How to Avoid the Common Traps of Real Estate Investing
The strive for perfection is common among real estate investors, who risk losing massive amounts of capital should they misjudge the market.
But there’s a benefit to falling on your face, and that’s learning from those mistakes to do even better going forward. However, nowhere in the rulebook does it say you have to make all the errors yourself.
With decades of history to draw from, aspiring new investors can learn from the flaws in other people’s investment strategies. So, if you’re thinking of giving the investment world a whirl, then consider these strategies to avoid the most common pitfalls of real estate.
Embrace the Numbers
Real estate is a game of numbers. Mortgages, closing costs, fees, profits, it’s all a bunch of numbers. And the ultimate goal is to make sure the right numbers are high and the right numbers are low.
One of the most common mistakes investors make is not properly comparing the numbers. They buy a house at too high a cost and suddenly their ROI is no longer worth it and they’re now entangled in a property that’s losing them money.
It doesn’t have to be this way. While you can’t control every factor in your investments (otherwise they wouldn’t be investments) you can minimize your potential fail rate. And it’s as easy as keeping a close eye on the numbers.
Get yourself a spreadsheet (Excel or something similar) and track the numbers of not just houses you buy, buy every property you look at. This will give you the added benefit of having your own personal data on market trends, as well.
Ideally you should jot down all potential costs to you such as the mortgage or any renovations and then compare it with the money you’re likely to receive, like rent or resale prices.
Tracking this data lets you easily boil each property down to your likely ROI, and if it’s not high enough, then you know without a doubt to move on.
Location is Key
We all know that property location is a major selling factor, but there’s more to it than just market appeal. When you work in real estate investment in the United States, you need to consider which state your purchases are in.
The United States is kind of wonky that way, and much of what works legally in one state may not be viable in another. LLC’s are only valid in one state, so if you buy properties from all over, you’ll need to be managing multiple companies. And taxes differ from state to state as well, meaning you’ll be dealing with filing taxes for each state you operate in.
So before you start entering markets all over, you need to carefully consider their locations. Sometimes a market might bleed over a state line and you’ll need to get your footing in both states to take full advantage of the market, but unless this is the case, try not to cross state lines. This tactic is called “bundling.” The less you spread yourself out, the more focused and successful your business will be.
There is always room to spread yourself out later, if you so desire. Once you have a strong foundation to work from, you can consider branching out to out of state markets, but when you’re just starting out, sticking to one state is ideal.
Hire a Property Manager
Possibly the biggest mistake new investors make is trying to do everything themselves. It seems like the right choice, as hiring a team to work with you costs money and the aim is to keep your expenses low. However, you’ll find that in most cases, one or two people on your payroll is actually going to save you time and money in the long run, as well as keep your investments stable.
The most important of these hires is a property manager, especially if you’re going into renting.
There’s a lot of time and work that goes into managing a property. You’re going to be busy investing (and possibly dealing with another job if real estate isn’t your main source of income) so having someone at your side who’s able to get those rent checks and make sure your properties aren’t falling apart is vital.
Property managers vary wildly in price depending on a myriad of factors, but you can expect to pay about 10 percent of the rent revenue. Be picky with the selection of your manager, as well.
Remember that this person is going to be in charge of a big piece of your investment, so shop around until you find the firm that’s the right fit for you. It is better to go without a manager for a little while as you hunt for the perfect one than to hire someone who is an ill fit.
Christine Yaged is a co-founding partner and Chief Product Officer of FinanceBuzz. Christine launches and scales brands. She is passionate about technology, digital marketing, and people.