In the current atmosphere everyone is a real estate investor. A simple search on Instagram will land you with everyone from realtors to marketing gurus pretending they know how to invest in real estate. The truth is, the last ten years in real estate have been easy. Basically anything you bought increased in value and it was really hard to make a bad deal. Yet, here we are in 2020. Real estate investing is going to get a bit trickier and take it from me you want to have a true “expert” leading you in your journey. I wanted to share with you some common mistakes I see investors making when they first start out in real estate.
1. Ignoring the Numbers
The numbers are the MOST IMPORTANT part of any deal. So many times I hear of investors trusting their realtor or a friend who knows real estate. When you purchase any property it is a big investment and there is risk involved. That risk decreases significantly with the more education in real estate you have. Any deal you make you should personally crunch the numbers on to ensure it is cashflowing. I go over this step by step in my book “The ABC’s of Buying Rental Property.”
The truth is Many people miss the costs associated with real estate and are overly optimistic on their numbers. I’ve seen first-time investors run the numbers on a new deal and miss critical costs like Cap X or property taxes on their spreadsheets. You need to know all of the costs associated with a property and the actual rent you can collect from capturing other similar properties in your area.
2. Not Properly Screening Tenants
Having a tenant is having a business relationship with someone and is not just putting someone in a unit. I see first time landlord’s rush on this critical piece, but here are the standards you must check before moving someone in. I listed them below, but go in more detail on this here.
1 HEALTHY CREDIT HISTORY
2 CLEAN BACKGROUND CHECK
3 CLEAN EVICTION HISTORY
4 STABLE EMPLOYMENT HISTORY
5 SUFFICIENT INCOME
6 POSITIVE LANDLORD REFERENCE CHECKS
3. Repairs and Maintenance
No matter how nice the property is there will be maintenance issues that arise. Most new investors don’t calculate this. An experienced investor will know to put aside at least 2% of the value of the property every year to account for any of these potential costs. This can at times kill a deals profitability, but it has to be considered. Finding a good, affordable, and reliable handyman is someone you need to have on call in these situations to mitigate the cost.
4. Getting Too Attached
Do not let your heart rule on any of the decisions when it comes to buying or selling a property. If you let your emotions get involved you could end up making the wrong choice. I never get attached to any property I am looking at. I buy based on the numbers, it’s as simple as that.
I have seen this too when people already own a property and go to rent it. They are worried about the tenant staining the countertops, or scratching the wood floor. Once again, don’t be emotional. Get a nice sized security deposit to cover these incidents, because they will happen, and move on. Your rental properties are your business and you can’t get attached to them.
5. Not Knowing the Market
The worst deals are made when someone who isn’t a local comes in knowing nothing about the market and starts purchasing. I always advise small investors to stay in their local markets. You know that market better than anyone. You know what areas are good to be in and where you would run. If you are going to invest in a market you are not extremely familiar with then go there and get to know the area. Also, chat with people in the community to better understand the pros and cons of that area.
If you’re looking to get into real estate investing you should know it’s not easy. It’s going to be a whole lot of work and there are going to be a whole lot of things you need to watch out for.
Make sure you know the numbers and that you’re willing to walk away from the deal if it doesn’t work out for you based on those numbers. Rushing in could cost you a lot of money, but knowing what you’re doing could make you a lot of money.