Investing in real estate is one of the best ways to ensure you have a steady cash flow in the future, but newbie fix and flip real estate investors are prone to making costly mistakes. If you want to enjoy long-term success in real estate investing, you should be aware of the mistakes you need to avoid.
Real Estate Investing Mistakes To Avoid for Long-Term Success
Mistakes in real estate investing can have hefty financial consequences. Whether this means you are unable to sell a property at a higher value or you are unable to pay back a hard money loan, any mistake can delay your success. The most common real estate investment mistakes include:
Buying Without a Plan
Buying a property without making a plan or doing enough research on the property is a major mistake. Many new real estate investors fall for buying frenzies when the real estate market is high and wind up with a property that only generates losses. Before purchasing any property, you should conduct thorough research on the property and make a plan for what to do if the market dips.
In particular, you will need to create an investment strategy for each property you plan to purchase. Before you apply for a hard money loan or a mortgage for the property, you should have a plan for how you will use the property, such as for renovations or as a vacation home. If you plan to become a landlord, or you want to flip the property, this investment plan will help you estimate your potential gains.
Becoming a One-Person Team
Real estate is complicated. From the tax rules to the process of closing a property purchase, it’s nearly impossible to handle every aspect of your investment by yourself. Yet all too often, new real estate investors believe that they should do everything hands-on, including inspecting the property, renovating the property, and completing the property transaction.
However, if you want to invest in real estate without any bumps in the road, the best thing you can do is gather a skilled team that can help you along the way. You should work with real estate agents, home inspectors, contractors, attorneys, and insurance adjusters as you assess and purchase a property. These experts will be able to notice potential pitfalls that will prevent you from making profits in the future.
Overlooking the Current Market
The real estate market is incredibly localized. While the national market may say one thing, the local trends in your area can be completely different. There are many local regulations that directly affect the climate of real estate in your area, including home values, land values, and taxes. You should also learn more about real estate inventory and real estate demand in your area before you decide to purchase property, since these factors will impact whether you can sell the property easily in the future.
Ignoring Tenant Needs
The way you use your property will rely heavily on who will become tenants of the property, especially if you plan to become a landlord. Whether you want to run a short-stay vacation home or you are planning to own a multifamily unit, it’s a major mistake to ignore the needs of your tenants. Different renter demographics will have different needs, such as families wanting access to good schools or young people wanting access to public transit. If your property can’t provide these amenities, you may have trouble attracting tenants.
Similarly, if you want to purchase a vacation home to rent out throughout the year, it’s ideal if the property is located near local attractions. After all, renting a home over the summer “near the beach” that isn’t actually beachfront can be a huge disappointment and can potentially affect your reputation. In this case, instead of a vacation home, you may simply want to flip the property and sell it to a family.
Lining Up Poor Financing
Financing is one of the biggest hurdles to overcome when you want to become a real estate investor. Not many people can afford to buy a new property out of pocket, which means you will need to arrange for financing either from a mortgage or another type of loan. For real estate investors who plan to fix and flip, a bridge loan or a hard money loan is typically more appropriate than a conventional mortgage.
It’s also important to pay attention to the interest rate on your financing. Interest rates can rise unexpectedly for loans such as adjustable-rate mortgages and interest-only loans. It’s usually safer to opt for fixed-rate financing, even if you plan to flip, as this will protect you from unanticipated interest rate spikes.
Overpaying For the Property
It’s also a major mistake to overpay on the property you plan to purchase. When you’re new to real estate investment, it’s easy to become overeager to overpay on a property to win a bidding war. However, overpaying for a property will directly affect your profits when you’re ready to sell in the future, especially if the real estate market dips. Overpaying can lead to other issues too, such as too much debt, higher monthly payments, and higher interest.
To avoid overpaying for a property, it’s best to work closely with a real estate broker who can show you the history of the property, so you have a better idea of the real property value. You should also look at the value of similar properties in the area and be ready to negotiate for a better price.
Underestimating Property Expenses
Underestimating the expenses for the property is especially risky for real estate investors who plan to fix and flip. In addition to the mortgage or loan payment you will be making for the property, you will also need to consider other expenses such as property taxes, utility costs, and renovation costs. You will also need to include insurance on the property when you are itemizing expenses.
The best way to avoid underestimating property expenses is to create a list of all the costs associated with fixing and maintaining the home. For flippers, you should consult your home inspector and construction crew to estimate the total cost of repairs. For landlords, you will need to calculate the property expenses per month, so you can set a rental price that covers these costs.
What Are the Benefits of Fix and Flip Real Estate Investing?
Investing in real estate has long been one of the top recommendations for people who want to increase their monthly income or diversify their investment portfolio. There are significant benefits for real estate investment, such as tax breaks from the IRS, increased cash flow, passive income earning, and equity building. Real estate investments can even help you hedge against inflation.
More importantly, real estate investment is considered a much safer investment than stocks. Although the real estate market can fluctuate, it’s much less volatile than the stock market, which means that it’s a low-risk method of earning income to generate wealth. And since property values tend to increase over time, you can rest assured that the security of your investment will pay off when you’re ready to sell your property.
If you’re a new investor, it’s important to avoid real estate mistakes, so you can turn a solid profit in the future. In particular, you will want to be sure that you can line up reliable financing you can afford. Get in touch with Turning Point Lending to learn more about your financing options.