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INVESTING 101 EDUCATION

5 Rookie Real Estate Investment Mistakes to Avoid

Real estate investment mistakes can cost more than money. They can also cost you a lifetime of enjoyable and lucrative real estate investment experiences. One bad experience can sour you on the entire investment concept. Don’t let that happen to you. Here are five common rookie real estate investment mistakes to avoid.

Being Underfunded

When planning for a real estate investment, many first time investors are underfunded. A lot of things can add up. Maybe the rehab is taking longer than expected. That’s extra money you weren’t counting on. Or materials got more expensive, or the overtime got out of control, or you discovered you have to add $10,000 to the budget for a new roof. Maybe you can’t rent it out for a long time because you can’t get an occupancy permit from the town. You just never know where the extra costs are going to come from.

Keep some cash reserves on hand to cover yourself for things like this. Even if you’re investing in a turnkey rental, you’ll still need cash to pay for repairs and/or replacements now and then. When buying a property, don’t spend all your cash on the down payment. If you have to finance a little more in order to have a better cushion on this first real estate investment, so be it. Your cash position will improve over time. It’s better to have cash in the bank to pay for the unexpected issues than to have to stop construction or incur high-interest credit card debt.

Trying To Go It Alone

There are a lot of moving parts to a real estate investment. Even if you did happen to have all the skills, experience and knowledge needed to manage every single little thing, who has the time for that? It’s a rookie mistake to try to go it alone. You’ll either run out of time, energy, money or all three.

The most successful real estate investors work with a team. Each team member has an area of expertise. Together, the team comprises the total package needed to cover all the needs of the investment. You don’t have to be wealthy to build your team. They don’t all need to be on your payroll. You simply build a team and pay for services as you need them. Your core team might consist of a general contractor, a property manager, a property inspector, and a bookkeeper, to start with.

Skipping the Market Research

A lot of first-time investors are overwhelmed with the amount of due diligence they’re supposed to do. Market research is often skipped or glossed over. If you’ve heard a lot of people saying good things about an area, you might feel that’s good enough. Or a real estate agent has told you the city is ripe for house flipping, so you go all in. It’s all well and good to listen to professionals, but that doesn’t mean you can skip your own market research.

You have to remember that when you hear opinions about a certain area, they may be making recommendations based on totally different criteria.  You have to buy based on your real estate investment goals and your criteria. Maybe someone is dismissing an area because single-family rentals aren’t cash flowing. But if your goal is to get into private money lending on commercial properties, that area might be ideal for your needs. Or a group of investors urges you to invest in a market with cheap properties. If your goal is to invest in A and B class homes, that’s not good advice for you. Always follow up on opinions and advice with your own research, keeping your personal real estate investment goals in mind.

Making Handshake Deals

There was a time when most people were as good as their word. Not today. We don’t live in the Wild West anymore. Handshake deals are a bad idea in any kind of business endeavor. There are a lot of good people working in real estate, and many people you talk to will seem so open and honest that it feels like a contract is an overkill. It isn’t.

Always use contracts and formal paperwork in your real estate dealings. If a contractor says he’ll come back in a week to take care of the finish work, get it in writing. If the electrician turns up with the fixtures he picked up from Home Depot, get a copy of the receipt. You’re protecting your reputation, your finances, and the other person by getting everything in writing. If you really want to be a success in real estate investing, this is a necessity.

Foregoing A Property Inspection

It’s your first real estate investment and you think you’ve found the perfect property. The heat is on; the seller claims to have a lot of interest in the property. The place looks pretty good, so you decide to forego the property inspection. You don’t want to insult the seller, plus you want to get a step ahead of the other buyers. This is a common scenario that happens with rookie real estate investors.

First off, don’t worry about insulting the seller. This is a business transaction, and inspections are a part of the process. The seller will respect you more when you get a professional inspection. Second, a lot of issues take place behind walls and under flooring. Mold, termite damage, wood rot, foundation issues, and other things often can’t be found without digging beneath the surface. Without a professional inspection, you can’t set a realistic budget for the rehab. Then when something serious is discovered, your entire real estate investment could be lost.

The longer you invest in real estate the fewer mistakes you’ll make. You may never get to a point where no mistakes are made. It’s the nature of the industry. But at least you won’t have to worry about making these five rookie mistakes. To learn more about private money lending and other real estate investment opportunities, please contact American Real Estate Investments today.