Andrew Carnegie, one of the richest people of all time, once said, “90% of all millionaires become so through real estate investing”. Real Estate has been proven to be a successful method of building wealth through centuries. However, there is a right way and a wrong way to purchase real estate and if not done right you may find yourself falling in to a huge pit.
The following are some of the common mistakes made by investors when investing in real estate:
Chasing the Highest Yield: There is nothing wrong with investing in high-yielding properties but sole focus on yields can cause one to overlook other important factors which affect profit. As with investing in any asset class, there must always be a balance between risk and return. Any property with high yield usually comes with the highest risks. This risk usually comes from higher tenant turnover, vacancies and costly renovations. The goal for investors should be to make successful choices when it comes to investing to achieve positive results and not just high yields.
How to Avoid: To chase highest yielding properties, a large chunk of the budget must be put aside for renovations and for preparing ahead for months of no cash flow due to unpredicted vacancies. An alternate solution would be to invest in properties in good neighbourhoods that have stable returns albeit with a slightly lower yield.
Waiting for an Unrealistic Opportunity: Real estate investors have been capitalizing on strong real estate markets around the country many of which are seeing new highs. On the other side of the equation are the investors who are standing by waiting for the perfect opportunity to appear. Investors often have a very particular picture in mind about the perfect opportunity which are usually turnkey properties with high yield and stable tenants. The perfect investment is quite rare in the current times and waiting would mean letting the investment money sit idle.
How to Avoid: The focus should be on finding the right investment to suit one’s unique requirements. Finding the right property means balancing the risk versus return for goals with realistic expectations for yields based on what one is trying to achieve. For instance, someone closer to retirement should be looking to maximize their income in a low risk neighbourhood as compared to someone in their 20s who can have a higher risk appetite.
Get Rich Quick Attitude:While one can certainly successfully invest in income properties to yield high RoI, expecting to get rich overnight will leave an investor disappointed.
How to Avoid: In order to maximize gains from real estate, it should be viewed as a long-term investment, or buy-and-hold strategy. Monthly cash flow can be generated through rents, but profits can also be found on the property through appreciation.
Not Accounting the Costs:Part of the research that comes with finding and purchasing a quality investment property is evaluating all the costs. While it is easiest to only look at the large yield percentage and not factor a realistic scenario of the overall investment, your RoIis very important.
How to Avoid: Each property is unique but some costs are common to all properties. These include cost of vacancies between tenants, maintenance, and repairs. Additionally, there are other fees such as HOA, taxes, leasing fees, property management, and insurance, which can all affect the bottom-line. Calculating these costs helps in estimating realistic profits.
Buying just because a Tenant is in Place: Investing in a property with a tenant already in place is a serious motivator for investors. Although this means that cash flows start from the very first day, often times there are hidden hurdles which are overlooked. The tenants may be delinquent on rent or they come with a poor rent payment history leading to possible eviction. The sellers would usually conceal these problems at the time of sale.
How to Avoid: There should be thorough screening process for tenants already living in the home before any investment decisions are made. It is advisable to do a proper rev check before purchasing rental properties with tenants already in place or buy an untenanted property and put a reliable tenant after proven screening methods.
Doing it yourself: Some investors choose to take on the entire investment process on their own but this can prove to be hazardous. It is certainly possible to find, acquire and manage rental properties independently but there are benefits to working with real estate investing experts. Additionally, there are many roles that play a part in the investment process including real estate agents, lenders, contractors, property managers and other highly specialized roles.
How to Avoid: Working with the right people can help with achieving investment goals and use the expertise of professionals on the real estate investing process. It would also get checking daily details with tenants off your hands. A good property management company will help with finding tenants, collecting rents and taking care of any repairs.
Real Estate can be an excellent investment in order to successfully grow your wealth if the above mentioned pain points are taken into consideration while making an investment decision. An expert partner can help one achieve their unique investment goals.