It takes planning and groundwork to be successful investing in real estate. Whether your goal is to generate passive income through real estate investments or to participate in a potentially lucrative development project, there are a few common mistakes you can avoid while learning how to invest in real estate.
Real Estate Investing Mistakes
1. Lack of effective planning and research
There's more to successful real estate investing than having money and an idea. Understanding the current real estate market, choosing a property that can meet your potential renters' needs, and navigating the process of getting a mortgage on the property requires a great deal of research and planning.
You may have a lump sum as a result of your decision to start investing early, and you may be ready to get started making money with real estate as soon as possible. Don't rush into purchasing your first property, though. Take time to build your knowledge base and connect with experts who can support you as you work toward becoming a successful investor.
2. Not having a solid exit strategy
Buying properties can be exciting for real estate investors. It's crucial to know exactly how you'll make a profit, though. If something goes wrong, having an exit strategy in place could save you time and money. If you can't figure out how you could potentially extract yourself from an investment property without losing money, it may be wise to forgo the purchase.
3. Overlooking tenants needs for rental properties
If you plan to purchase residential or commercial property and make money as a landlord, it's crucial to keep potential tenants in mind while shopping for your property. Match your property attributes to the type of renters you'd like to attract.
- Young families may prefer homes in low crime areas near highly rated schools.
- Young professionals may prefer a more urban setting close to public transportation, good restaurants, and nightlife.
- Potential short-term renters looking for vacation rentals prefer locations close to area attractions.
4. Not identifying goals before searching for potential a rental property
Before you go shopping for an investment property, answer some questions to help clarify your objectives:
- Do you want to manage the property on your own or hire a property manager?
- How long would you like to keep the property?
- What's your budget (including renovations, repairs, and upgrades)?
- What are your goals for return on investment?
- What are your two-year goals for the property?
When you understand your goals, you can effectively identify deal-breakers and stay focused on finding a property that will help you reach your objectives.
5. Treating real estate investing like a hobby
Beginners may see their real estate investments as a side project or hobby. However, unless you see it as a business, the chances that you'll make money as a real estate investor are slim. Understand your potential returns, identify your goals, and keep accurate books so you can take advantage of potential tax breaks. Real estate can be time-consuming, and beginners may not understand how much of a commitment is required to be successful. There's also a steep learning curve for people who don't have experience buying and managing real estate, which makes success more difficult to achieve at first.
6. Getting the wrong financing
After the real estate bubble burst in 2007, new regulations made it more difficult to get certain types of mortgages. Even so, there are still several special mortgage options that allow buyers to access properties that they may not be able to otherwise afford with a traditional mortgage loan.
Before participating in a non-traditional financing option, make sure that you have the ability to make higher payments. It's wise to also have a plan to convert the loan to a fixed-rate mortgage as soon as possible.
If you pay cash for an investment property or start out with a traditional mortgage with a fixed interest rate, you don't have to worry about your interest rates rising.
7. Failing to negotiate
Investors who pay too much for a property often do so because they've finally found a property that meets their needs, and they don't want to lose the opportunity and start searching again. When you are ready to get started with a real estate investment, it can be difficult to remain patient and wait for the right deal to materialize. When you overpay for a property, it can cause a chain reaction of problems that often result in a much smaller return on your investment that may lead to losing money.
8. Ignoring opportunities close to your primary residence
When you buy a property close to home, you can take a hands-on approach to managing the property. If there's an issue that requires your attention, living near your investment property makes your in-person visit much easier (and less expensive) than if you purchase property far from home.
9. Underestimating additional costs
Investment experts recommend that property owners set aside a minimum of 2% of the property's value each year to cover potential ongoing maintenance costs. Surprise expenses are common in both residential and commercial real estate investing. First-time investors may be surprised when unexpected expenses eat into their deal's profitability. Whether you want to flip a house or invest in a long-term rental, it's crucial to do your due diligence where potential ongoing maintenance costs are concerned.
10. Failing to build a team of trusted experts
It's impossible for a new real estate investor to know as much about the potential pitfalls of the business as a tax strategist, real estate attorney, and mentor with a track record of successful real estate investments. You'll need more than the power of Google to manage powerful assets like real estate. Build your team and consult with them before, during, and after every transaction.
Avoid Real Estate Investing Mistakes by Investing with Gatsby Investment
Real estate investing can be lucrative, but it isn't easy, especially in the beginning. While some people get into the market quickly and experience excellent returns on their investment, others struggle for years before they have success.
Educating yourself about the potential pitfalls of real estate investing is a great way to avoid some of the most common problems faced by new investors. One way to get access to the expertise of experienced investors is to participate in real estate syndication, which allows multiple investors to participate in a real estate deal together. Since investors pool their money with syndication, they can access substantial real estate deals.
When you invest through Gatsby Investment, you can own real estate for as little as $10,000. With a proven track record of returns and full control over which deals you participate in, this real estate syndication structure provides exposure to the real estate sector while helping you avoid common mistakes that could reduce your returns.