Twelve Deadly Mistakes Even Experienced Investors Make…and how to avoid them

Twelve Deadly Mistakes Even Experienced Investors Make…and How to Avoid Them .

The real estate investment business is tough no matter how much experience or practice you have under your belt. There are tons of gurus wanting to sell you coaching, courses and systems to you. Education is of an essence but to be honest there really is no simple formula that will guarantee a real estate investor will make a fortune, but there are some deadly mistakes that can be avoided that will knock an investor out of the game altogether.

These mistakes are made by even the most senior investors who have had years of experience and practice in the tough game of real estate. The unfortunate part is that many of these mistakes keep investors from really getting starting in the business of real estate or make them walk away before they even get started. Simply by being aware of twelve mistakes past investors have made can make the difference between staying in the ball game and walking away empty handed.

Mistake #1: “Gotta get my first deal” syndrome

This syndrome is especially true of new real estate investors who first get out into the world of real estate and see all the different options that are available. They just want to get their feet wet in the real estate business so they will take just about anything to get into a deal, which often times means that they are getting a bad deal. Instead of waiting for a good deal to come along, new real estate investors will instead take a bad deal just to say they have gotten their first deal as an investor.

It is absolutely essential not to make this mistake upon first entering the real estate investment business, simply because this could be a deal breaker. One bad deal could force a new potential investor to decide that the real estate business is not for them and they will end up getting out if they lose money because of a bad first deal. This is also crucial because most people who are trying to invest in real estate cannot afford to lose on their first deal.

Mistake #2: Trying to retail a rental

Another major mistake investors make is to get an idea in mind that they are just interested in buying and selling as soon as they fix up a property. Although this is a great idea in theory, an investor needs to first make sure that the house is salable.

There are so many neighborhoods out there that are perfect rental neighborhoods, and there are neighborhoods out there that are perfect retail neighborhoods, and there are neighborhoods that are good lease or purchase neighborhoods where there is a good mix of rental and retail. It is essential to make sure the property an investor is considering has the right future set up for the house.

Mistake #3: No reserves for retails or rentals

Unless you are an investor who is lucky enough to have a rehab lender, it is essentially to have reserves available for resale or rental properties that you have purchased. This is true whenever you are buying a property, whether you are going to buy it, fix it up and sell it or buy it, fix it up, refinance and rent it.

Even if an investor is going to rent the property, they should keep a little bit of money in the bank or have money in an escrow or construction account, just in case. This is extra money that should remain in an account even after a rehab on the house is done because invariably this property is going to go vacant at some point. Whether it is three, six, twelve, or eighteen months down the road and when the time comes the investor will need to almost always redo the carpet and paint in the house. There may also come a time when further repairs are needed on the home and without these reserves the money is coming out of the rent check or the investor’s pocket and no profit is being made off of the property.

Mistake #4: Underestimating repairs

Without a doubt one of the biggest mistakes that real estate investors make is simply underestimating repair costs on rental and retail properties. Keep in mind that when first viewing and inspecting the home you cannot see everything, so you have to assume that whatever you are estimating you need to go with worse case numbers. Even the smartest, savviest investors will say that they have rarely, if ever, seen a real estate deal come in under budget. With this in mind, it is best to go with the worst-case scenario by adding at least a few thousand dollars to the budget estimate, making sure you have that extra cash flow in the bank if necessary.

Mistake #5: Not doing your own due diligence

One of the most important things you can do as an investor is to shop around when it comes to repairs and inspections. Be sure to get several different prices and estimates if you are having a contractor do repairs on a purchased property. Don’t rely on the estimates of a mortgage company’s inspector or a real estate agency’s contractor, go out and get your own estimates. Even if you feel pressed for time to close a deal or make a sale, not shopping around could cost valuable money in the long run.

As well, it is important to always do your own homework when it comes to a deal. No matter who you are talking to about that deal, do your own due diligence and homework and get people who are not associated with that deal to give you advice on the deal. This also means finding someone to determine what the investor can afford to buy or rent a property for and don’t rely on what realtors say.

Mistake # 6: Treating real estate as a passive investment

Investing in real estate passively is simply loaning somebody money, as long as you can you trust them and not worrying about collecting payments, repairs on a house or any of the details. Even for those investors who are just making payments, you are still actively involved because it is essential to know the place of your real estate security and the position of your equity before making a real estate deal. Although finding someone experienced that will do the hunting down of real estate properties, getting the deals, making sure that the rehabs are taken care of and then splitting the profit with them is a great way to do business, an investor still needs to be actively involved by making sure the person you are working with knows what they are doing and is trustworthy. That person’s position is very important in what they do and they can truly make or break an investor’s real estate deal. Even for those who are a silent partner, you will want to know where your money is going as far as properties, closing costs and fixing up a house, so there really is not passive investing without potentially being left out in the cold.

Mistake #7: Trying to go solo

There is definitely safety in numbers. By networking and going to your local Real Estate Association group meetings and getting involved and learning who the players are, you can be successful. As an investor, you have to associate with successful people. For investors who are interested in really being successful in the real estate industry, hang around people that are successful and people that are buying a bunch of deals and know what they are doing and either have a lot of rentals or buying and selling a lot and know how the game is played and that are doing not only a lot business, but good clean business.

Mistake # 8: Not verifying information given

Be sure to always check any information given to you by someone who is interested in selling you a home. Do your own legwork. Although it is all right to trust what others say in the real estate market to an extent, when it comes time to make a deal, you don’t want to be left out in the cold. So, even if a seller is offering their appraiser to do the appraisal on a home, tell them that is fine but that you would also like your appraiser to view the home. If someone suggests that homes in the area rent out for $500.00 a month, assume that they might be close to the ballpark figures, but check the rental values in the neighborhood yourself.

Not verifying information that is given to you by others is simply setting yourself up to fail in the real estate business. Remember that others are trying to make money as well and that not everyone is completely honest in the real estate game. This means simply trusting your own instincts and rechecking everything before you close on a deal.

Mistake #9: Overestimating rent

Overestimating rent can definitely be a major problem for real estate investors who assume they will be making a certain percentage of the mortgage every month. The difficult part about overestimating rent is that many investors will examine homes in the area for rent and assume that their house will make the same amount. While this may be true for the time being, the value of rental properties may change, and a home that used to get $700.00 a month might not get that any longer.

Mistake #10: Relying on bad appraisals

Appraising is definitely an opinion, but it is an extremely educated opinion and in order to know whether or not that appraisal is a good one, an investor needs to be an educated consumer in knowing what it is that a lender is looking for. There are some key things that any investor really needs to be aware of when it comes to appraisals. The first is how many days a property has been on the market and what the average days that similar houses in the neighborhood stay on the market.

Without a doubt, it is essential to really go over an appraisal with a fine toothcomb once it is received from an appraiser before it is sent to the mortgage lender. Make sure that it explains anything that is unusual. It is really important to just make sure that there is no question in the mortgage lender’s mind. They are going to take this appraisal and run through it, looking at all the other properties that could have been used as comparables and were not and questioning why they were not used. With this in mind, when talking to appraiser that is getting ready to do an appraisal on a property, explain to them that if there are other similar properties in the neighborhood they need to be used, or an explanation of why they aren’t used should be given to get rid of any potential red flags.

Mistake #11: Quitting your job too soon

Quitting your job too soon is a common theme among new real estate investors. Since they have been successful at the business of real estate for six months to a year, they have the idea it is okay to quit their regular job and go at investing full-time. This can be a deadly mistake in the world of real estate.

One of the major problems with quitting another form of employment is that it is awfully hard to prove that you can pay a loan back. If you quit your job to go into investing full time and you have not been investing for at least two years, an investor cannot get a CPA letter saying they have indeed been self-employed for two years. Any loans an investor could get would be classified as no income no asset and the loan to values ratio would be a lot lower while interest rates are a lot higher, meaning good deals would be out because financing would kill the deal.

Mistake # 12: “Don’t let the analysis of paralysis bug bite you

As funny as this term sounds, it is true of many potential real estate investors and is the exact opposite of mistake #1. Instead of jumping on a deal, a new investor will sit and analyze deals to death before actually jumping in and getting their feet wet. Of course new real estate investing is nerve racking, especially because your own money is involved. But if you do your homework, you go over the twelve deadly mistakes of investors, get other people’s advice, do your own due diligence, overestimate your repairs, underestimate your value and underestimate your rent, you are going to be okay to just jump in.

Thank you for taking the time to read my “Twelve Deadly Mistakes” report.

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