How To Avoid The Most Common Real Estate Investing Mistakes
By Paul Esajian on November 2, 2018
If you invest in real estate long enough eventually you will do something you regret. This could be something minor like choosing the wrong paint color or something much larger like overestimating the after repair value. Whatever the mistake is the goal should be to learn from it, so you never make it again.
Perhaps the most common mistake made is thinking that you will never make one. Regardless if you are looking for your first deal or are a seasoned vet you are going to stub your toe at some point in your business. Instead of thinking you know everything or are above error just because you have closed a few deals you need to constantly be aware of what is in front of you. Here are five valuable tips to help avoid business crushing mistakes.
- Know your numbers. It cannot be stressed just how important numbers are to your business. They are the backbone of everything we do from property evaluation to structuring a marketing budget. As important as they are too many investors skim the numbers and aren’t sure exactly what they mean. You don’t need to be a finance major to invest in real estate, but you had better know the numbers like the back of your hand. In addition to knowing the numbers on an individual deal, you need to understand the formulas for how you got them. Anybody can bend and twist numbers to make a deal or a property look more appealing. If you know the formulas you can work backwards to help understand exactly what you are walking into. It is when you make numbers assumptions or use fuzzy math that you find yourself in trouble.
- Learn to walk away. There is plenty of competition in the world of real estate. Some of the best investors are the competitive type that are used to winning. That being said, you need to understand that not everything is worth competing over. You may love a property and have watched it for weeks, but it doesn’t mean you should fall head over heels for it. Like anything else in business, there is a point where the price doesn’t justify the expense. Instead of getting caught up in a bidding war you need to know when to walk away. In every negotiation you should have a number in mind where if exceeded you swallow your pride and move on to the next one. Of course, this is easier said than done, but is essential if you want to succeed. As much as you may love a property, there are always other fish in the sea. By overpaying for a property you immediately start behind the eight ball. Everything you do will be done to make up for overpaying for the property. Sometimes this can work out but too often it does not. It is ok to walk away from a deal and wait for the next one.
- Keep reserves. Every real estate investor should have a rainy day fund. It seems to rain much in real estate than most other professions. Regardless of what niche of the business you are in you never know what is on the horizon. If you own rental property you need to be ready for the unexpected furnace malfunction or a tenant who suddenly decides to stop paying. If you are a rehabber you never know when you will need to shift gears in the middle of a project to deal with a foundation issue, zoning problem or water leak. Even in running your business daily you never know when you will need to increase your marketing budget or spend money on your website. There are literally dozens of examples of facing the unexpected and having reserves best helps you deal with them. You don’t need to spend every dollar you receive from a closing. It is ok to put some of that money away for a rainy day.
- Do independent research. On every deal you are part of it is up to you to do your homework. As much as you may like your real estate agent or wholesaler it is your job to know everything about the property. There are plenty of times when the data they provide is not entirely correct or accurate. They may be using old information and simply passing that along to you. When you close if something is different than you thought it is on you, not your real estate agent. Spend a little time going to town hall and pulling the field card or looking at previous property listings. A property is too big of an investment not to talk your time and know exactly what you are buying.
- Accept struggle. One of the negative byproducts of all the investing shows on TV is the unrealistic view some new investors have. They see their favorite TV star making offers in cash and having ample reserves to fix whatever mistakes they make on a rehab. What they don’t see or may not know are the years it took to get to that point. Almost every new investor will struggle somewhere along the way. They are forced to stretch their proceeds from closing for weeks, even months, between deals. It is this struggle that helps mold and shape their business and springboard it to greater heights.
If you can learn from the mistakes of others you will be ahead of the game. There is no getting around the fact that you will make mistakes. The only question is how you make them and whether you make them again.