that are primarily cosmetic. A money pit is a property that requires high-level renovation, demanding more input than the property may eventually be worth.
Many investors also make the mistake of over-renovating a property. Remember, you don’t need to be better than every property in the area, you just need to cater to the tastes of the local market.
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