10 Real Estate Investor Mistakes – How to Avoid Them
10 Real Estate Investor Mistakes – How to Avoid Them
There’s lots of information about all the attributes of real estate investing on the internet, but I believe every investor also benefits from understanding the most common real estate investor mistakes and how to avoid them. To help you, in this article, I’m going to share the ten of the most common mistakes that I have seen property investors make, as well as, some tips on how you can avoid or overcome these mistakes and succeed with your real estate investing:
1. Not having an overall plan:
I’ve previously spoken about the importance of developing your own real estate investment plan. If you are not clear about the how, why, when, where, and in what you are investing, then you will have a difficult time achieving consistent success and understanding what makes a good investment for you. You may wish to look at two of my previous posts 7 Profit Centres of Real Estate and 8 Habits of a Successful Real Estate Investor for reference. Your real estate investing plan should be an overarching plan that guides you and serves as a foundation for your investing.
Not having a plan typically results in:
- Not treating your investing as a business, that usually includes making emotional or personal decisions on what to purchase.
- Not knowing where you are going and therefore not investing in properties that will necessarily help you achieve your desired investment outcomes within the desired timeline.
- Not understanding the key differences between two popular strategies: 1. Fix and Flip versus 2. Long Term Hold – these are quite different investment strategies and if you don’t have an overall plan it’s difficult to know which strategy will work best for your investment portfolio.
How to avoid this mistake: Make a plan and follow it even if the fit is a bit rough to start. However, there are some key considerations for developing your plan such as: understanding why you’re investing; defining what are your desired outcome(s); knowing what is your investment timeline; recognizing what are the resources you can bring to your investment, and what resources you need to get from experts. What are you good at and not good at? What do you like to do and don’t like to do? Answering these questions will then enable you to develop your plan and determine the strategies that will work best to support it. It can be short to begin with and then be expanded as you gain knowledge and experience. It should be reviewed at least once a year, so that you can adjust it as required.
2. Lack of due diligence or research:
This includes, but is not limited to, not taking the time to research an investment property including the market it’s in; making sure you’ve thought things through and that a particular investment fits your real estate investment plan. Effective research considers a number of factors such as:
- Understanding the general market trends
- Where the market is currently in the real estate cycle?
- What are the market impactors and whether there are upcoming significant positive or negative changes?
- What is the condition of the property, neighbourhood?
An example of not completing due diligence is listening to others that have not actually invested in real estate and who may have:
- Unqualified opinions
- Dubious motivation such as:
- Personal financial gain from competitive investment opportunities
- Keeping you back so that they don’t feel so bad about themselves.
Another example of not doing due diligence is buying where everyone else is just because everyone else is buying there, rather than researching that property and/or market to see if it fits with your overall plan.
How to avoid this mistake: Real estate investing shouldn’t be impulsive or “off the cuff”; it’s important to take the time to do your due diligence and research all potential investment properties, and then make your final choices based on sound business decisions, rather than emotional responses to a particular property. An important component of researching a potential investment property is to understand the market it’s in, and what’s happening with that market. I touched on this topic in an earlier post called Bulletproof your Real Estate Portfolio.
It’s also wise to consult with, or listen to, trusted experienced real estate investors who know the market in which you’re interested. Sellers and some realtors within that market will provide you useful information. Be sure you understand the motivation of the person providing the advice and ask questions of them. Another part of doing your due diligence is to use your real estate investment team and listen to their advice and suggestions with respect to the investment property you’re considering.
3. Doing everything on your own:
It’s tempting to think that you can cover all the bases. We all have egos, and that can make us think that we can do everything or nearly everything. That may be true, but at what cost, not just the money, but also your time. What is the quality of the end product? Trying to do it all can actually cost you more money; it can take longer and look amateurish to the experienced eye. That, in turn, could have a negative effect on your overall investment return, whether it is a property’s selling value, or rental income profit, or both. Television shows about rescuing renovation or DIY projects are based on proving this point – that very few people can actually do everything on their own, and that we can all benefit from expert help and guidance. To summarize:
- Understand the value of your time – you can’t ever get it back
- Know your strengths and weaknesses
- Value expertise
How to avoid this mistake: No one can do it all and know it all. This is why I strongly recommend having an experienced real estate investment team including, but not limited to, at least one real estate agent, contractor, accountant, lawyer, mortgage broker and potentially a property manager. There are lots of resources available that cover the fundamentals of real estate investing, as well as, specific markets that might be of interest to you. Take the time to educate yourself whether that’s through online resources, courses, meet-ups with other investors, or meeting with your team. A couple of online and live investor communities that I recommend are REIN – Real Estate Investment Network Canada and REAG – Real Estate Action Group, which is located in Vancouver.
4. Buying strictly for appreciation:
It is tempting in markets such as Vancouver to buy for the sake of buying in an overheated market. The challenge is that unless you know the market dynamics and the sources that are driving the prices up, you are gambling and taking a big risk. At best, you are speculating, which is not investing. You have no control over the real estate markets in which you invest and markets can turn quickly. What if you’re wrong about the markets? You could end up holding a property that will actually cost you money to carry or even worse, you have a property you must sell at a loss, because you can’t afford to hold on to it for longer than a brief period. Real estate investing works best when it’s a longer-term investment; flipping properties is not really investing in properties.
How to avoid this mistake: Keep the big picture in mind, work your plan, and consult your real estate investment team. Be critical and consider whether or not each particular investment property is consistent with what you can afford and whether it is sustainable – especially within the resources you have when it comes to dealing with the unexpected.
Conversely, you might consider making a speculative investment if you have a solid sustainable real estate investment portfolio already in place. In this case, you could treat the investment as a one-off to start, and thereby protect your core, sustainable investment properties.
5. Not having a sustainability fund (enough funds to hold the property):
Trying to make deals happen can cause real estate investors to highly leverage themselves, which ultimately puts them at risk if something unexpected happens in the market, or goes wrong with the property. We all know that in life, not everything goes exactly as planned. Real estate investing is no different, but it can have financially disastrous impacts on our investment portfolio if it does go wrong.
Market conditions can change, delays will happen, timelines can run longer than expected, extra costs can creep into an investment particularly if you don’t have enough funds to complete a planned renovation or address an unexpected renovation.
How to avoid this mistake: Retain the funds that you need to support each investment, and be able to access them if needed. I recommend creating and maintaining a budget for each property with the capacity for 3 to 6 months of mortgage payments/carrying costs set aside, ideally before you make the investment. You have to be able to afford to invest and you have to anticipate that things will go wrong, so have a realistic plan A and a plan B so that you can weather the unexpected, and still have a successful investment. It’s not about how strong you start, but how strong you finish. Also track the performance of each of your properties, so that you know what is going on and you can spot trends early.
6. Looking at the properties versus looking at the numbers:
Too often beginner investors look at the property and buy it because they like it, rather than looking at the actual income expenses, renovation costs and potential returns. They get swayed by the look of a property or a neighbourhood because it’s in keeping with their personal taste, which sometime overrides the importance of the potential numbers associated with the investment property. Other pitfalls include:
- Making emotional decisions instead of affordable, achievable decisions
- Diving into too quickly because it’s perceived to be such a good deal, even though you haven’t run your numbers to determine if you can afford the investment property, and whether it’ll deliver a return on your investment
- Being held back by fear – This project is “too daunting” or “it’s outside my comfort zone”. This might seem counter intuitive, but once you have your plan in place, your financing in hand and you’ve done your research – it’s time to make the investment.
How to avoid this mistake: I’ll say it again, purchasing an investment property should ultimately be a business decision, not a personal, or emotional decision. The best way to avoid making the mistake of diving in too quickly is to take the time to research the potential investment property, the market it’s in and where that market is in the real estate cycle.
Check out the property itself (or have a member of your real estate investment team do so if you’re unable to or inexperienced enough), and conduct a full risk assessment of each investment opportunity to ensure you have the capacity to make the investment, and that it fits with your overall investment plan. I have posted about some of the Top Real Estate Calculations that successful investors regularly use. Successful real estate investors look for properties that meet their financial needs and suit their objectives. Before you look at properties, understand what you feel you can afford and what is financially feasible for you as an investor. It’s also important to be aware of what you’ve qualified for or been preapproved for by your investment lenders.
7. Thinking you will get rich quickly:
There are rarely any shortcuts and typically shorter term investments with potential higher returns come with higher associated risk. You may have a good return if your timing happens to be ideal in a particular deal, but that is a rare situation and not consistently repeatable. We hear stories where the investor counts on the outcome being different “this time”. Real estate is like everything else in life – it’s cyclical in nature. It can’t go up forever, otherwise everyone would be doing.
How to avoid this mistake: We all have different tolerances for risk and even a single investor will have different capacity for risk at different times. Be realistic about what real estate investing can accomplish for you, and consider it as a longer-term investment opportunity (five years plus). While you should be realizing a return on your investment in the first five years, typically that return will be the smallest for the property. This is due to the fact that during the initial years of a mortgage the interest portion of the mortgage payment is at its highest, and it takes time for the compounding effect of appreciation to be realized.
It is better to plan for the longer term and if it works out that there is a great profit in the short term, then fantastic, take the profit off the table or somehow take steps to benefit from it. That is a far better way to go than if you plan for the short term and get stuck in a longer term investment due to poor planning.
8. Bad financing:
Inadequate or incomplete financing can result when you don’t have your financial house in order or when you make a snap decision rather than taking the time to do the research and understand important things like the terms and conditions of a mortgage for an investment property. Investment financing is more than just finding the best rate, which is why working with a specialized investment mortgage broker with experience in finding and securing mortgages for real estate investors is invaluable.
How to avoid this mistake: Get organized before you make the investment – have your experienced real estate investment team in place, follow your real estate investing plan and look at the whole picture. Reviewing and understanding the terms and conditions of a mortgage in addition to the mortgage rate can be invaluable in making a better financing decision that will help grow your real estate portfolio. Working with a mortgage broker who understands your circumstances, as well as, the types of real estate investments you’re interested in is important for successful investing. I wrote couple of in-depth pieces about Getting the Best Financing and Essential Tips for Investor Financing you may wish to review.
9. Buying in your local market only:
Proximity to your investment doesn’t necessarily reduce risk, or provide the best investment opportunity. Living in a particular area doesn’t necessarily mean that you understand its market cycle, the competition within the market, and other such conditions. Buying in one market only also means that your real estate investment portfolio will lack diversification – you literally have all your real estate eggs in one basket.
How to avoid this mistake: Expand your horizons and look for investment opportunities beyond your local market that are experiencing the right type of conditions. This is especially relevant if you live in a volatile market like Vancouver or Toronto. Depending on your investing timeline, looking at other more sustainable markets should provide a more sustainable investment with lower risk. Consulting with your real estate investing communities or online government and market resources can provide you with suggestions as to other markets in which to invest. Once you’ve identified some potential markets, work with professionals experienced with those markets.
10. Getting the numbers wrong:
There are many ways an inexperienced real estate investor can do this. For example, you might underestimate the expenses involved in purchasing a property, maintaining it, and keeping it tenanted. Rental income could be overestimated if you don’t verify a property’s historical rental income and the market conditions and comparable rents for similar properties. Another common mistake is underestimating renovation costs and the time they will take; or over renovating for a particular property or market.
How to avoid this mistake: Ask questions about all the costs that could be involved. Be realistic. Work with your team and take the time to work through the numbers to ensure that each potential investment is affordable, and that it fits with your overall plan, and complements your existing real estate investment portfolio. While there aren’t any absolute guarantees, you can make wise, informed decisions and realize a healthy, sustainable return on investment. The key here is to know your numbers before you purchase and that means Understanding the Important Calculations.
By now you’ll be familiar with these recommendations: take the time to do your research/homework; connect with the right people (have a trusted experienced mentor/advisor); access the right resources (have a strong real estate investment team in place and use them); have a plan B (assume that things will go wrong and plan for that in advance); have the capacity to support your investment and ride out things when they don’t go according to plan. With this in mind, you’ll be able to avoid these 10 Real Estate Investing Mistakes and develop a reliable, sustainable real estate investment portfolio that will provide you with a long-term return on investment.
The post 10 Real Estate Investor Mistakes – How to Avoid Them appeared first on Andrew Schulhof.