It’s no secret real estate investing can be an excellent way to start building wealth and get one step closer to the dream of financial freedom.
A mostly “hands-off” approach of investing in real estate can certainly look like the perfect medium for generating passive income, establishing a reliable monthly cash flow and often sparing you the hassle of having to look after the day-to-day management of properties yourself.
But just because this investment strategy can bring a lot of benefits with fairly little daily work, it doesn’t mean that you shouldn’t spend a considerable amount of time carefully gauging the profitability of each opportunity you come across. While you might be tempted to feel like you can do no wrong when investing in a new property, real estate is not exactly “free money” — you will always get what you put out, and if you fail to calculate the true profitability of the shiny new addition to your portfolio, you might just get a bad investment in return!
So, how can you avoid making those expensive mistakes?
In this guide, I’m going to walk you through some of the biggest and most costly oversights that first-time investors tend to make so you can dive into the world of real estate investing with all the knowledge necessary to succeed!
The Seven Biggest Mistakes You Can Make in Real Estate Investing (And How to Avoid Them)
First things first: You should keep in mind that several factors can affect the profitability of an investment, including the location of the property, the condition it is in, and its current and projected market value.
Picking a desirable neighborhood in an area set to experience incremental growth, for example, is likely going to be a good call and worth the upfront investment if you’re after reliable cash flow and infrequent vacancy periods.
But even when you think you’ve got all the basics figured out, good deals can still turn sour, and making a few mistakes along the way is often unavoidable. While you should strive to be comfortable with a reasonable degree of error, many of the most expensive oversights can be alleviated with a sound and well-informed strategy, so as not to break the bank and shatter your dreams of location independence and financial freedom.
So, without further ado, here are some of the most common and easily avoidable mistakes to watch out for when starting your investing journey, and a few tips on what to do instead:
When considering a new investment, one of the biggest mistakes you could ever make is miscalculating the actual cash flow you’re going to get from the property, meaning the income flow left after you’ve taken out maintenance expenses, insurance, taxes, mortgage repayments, and any lost income following unexpected vacancy periods.
Rent collection is not what makes a property profitable. You should always take into account all expenses that might come out of pocket with every investment so that you can have the full picture at hand and carefully weigh the pros and cons of closing a new property deal.
As a general rule of thumb, you’ll want to err on the conservative side of all estimates, calculating the maximum amount of cash you’re willing to spend on all property-related costs, compare it with the residual cash flow you’ll be getting each month, and finally decide whether or not to move forward.
That’s how you can keep yourself in the game for the long term: Investing in more profitable properties as you collect a reliable monthly cash flow from each good investment.
If a property isn’t actually making you money, why go through the effort at all?
Overestimating Cash Flow
Continuing our previous point, overestimating the amount of income you’re going to get from a property is an easily avoidable but at the same time common mistake you might make along the way.
Many inexperienced investors rely on single estimates, often coming from only one property manager, when calculating the cash flow of a seemingly profitable investment.
The easiest way to avoid this pitfall is to do your research beforehand and ask around for as many opinions as you can: Reach out to other property managers in the area, browse the web for listings, contact realtors, or drop an email to a trusted real estate agent that knows the area and the local market from the inside out — the rent you might want to ask for the property might be considerably less than what you can demand!
Once again, basing your strategy on a more conservative estimate will help you invest smarter and with a whole lot more peace of mind.
Underestimating Property-Related Costs and Emergencies
By the same token, many investors are likely to underestimate the total expenses coming with their chosen property, especially if they fail to take the cost of emergencies into account.
You should always do your due diligence and calculate the amount of total tax you’ll need to pay on top of a set mortgage plan, the cost of insurance premiums, and most importantly the cost of major and minor repairs needed before the sale and after the agreement is signed and your property is listed for rentals. Don’t underestimate the cost of unforeseen taxes or of major fixes like replacing a roof or sorting out faulty plumbing — they will all come back to bite you in the end!
The best way to avoid underestimating expenses is to take 10% or even 15% off your initial income estimate. If your calculations show that you’re still going to make a sizable profit, you can comfortably go ahead with the purchase.
Being Too Lenient with Tenants
Being a landlord is not an easy job, even if you’re lucky enough to be dealing with exceptional and unproblematic tenants.
So, when you encounter problematic tenants who regularly miss rent payments, the job not only gets much harder, but it can also start chipping away at your profits every month.
If that becomes the case, it can be easy to let things slide once or twice, but being too lenient and dipping into your own pocket every time a payment is missed will ultimately hurt everything you’re trying to work for.
The key is to simply think of your property as what it essentially is: a business. In order to make the business profitable, you have to implement the regulations in place to make the structure work smoothly, so if that means having to start the eviction process at the first or second missed payment, it’s best to leave all emotions aside and play by the rules.
Not Saving for a Rainy Day
No matter your risk tolerance, having enough saved up for a rainy day (in the case of real estate investing, that means having a good emergency fund to cover unexpected expenses) is non-negotiable if you’re looking to turn a good profit.
There’s nothing worse than having to dip into your personal account or having to go into credit card debt to fix major damages that will, eventually, come along as you purchase new properties.
Whether it’s replacing a roof, fixing appliances, or tackling mold issues, you should always make sure to put aside a few hundred dollars each month from rent payments in order to make sure you’re able to afford repairs and other maintenance expenses comfortably.
Expecting Fast and Easy Results
No matter what gurus may tell you, real estate investing is far from a “get rich quick” scheme.
In order to succeed in creating wealth and generating reliable cash flow, you’re going to have to do plenty of research, focus on implementing a foolproof strategy, and have a savings buffer on the side to cover all unexpected setbacks.
Investing in real estate is not an easy journey, but if you put in the effort it demands, you’ll get your money and energy’s worth in the long run!
Doing It All By Yourself
Finally, one of the most overlooked mistakes you could make when investing in a new property is to think that you can do it all by yourself.
While you might think you already know everything that there is to be known about the industry, the truth is that the real estate market is an ever-changing and unpredictable world, even for the experts.
You shouldn’t take anything for granted; instead, make sure to research the local market thoroughly and ask for direction and insights from those who have walked the walk long before you — which is exactly what I’m here for!
Save Ten Years of Errors in One Single Week
Just because you’re expected to make mistakes along the way, that doesn’t mean that you should throw in the towel and jump into an investment without being as prepared as you can be.
While I’ve given you a brief overview of common pitfalls to keep an eye on and some basic strategies to avoid them, there are many more factors at play that could harm your investments and your wallet.
If taking all the right steps toward a bright financial future is your top priority, you’re in luck: There are still some spaces left to join my course and start learning everything you’d ever need to know about building wealth with real estate investing!
Not up for the challenge just yet? You can get in touch for a consultation instead to explore just how you can make your vision become a reality.