If you’re new to investing in real estate, you may be wondering: how can I make sure that my investment is worth it in the long run? A property can be a big commitment, and you want to avoid investing in one that will only end up costing you.
The truth is, people who are just starting out in real estate tend to make a few classic mistakes. We highly recommend working with a property manager to avoid these common mistakes. Having an industry professional by your side will make the entire process so much easier.
To give you a head start, this article will walk you through eight different mistakes that we have noticed beginner investors tend to make when they begin their journey in real estate. Hopefully by reading this post, you will be able to avoid some of these common missteps and save yourself the headache.
From the planning stages of your investment to managing your tenants, owning a rental property will take a lot of work. However, by avoiding these common mistakes (and hiring a property manager!), you will set yourself up for success.
8 Common Real Estate Investor Mistakes to Avoid
1. Failing to Come Up with a Strategic Plan for Your Investment
The first step in any investment is to start the process with a solid plan. Trust us, you never want to buy a property before you have a good understanding of how the investment will perform financially.
When the real estate market is experiencing a boost, it can be difficult to resist the urge to buy a property as soon as you can. However, in order to avoid future problems, you will need to take a step back and outline a clear plan, which will include what to do if the housing market crashes and your initial predictions are wrong.
Before you go out and get a mortgage for a property or start making large payments, you will need to sit down and determine what your investment strategy will look like.
For example, what kind of rental property are you looking for? Do you want to own a single-family rental home or a multi-family complex? Or, would your business best be suited for a vacation rental?
Consider what your approach will be as a rental property owner and plan accordingly. Only then should you begin to shop around for a property to invest in.
2. Skipping the Necessary Research
When most people are purchasing an important item in their lives, like a couch or a new computer, they will shop around by comparing different brands and models, asking a variety of questions, and more.
Overall, they will consider whether or not this item will be worth their investment. Seeing how a property is considered a major investment, you should be putting in an even larger amount of diligent research before you commit to purchasing a rental property.
As a future landlord, you will need to take the time to conduct your research thoroughly. You need to ask as many important questions about the property that you are thinking of purchasing as you can. Here are some questions to ask before you commit to investing in a new property:
- Is the home located near a construction site? Are there any future plans for major construction in the area?
- What are the city’s future plans regarding the neighborhood and the surrounding area?
- Has the neighborhood changed significantly in the last few years?
- Is the property built in an area that could be problematic, such as a flood zone or an area that is known for radon and termite infestations?
- Are there any foundation or permit problems in the property that have yet to be addressed?
- What is the main reason that the current owner has for selling the property?
- How much did the current owner pay for the property when they first purchased it?
- If you’re new to the city you’re purchasing a home in, are there any areas that you should avoid?
- How close is the property to important resources like grocery stores, hospitals, and jobs?
You might want to consider reaching out to a property management company in your area at this point in the investment process.
3. Trying to Do It All Alone
Most successful real estate investors have a team of professionals around them to help make sure that their rental property remains as profitable as possible, in addition to helping all the daily operations and problem-solving run smoothly. This is especially true for the buying process.
Many first-time investors try to navigate this process alone. They assume that they know exactly what they’re doing when it comes to purchasing a property on their own. However, we do not recommend this, especially if you find yourself purchasing a property in the middle of a down market.
When you are investing in real estate, it is absolutely crucial to use every resource that you have and to work on befriending more experts in the industry who can help you make the best decisions possible in your purchasing process.
At the very least, you should have a reputable real estate agent, a property manager, a professional property inspector, a reliable handyman, a licensed attorney, and an insurance representative that you can trust on your team to help you.
These industry experts can let you know what to watch out for when purchasing your new property, and they can help you avoid common issues in the buying process. And, once you’ve started renting out the property, having a trustworthy team of property managers and other professionals can be a huge advantage.
4. Forgetting about the Local Aspects of Real Estate
In order to make smart buying decisions for your new property, you will need to be as familiar as possible with the local real estate market of that property. This means knowing your local land values, property values, the current supply and demand levels, and more.
By developing a solid and reliable understanding of these parameters, you will be able to make a more informed decision regarding which property to commit to and which ones to pass on.
5. Not Taking Your Tenants’ Needs into Account
If you are planning on owning a rental property, you will need to be prepared to deal with tenants. This means that when you are in the purchasing phase, you will need to think about your target demographic of prospective tenants and what features they will look for in a rental home.
For example, if you’re planning to buy a single-family home that is ideal for families with children, you may want to make sure that you are purchasing in an area with low crime rates and good schools located nearby.
Alternately, students or young single people may be more drawn to homes that are close to public transit or restaurants. If you are planning on purchasing a property that will be used as a vacation rental, how close is the location to your area’s main tourist attractions?
Try to picture how your target demographic would feel about a property before committing to it. It will only help you in the long run!
6. Getting Unreliable Financing for Your Property
As you go on to purchase a property, you may be presented with a few options when it comes to your mortgage payments. These options mainly exist to allow people who may otherwise not get an opportunity to purchase a home.
Unfortunately, many property owners who opt for an adjustable-rate mortgage or an interest-only loan may eventually face unfortunate results when the interest rates start to rise.
Make sure that when you purchase your property, you either have the financial flexibility to prepare for increased mortgage payments when the rates go up, or you have a backup plan in place to convert to a fixed-rate mortgage down the road if needed. However, if you have a choice, we recommend opting for a fixed-rate mortgage.
7. Overpaying for Your Property
This issue can occur when the above mistakes are made by a new investor. Searching for the right property for you and your business is a time-consuming process that can be frustrating and confusing.
This means that sometimes when a buyer finds a house that fits their needs, they can be naturally eager to ensure that the seller accepts their offer, causing buyers to overbid on the property.
Overbidding on a property can cause other problems down the road. You could end up living beyond your financial means, finding yourself in an overwhelming amount of debt. With your payments ending up larger than you expected, it can take years to recover from a financial mistake like this.
In order to find out whether or not your ideal property is worth the cost, start by doing a general search for what other homes in the area with similar features have sold for in recent months. Working with a real estate broker is the best way to get this information.
8. Underestimating Costs
When you buy a property, you will be paying for much more than just the home itself. This is true of any property you could end up purchasing. When you buy a home, you will have to prepare for a long list of associated costs, including property taxes, insurance, repairs, appliances, and more.
Not to mention the various costs associated with renting the property out. Make sure that you take these costs into consideration and budget accordingly. This is another area where working with a property manager can be helpful – they’ll take care of organizing repairs, advertising the property, managing your tenants, and more. Although they’re another cost to consider, it’s worth it in the long run.
Bottom Line
If you’re purchasing an investment property for the first time, you may end up running into some problems along the way. The best way to avoid common mistakes is to work with a reliable team of real estate professionals and do your research.
If you are in the process of trying to find a new rental property, we hope that this list helps you navigate the market and avoid common pitfalls in the industry.
