5 Mistakes New Investors Make
I’m going to let you in on a secret. If you’ve gotten into real estate investing over the past ten years, you’ve had it easy. That’s because for the last decade, pretty much everything has increased in value. During this time, the real estate industry has seen an influx of newer investors, and the overwhelming majority of them have made healthy returns on their investments, regardless of their prior experience. The market has been so strong this whole time that it’s been able to compensate for investors’ inexperience and even, in some cases, incompetence. So if you’re new to real estate investing, even if you’ve been successful at it, much of your knowledge has been untested.
Right now, the market is no longer on cruise control. We can’t keep expecting an easy upward trajectory, or that once we close on our property that we’ll be able to rent it out right away. Real estate can offer a lucrative passive income, but in order to get to that point, you’ll need to do some footwork at the outset, and you’ll definitely want to avoid these common mistakes.
Ignoring the Numbers
Thou shalt not ignore the numbers. Never, ever, nada, no way. The numbers are the most important part of any deal. When you purchase a property, there is always risk involved, but that risk decreases significantly the more thoroughly you understand the numbers on your potential investment. While listening to experienced professionals is important, in some cases newer investors will place too much trust in a self-professed expert. If these “experts” tell you to overlook the numbers, or they have their own projections that are based on wishful thinking, they aren’t experts (and from now on you should let their calls go to your voicemail). For any deal you make, you should personally crunch the numbers to ensure that it is cashflowing. (If you don’t know how to do this, I go over it in my book “The ABC’s of Buying Rental Property.”)
The truth is, many people run their numbers incorrectly. They’ll omit certain costs or become wildly optimistic about what they can have tenants (or the next owner) pay. I’ve known first-time investors who ran the numbers on a new deal but neglected to factor in critical expenses like property taxes. You need to know all of the costs associated with a property and determine a rent that you can actually collect based on similar properties in your area.
Not Properly Screening Tenants
Tenants aren’t just one-time customers. You are in a long-term business relationship with each of your tenants. I see first time landlords rush on this critical piece, or overlook some red flags because “they seem nice,” but here are the standard items you must check before moving someone in:
- Healthy credit history
- Clean background check
- Clean eviction history
- Stable employment history
- Sufficient income
- Positive landlord references
These are just some bullet points, but for more information on screening tenants, click here.
Repairs and Maintenance
No matter how nice, new, or updated the property is, there will always be maintenance issues. Most new investors don’t calculate this, but an experienced investor will know to put aside at least two percent of the value of the property every year to account for any of these potential costs. Sometimes, this can kill a deal’s profitability, but it has to be considered. In fact, that’s when it’s a crucial consideration. Once you’re up and running, having a good, affordable, and reliable handyman on call will be indispensable. This will save you headaches and money.
Getting Too Attached
New investors can fall into the trap of falling in love with their property. Do not let your heart rule any of your decisions when it comes to buying a property. Sometimes on the surface, something feels “meant to be,” but if the numbers don’t work, it is meant to be, just for someone else. Falling in love with a property is an exciting feeling, but it can cloud your vision. I never get attached to any property I am looking at. I base my decisions strictly on the numbers, and it’s never led me astray.
For newer investors especially, I have seen this attachment come to the surface when it’s time to rent the property. They may worry about a tenant staining the countertops, or scratching the wood floor. Once again, don’t be emotional. Get a big enough security deposit to cover wear and tear, because that will happen, and move on. Your rental properties are your business and you don’t need the extra anxiety of finding tenants who will always use a coaster.
Not Knowing the Market
Some of the worst deals are made when someone who isn’t a local comes in knowing nothing about the market and starts purchasing. They may have heard that a certain area is blowing up and want in, but I always advise small investors to stay in their local markets. That’s the market you know best. You know what areas are good, and you aren’t dependent on someone else’s word for it. If you still decide to invest in a market you are not extremely familiar with, then you’ve got some homework to do. Go there in person and get to know the area. Talk with people in the community to better understand the pros and cons of that area.
If you’re new to real estate investing, you should know that it’s not easy money. There’s a lot of work involved and there are going to be a lot of things you need to watch out for. Always make sure you know your numbers and that you’re willing to walk away from a deal if it doesn’t make financial sense. Rushing in can cost you a lot of money, but putting in the work now and avoiding these mistakes can create a revenue stream for years to come.