by Anthony Seruga and Yolly Bishop
In the complex world of real estate investing, you can do very well indeed. You can also lose a lot of money if you make just one catastrophic mistake. This applies to everyone, both the experienced investor and the newbie alike. Below are some of the most commonly made errors by new and seasoned real estate investors. Read them, and swear to yourself that you will never do this.
1. You consider only quick turn investing. Real estate is not designed for quick turnaround investing. I don’t care how much money your cousin made in just a year or two by flipping houses. The days of rapid appreciation are over with, except in a very few markets. And even where appreciation is still continuing at a fast pace, there is a ceiling to it, a point at which people will no longer be able to afford those properties – and at that point, the market will plummet.
Instead of flipping houses, look at real estate investing as a long-term stable investment that can bring you a healthier income than most dividend-paying stocks. Don’t expect to flip and flip and flip, but rather to hold on to a property for a period of years, using rents to purchase your next property. In a few years, you could hold an empire.
2. You do not take the time to educate yourself. Your success in real estate is directly proportional to your understanding of the market and of properties. What do you know about real estate investing techniques, acquiring properties, financing and leveraging properties, negotiating deals, your local market, or simply home assessment? The more you know about how to locate and manage your properties, the more money you are likely to make.
3. You do not plan enough reserve money. Here’s a scenario: you line up a property and a renter at the same time – perfect! Your property costs you most of your nest egg in down payment, leaving you with a reserve of about $3000. You also pay a mortgage on the property of about $1200 a month. Your tenant is going to pay you $1400 a month, leaving you a $200 profit after you pay the mortgage. It’s perfect, right?
But what if your tenant moves out? Say his business fails, and he must leave. Suddenly, you are out $1400 a month. In just over 2 months, your entire reserves are depleted. If you don’t yet have a tenant, you may have to pay for repairs and renovations out of pocket in order to rent the place. Suddenly, that low reserve you had makes an impact on your real estate cash flow.
Moral: Always leave enough in your reserves to pay your mortgage for six months, and hold the deposit of your tenant in escrow.
4. You do not treat real estate investing as a career. Real estate is a career, not a get-rich-quick scheme. You need to learn the business, understand how things work, and figure out how to outbid the next investor without cutting out your profits. Take your time and learn how things work. 90% of your competition will drop out in the first few months. Give yourself a year at least to master the real estate investing game.
5. You do not plan out your real estate strategy. Plan out your real estate strategy. Real estate is not a whimsical business; it is a hardheaded investing business, and if you don’t plan ahead, you will lose out. Before you purchase any property, know what you’re going to do with it. Even if it’s a perfect Tudor and you know that with some TLC it will be perfect for other prospective homeowners, you need to plan out how you’re going to do it. Otherwise you could be stuck paying the mortgage on that Tudor with no buyer in sight.
6. You try to do it all yourself. Don’t try to do it all yourself. The home inspector is a critical part of your real estate investing business, as are the financiers, the contractors, the closing attorney, the appraiser, and the realtor. You can’t know everything you need to know, so don’t try. Instead, develop a very good relationship with at least one professional from each class you’ll need to work with. This will keep you from making stupid and avoidable mistakes.
7. You pay too much for a property. Don’t pay too much for a property. Have a realistic assessment of what you’re likely to sell real estate for, and pay no more than 75% of that price, less if you think there will be some rehab to do on the house.
8. You do not keep a steady flow of projects going. Once you have one transaction lined up, start on the next. You don’t want a business that moves in jerks; instead, you want one that runs smoothly, with all stages of your real estate planning running at the same time but with different properties. Keep a steady flow of new investing projects coming down the pipeline.
9. You only have one exit strategy. Always have multiple plans for what you’re going to do with a property. Your renter may back out right after you purchase his building. Or you may find that the rental market has dried up once you have the property ready to go on the market. Or perhaps you’ve fixed a property up, but now there are no buyers. Make sure you have at least two, preferably more, backup plans. Real estate is too expensive to sit idle.
10. You quit your day job too soon. Do NOT quit your day job when starting out. Real estate investing is a lucrative career, but it also takes time to get one started. Your day job pays for your bread and butter.
11. You let a property drain your resources. Never hold a property too long. If you don’t have an immediate seller, look at renting instead. If you bought a home that’s in bad shape, get it renovated immediately. If you don’t have the cash for the renovation, don’t buy the house. Empty property you’re holding is only a drain on your resources.
12. You do not prepare for expenses. Inspections, appraisals, attorney fees, loan closing costs, mortgage payment, maintenance, repairs – all these things need to be paid for out of your real estate investing budget, and some of them will happen every month. Never go into a real estate deal without a generous nest egg.
Learn from the common mistakes of others who have gone before you so that you will be successful in the world of real estate investing.
About the Author
Tony Seruga, Yolanda Seruga and Yolanda Bishop of Maverick Real Estate Investments, Inc. work with builders, developers and other players in the commercial real estate industry to acquire and develop properties. They use progressive investment strategies that have proved extremely profitable. In addition to their own deals, they teach both seasoned and inexperienced investors how to be big players in the game. Visit the website for more info.s
