Top 10 Mistakes First Time Real Estate Investors Make
I’m often asked “as a first time investor, what should I be doing”?
I believe a better question is “as a first time investor, what can I learn from other investors based on the mistakes they’ve made?”
Keeping this in mind, I put together a list of the top 10 mistakes first time real estate investors usually make, to help others that are in same boat.
1) Planning As You Go
You will find that if you execute on an investment strategy you will have a better chance of success, reacting to issues as you run into them is a guaranteed defeat. An investment is no different than a business, and you wouldn’t start a business without a business plan. Plan out your goals, strategies, and how you will achieve them. Try to not focus only on the wins, but have a plan of action if the investment takes a turn for the worse.
2) Thinking You Will Be Rich
Investing in real estate is best looked at for a long-term hold as there are unforeseen variables that can come into play during the process. If you are a flipper, you can still look short term but know what the long-term forecast also looks like just in case. Don’t bank on just the appreciation, look for cash flow as well.
3) Not Building the Right Team
Finding the right team to protect your investment is a key ingredient. The right maintenance people, leasing team, and all vendors are very important to making sure your investment succeeds. Don’t forget, your team starts before you even acquire the investment. Having good advisers (brokers) you trust, as well as inspectors and real estate attorneys will help you avoid many pitfalls.
4) Over Paying
I believe this one is obvious. Be patient! Realize that the real estate market is cyclical, don’t try to time that market (no one ever can). Make sure you’re not wrapped up in the hype of an over inflated market.
5) Not Understanding the Process
Understand the entire process from seeking the investment, to managing your investment through to your ultimate end game. If you are not 100% clear on the processes don’t invest and consider finding a good mentor.
6) Not Completing Due Diligence
Be sure to complete all due diligence about the deal, the costs of the investment, rehab if needed, physical inspections of the major systems, licenses, insurance, current market conditions, current mortgage rates, comparable rentals and demographic shifts should all be a part of your due diligence.
7) Not Calculating your Cash Flow Correctly
Always look at your real historical cash flow (not pro-forma) when buying your investment, and don’t pay a price based upon pro-forma figures. After all, if the pro-forma numbers are true and easily reached, why wouldn’t the current owner just make the changes necessary to achieve them? If the property is vacant, you need to know how long you typically have a vacancy in your market (don’t think it will lease immediately).
8) Not Having a Steady Deal Flow
We have found that if you are looking at a steady flow of deals that you are looking at you will not be tempted to buy one that cuts to close to your margins. Pick only the best assets to invest in for your appetite.
9) Not Having Multiple Exit Strategies
Having a singular exit strategy can be hazardous to your investment success, let me give you an example. Inglewood California just passed mandatory rent control, a few Investors had gone into the area to invest because of a new NFL stadium in the area. The exit multiples these investors anticipated can no longer be reached unless they hold several addition years but their investors want their money back with 18 months…ouch!
10) Not Knowing What Everything May Cost
Not knowing what everything costs from labor, taxes, insurance, materials and money can create a serious problem and you will be scrounging for additional money, know your costs up front.
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