Top 5 Real Estate Investing Mistakes to Avoid

So what are the top 5 real estate investing mistakes to avoid?

Top 5 recommendations for your mortgagesAs a real estate investor for the last 20+ years, I have experienced what only can be described as the good, the bad and the ugly of the industry. From managing properties myself to working with professionals, I have discovered that the small details can make a huge difference to your real estate investing success.

When it comes to your rental property, you are looking to ensure that you make sure that you avoid the mistakes that so many real estate investors make.

This month’s newsletter will focus on what I think are the top 5 real estate investing mistakes I’ve seen over the years.

   due diligence checklist1.    Skimping on Research

Before a big purchase like a car, we take the time to compare different models, ask questions and try to determine whether what it makes sense to purchase a particular vehicle. The due diligence that goes into purchasing an investment should be even more rigorous.

Take the time to understand the economic fundamentals of the area and region, and ask some questions about the investment itself.

In terms of area research, some key areas of considerations include:

  • Economic Growth
    • Review government websites, economic or business development websites, Chamber of Commerce or Tourism websites for key stats
    • Determine new project, infrastructure and sector development through research on  government websites
  • Demographic Factors
    • Consider migration factors, average age of residents and what is the general population growth
  • Real estate prices and recent sales ( it is good to look at key market indicators such as days on market, pricing trends, Sales to listing ratios and sold prices compared to listing price)
    • Assess market demand on CMHC, Realtor.ca and local realtor sites
  • Rental rates and Vacancy rates in the city, the area and specifically the neighbourhood
    • Understand how the market was impacted during the economy shift and how it has impacted job growth

When considering the actual investment, you need to consider the following items:

  • Age of the building (what upgrades have been done and when)
  • Foundation and building envelope
  • Plumbing and Electrical systems
  • Fire system and water heaters

Finally, in terms of improving the investment, you will need to look at your cost to acquire and hold:

  • Property management fees and their scope of work, legal fees and mortgage broker costs
  • Renovation budget and schedule
  • Condominium budget and current tenants, vacancy rates and trends, as well as rental rates and trends in the building and comparable/competitive buildings

Knowing and understanding the structural, economic and political environment can prepare you to set realistic expectations around regular commitment.

scenario tests12.    Not running the numbers over multiple scenarios. (Stress testing your investment)

Before each property purchase, review your current income and expense scenario, especially for vacation and rental properties.

Determining the propensity for risk and your overall goal for real estate investing will help you determine how the new investment will fit into your portfolio.

As I mentioned in my last newsletter, interest rates are unlikely to remain this low.  Understanding the impact a change in interest rate will have on profitability is essential.  Work closely with a mortgage broker to balance your risk and understand the kinds of options you have with your mortgage.

Don’t put all of your eggs in one basket.  Spread your mortgage risk over different banking institutions. Like spreading your risk over different investments, having diversity in your lenders help reduce your risk and improve your options for renegotiation when your mortgage is due.

short term vs. long term3.    Looking at the Short Term vs. the Long Term

Too many real estate investors think that they will get rich quick. Unfortunately, the reality is that real estate investing requires time, focus, and patience. Instead of viewing real estate as a scheme to make money quickly, you need to think of real estate investing as a business — or at least as a long-term investment strategy.

The hay days of large appreciation in a short period of time have passed for now and we are back to slow and steady investing, so buying solely for appreciation carries a great deal of risk. One should be buying for cash flow and appreciation.

Build a plan for your real estate investing goals and treat your real estate investing efforts as a long-term effort. Real success comes from setting up your real estate portfolio and running it like a business with regular long term time and resource commitments. Without this focus, you run the risk of misunderstanding your risk and being unclear about portfolio performance.

Team4.    Not using the right team

Before you invest, you need to know your personal strengths and weaknesses. Having a team of experts can allow you play to your strengths and delegate your weaknesses. It is instrumental to your long term real estate success. Too many investors think they can do everything themselves. If you are looking to create a portfolio, it’s difficult to manage all of the details required to keep your property in great condition.

With so many choices, being an individual investor in a sea of information is difficult at the best of times.

By building a team that is focused on not only locating the right opportunities, but packaging and simplifying the real estate investing process, you are better able to evaluate and see the bigger picture. From financing to property management, your team will help you leverage one of your most valuable assets – your time.  Simply put, teamwork divides the task and doubles the success.

pay attention5.    Apathy…Not paying attention to your investment portfolio

Are you paying attention?

Like in any business, understanding the key performance success factors and targets means regular tracking and reviewing the right information. These metrics will help you monitor the performance of your properties. With real estate investing, the results that you generate reflect directly on your ability to organize and manage information regarding the particular opportunity and the after asset care once you invest.

The more organized you are, the better you fare with lenders and the tax department.  Keeping up to date accurate records demonstrates that you are treating your investment properties as a true.

If you own in multifamily properties get involved by participating on the board and voting on important issues as they arise. Having an ear to the ground means that you get an inside view on what is happening with your investment.

In real estate investing, your instincts, coupled with the knowledge of your team can lead to the greatest success. By having a plan and understanding your tolerance for risk, you can weigh up how the opportunity fits into your current real estate portfolio – and take the next step in building the right group of investments for you.

As the author Michael Burke once said, “Good instincts usually tell you what to do long before your head has figured it out.” Take time to remember your personal strengths.  Once you have the information together – then take action. This advice can help you avoid the top five mistakes real estate investors often make.

By Andrew Schulhof
26 Oct 2013