The Real Estate Investment Learning Curve: Ten Beginners’ Mistakes
|Real estate is the investor’s favorite new commodity, one that many see as a gold mine waiting to be prospected. Investors everywhere are grabbing cute little cottages, throwing on a fresh coat of paint, and waiting for the cash to come rolling in. It's a popular notion, and thanks to the infomercials popping up all over television, a popular bandwagon for novice investors to jump on. The National Association of Realtors reports that nearly a fourth of the houses sold in 2004 went to investors. Are you convinced that the road to riches is paved with properties? Keep these common beginners’ mistakes in mind, lest your gold mine turn out to produce only fool’s gold.
1. Getting emotionally invested. In order to be successful in real estate, says Robert J. Hill, a Nashville-based investor and author of What No One Ever Tells You About Investing in Real Estate, you can’t think like a homeowner. Get excited about the deal, but don’t get emotional about the house!
|2. Failing to do the homework. Your work as an investor should include much, much more than just an inspection of the property, although inspection is essential. You also need to conduct a thorough investigation of your area's current rental market. What are the vacancy rates and average rents for units similar to yours? What is the average age of the rental housing “stock”? How is the neighborhood zoned? What are the government regulations about rental properties? Has City Hall approved new rental complexes nearby? Investigating and answering questions like these will ensure that you are equipped with the necessary information to be a conscientious investor.
3. Not leaving ample room for improvements. As a rule, triple your budget and double your time when preparing a rental unit for lease. Allow for an extra cushion in your expenses and your calendar.
4. Believing everything you see on TV. The low rates advertised on television and radio spots are generally for owner-occupied homes. Lenders consider an investment property to be riskier, so you should expect to pay more in points and interest rates. Expect roughly 1.5 points or half a percent extra. The lending criteria also will be higher. While a flawless credit report isn’t necessary, bad or no credit won’t get you the loan, and you’ll be extremely unlikely to get low- or zero-down-payment offers at any credit score.
5. Lowering standards for tenants. The prospect of a tenant with cash in hand who wants to move in now can be tempting to a new landlord. Hill strongly advises against these quick deals. Require an application, a credit check, and employment and rental history before you take a cent from a prospective renter. Getting burned by a bad tenant is much more costly than having a unit sit vacant for a couple of months.
6. Having double standards. Adhering to your rental policies should not be optional. If you start waiving, ignoring, or even finding little loopholes in your own policies, you’re headed for trouble. For example, if you have a “no pets” policy, stick to it, and don't ever let someone move in without a security deposit or allow late fees to accrue.
7. Investing from afar. Long-distance relationships will put a strain on your pocketbook. Unless your rental property is in a location that you visit often enough to manage it and make repairs easily, keep your rental properties close to home.
8. Getting a bad deal. Real estate investing is not for the timid; don’t be ashamed to make a low offer. You’re trying to make money, remember? Rental property owners generally base rents on a multiple of 100; if you pay $100,000 for a unit, you need to collect at least $1,000 a month in rent to pay the bills and make a decent profit. A well-prepared investor will have done enough research to know what his rental market will bear.
9. Not keeping up with the Jones’s. Why does the property across the street from yours rent the same day someone moves out while yours sits vacant for months? A prudent investor will know how he compares to the competition, and be able to say whether his competitors have lower renter standards, lower rent, or better amenities.
10. Not covering your assets. Responsibly insuring a rental property means more than a policy covering acts of God. Look into, and obtain, coverage for liability in the event that you are targeted with a lawsuit. If a loose railing results in a tenant's child falling off of a balcony, or there is a burglary that a tenant blames on the lack of security alarms, you’ll be glad for the extra coverage.I would sincerely like to help you with all your real estate needs. My extensive knowledge of real estate investing, 1031 exchanges, quality of home construction can save you thousands of dollars when buying a home and dozens of hours looking for the wrong home. Please do not hesitate to give me a call.