Common Pitfalls To Avoid as a Real Estate Investor

Most people understand that the best way to create wealth is to invest in real estate. Over X% of millionaires in America invest in property to secure their wealth. However, the most common challenge when it comes to starting to invest in real estate is fear or lack of knowledge.

In this article, we will discuss common pitfalls that novice investors encounter and how to avoid them.

1. Not running the numbers

One of the challenges beginning investors face is how to properly evaluate the deal. In this article (LINK ARTICLE), we explain how to do a basic analysis. However, this analysis doesn’t stop once the property is acquired. It is imperative to routinely run the numbers on the deal and take into consideration unexpected costs, market fluctuations, variable comparables, and even shifting political or environmental climates until it is fully sold. In some cases, you may need to adapt your exit strategy to meet these conditions.

Read more about how our team used a different approach to sell a property when they realized their original strategy was not going to result in the profit they expected.

2. Not doing due diligence

For many new investors, their primary objective is getting a deal under their belt. In order to gain experience, they are willing to take on undue risk. Experienced investors are highly selective about which deals they move forward on, taking time to critically evaluate each component of the purchase. Depending on the deal, you may need to consider:

• Full inspection
• Title Report
• Termite and Pest Inspection
• Meth Test
• Insurance and Incident Reports
• Prior Rent Rolls
• Monthly and Annual Maintenance Reports
• Geology Survey
• EPA Testing

3. Not relying on professionals when appropriate

As a real estate investor, it is critical to build your team and surround yourself with reputable industry professionals, from contract to close. This may include:

• Real estate attorneys
• Realtors
• Contractors
• Title and Escrow Officer
• CPA and Bookkeepers
• Project Managers
• Architects
• Designers
• Surveyors
• Inspectors

 

These professionals act as additional level of risk management and can save you time, money, and resources to avoid issues or respond appropriately as issues arise.

Learn more about our experience and how we sold one property for $X more by changing how we utilized professionals.

4. Trying to do everything yourself

As a new investor, it may be tempting to cut costs by opting to do the lion’s share of the work yourself. This does not pertain only to the rehab or maintenance of the property, but all stages of the project, including the acquisition, marketing and sale of the property. As an investor, your time is best spent finding and putting together deals. When you spend time on tasks that can be delegated, you create the potential to lose profit through the opportunity cost of not focusing on real estate. Experienced investors leverage other people’s time and experience to achieve their end goal.

5. Not taking advantage of tax benefits

One of the greatest benefits of investing in real property is the ability to take deductions and depreciation. Many novice investors do not have a system for keeping track of their cash flow and expenses, and lose out on the opportunity to take advantage of the existing tax codes that can benefit homeowners and investors. You will need to maintain an itemized record of all the repairs, improvements, costs, and supplies necessary over the lifetime of the property. This can help offset any capital gains and tax liability you incur from owning the property and keep more money in your pocket.

6. Misunderstanding when and how to use credit

Though some financial gurus advise against borrowing, savvy investors realize that credit can be a helpful tool when used appropriately. Credit is best used to acquire income producing assets. In some cases, using personal or business credit or hard or private money may be the only way to get a deal done. In that situation, if the numbers work, it may be worthwhile to explore using those credit options instead of passing on the deal.

Learn more here about evaluating the cost of money in a real estate transaction.

In this article we have discussed many of the common challenges that new investors face. Although new investors may encounter unforeseen circumstances, it is possible to avoid undue risk by becoming aware of best practices and implementing strategic plans in advance. Experienced investors expand their capacity to respond and have a firm foundation in place.

For novice investors, the best way to mitigate any kind of obstacle is through proper education and support. It is much easier to achieve success when surrounded by like-minded individuals working towards similar goals who are willing to share their experience.