(Source: Forbes): Greg Herlean – Real estate investing can be a difficult field to navigate, especially if you don’t know where to get started. Property investment isn’t as simple as buying a house, filling it with tenants and raking in the cash for your retirement fund. After flipping over 450 homes and 2,000 apartment units, I’ve had my fair share of real estate investment challenges, and for first-timers, there are plenty of pitfalls that can make you lose money fast.
By performing your due diligence, and with a little guidance, you can avoid the common mistakes. If you want your investment to be a success, here are the top seven real estate investing mistakes you should avoid.
7. Planning On The Fly
If you invest in real estate, you should have a plan. Real estate investing can get pricey, and buying a house on a whim is not a good plan of action no matter how good the “deal” is. Without proper planning and research, you may end up paying more than you anticipate on a money pit of a home that you can’t unload. Think about maintenance, upkeep and fixing up the property, plus all the hidden costs that come with purchasing property.
An investment this big requires careful consideration. Before I buy anything, I have to look at the potential of the property, how much money and work needs to go into it, the market value and how quickly I expect to turn it around. You can’t do that by just looking at a house. It takes time.
6. Not Doing The Research
There are many nuances to selling and owning property. Depending on the home, you may need to be aware of zoning laws or require permits for any changes to the landscape. The real estate might be located on a floodplain or somewhere natural disasters such as hurricanes or tornadoes frequently occur, which could impact how much you spend on insurance. The property may have insect damage, or perhaps someone could have died in the home. You may have to rebuild the house from scratch — but there are steps to take to before you can make that happen.
In addition to any property issues, you must consider the market value of your real estate investment. Neighborhoods and school districts can dictate how quickly you sell or rent out your asset. Without the proper research, you may end up drowning in problems you might have never considered.
5. Hiring The Wrong People
If you are investing in real estate, chances are you are using it to grow your retirement fund. Of course, that means you can’t work on the property yourself. When a property is owned by your self-directed individual retirement account (SDIRA), you are prohibited from working on it; the IRS considers that an act of self-dealing, and you risk losing your investment if you do so. However, you can choose who does, and that could lead to another pitfall. You can lose a lot of money quickly by hiring the wrong people to fix or manage your property. You could be overpaying on repairs or maintenance or relying on slow, inconsistent workers, so be cautious with your selection. If you go the extra mile in your real estate research, do the same with whomever works on your investment.
4. Having A Get-Rich-Quick Mentality
So many people believe that real estate investment will lead to instant wealth. This is not true. Real estate is a long-term investment that takes time and money. You can make out pretty well financially if you play your cards right, but it does take patience. Investment property is not liquid; it is not easy to unload if you are losing money on it. Sometimes you will be holding on to your real estate for quite a while. Take your time and put in the work, and the payoff will likely be worth it.
3. Spending Too Much
One of the worst mistakes you can make when investing in real estate is spending too much on your investment. Whether you are spending more than you wanted to on closing costs or you are surprised by a property flaw that the inspector may have missed, you don’t want to waste money on an investment with too many problems. You can buy a fixer-upper for a low cost, but beware of getting stuck in a money pit. Fixer-uppers can end up costing more to repair than to sell.
If you are planning on renting the property, make sure it isn’t sitting too long without a tenant. Every day without a resident will be costing you more. Of course, renting to the wrong occupant can also cost you. Be cautious when selecting your property and who you allow to rent. The last thing you want to do is spend more than your investment is worth.
2. Not Planning For Expenses
Real estate investment is not cheap. It takes upfront cast for repairs, renovations, closing costs and utilities. Your IRA is responsible for funding your real estate’s upkeep. All the little costs, from a light bulb to the gas bill, add up. Like I mentioned before, real estate is a long-term investment. Jumping in without an expense plan can end up hurting you in the long run.
1. Forgetting Plan B
Having an exit strategy is all part of planning. While you want your real estate investment to be a success, sometimes you may be sitting on it for too long. You have to be able to adapt your plan to benefit your IRA. Though you may not need it, it’s a good idea to have an exit strategy. Flipping your house didn’t work? Maybe have a plan to rent. Before considering an investment, be prepared for several scenarios to make sure you still come out on top.
Smart Real Estate Investing
The best takeaway for anyone planning on investing in real estate is to have a plan and do your research. Real estate is a costly investment and, when done right, it can be profitable. Take the necessary steps to keep you in the green.