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3 Missteps That Can Derail Your Real Estate Investing

by Ken Corsini on August 30, 2012 · 6 comments

  

With the unprecedented drop in real estate values over the last few years, more and more people are trying their hand at real estate investing.  With the wealth of available knowledge related to real estate investing, it is not difficult to research the possible investment strategies and locations in which to invest.

Not surprisingly, investors in this market cycle seem to be more cautious about their investing … especially when compared to the wild west attitude of the mid-2000’s that were characterized by unsustainable appreciation and rampant speculation. I got into this business fulltime in 2005 and clearly remember those investors who blindly jumped into negative-am loans on properties with negative cash flow all on the basis of future growth.  We’ve come a long way since then and while investors do appear to be more cautious in their approach, there are still plenty of opportunities to make a bad investment decision in this market.

Here are 3 Common Missteps that can Derail Your Real Estate Investing:

Buying a Property Because it’s Cheap:  It can be tempting for new investors to jump at properties based almost exclusively on the price tag. Yes, you can buy properties today for less than a new car, but that doesn’t necessarily make them good investments. Regardless of the price, investors must carefully analyze whether or not the numbers still make sense once renovations, acquisitions costs, ongoing vacancy and maintenance, etc. have been calculated. And even then, a property that pencils out on paper may still not make a good investment. I tend to ask myself  if the  headache (ie. turnover, crime, tenant quality) and/or opportunity cost of buying a particular house makes sense.

Buying Without The End in Mind:  Most investors buy investment properties for the positive cashflow and potential equity growth. However, I’ve found that most investors haven’t really formulated a clear philosophy and exit strategy before investing. Some investors lean towards selling the property and maximizing a potential profit as soon as feasibly possible, while other investors know from the outset that their goal is to hold the property for 30 years and produce income. Knowing which strategy you want to employ is crucial before deciding where to invest, how to finance, and what kind of property to buy.

 Underestimating Your True Cost:  I think many investors tend to be overly optimistic when it comes to expenses associated with a real estate investment. Buying a property, renovating it, financing it and then renting it comes with a litany of expenses along the way. It starts with accurately estimating the costs associated with closing and financing a property. What are the attorney’s fees, the loan fees, state and local recording fees? And even more importantly, how much is the rehab really going to cost you? If you choose to take short cuts now, what will your maintenance numbers look like over the next few years (ie. new HVAC? New roof? Etc). Just because you didn’t pay for a repair at acquisition does not mean that you should forget to include this as a future expenditure.  New investors should be very careful and conservative when planning towards their first few investment properties as costs tend to be more than anticipated.

Having bought and sold a number of properties over the years, I can say that my experience (including my mistakes) has been an invaluable teacher.  Looking back, I wish I had spent a little more time seeking counsel from more experienced investors before diving in. However, ongoing education over the years has taught me to be much more selective and analytical in my approach to real estate investing. Learning to discern the right investments from the wrong is fundamental to becoming a consistently profitable investor.

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{ 6 comments… read them below or add one }

Ryan Z. August 30, 2012 at 1:31 pm

Great article, as an investor you always want to make sure that the property you are investing in is worth it. Even if the property you are about to buy is reasonably priced, you still need to understand that things will go wrong and realize at what price you are willing to settle for. Knowing how and when to walk away from an investment will make you learn what things to watch out for. This is a great article showcasing how an investor can get wrapped around buying into a property without even understanding all of the factors

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Koel G. August 30, 2012 at 7:21 pm

There is always going to be risk involved when investing in real estate. To avoid some risk, I stay away from single family homes and go for multi family homes. A duplex for instance, is low risk, ie, two people paying you’re mortgage for you. If one person fails the pay, its most likely the other will–reducing out of pocket expense. However, a single family home is high risk as the owner is stuck making the whole payment if the tenant falls short. Koel.

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Tracey September 2, 2012 at 4:46 pm

Ken,
understanding the true cost is really an issue and I had to learn my lesson the hard way (closing cost, utilities, taxes)
Thanks
Tracey

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David September 3, 2012 at 7:09 am

Great article! I am glad you use the associated costs of HVAC in your example. I bought a couple of properties where I should have replaced the HVAC in acquisition. Instead I chose to service the HVAC.

In the acquisition, I learned that I should have replaced them upfront. It would have cost me 3200.00 to replace the entire system. Instead, by patching, I paid closer to 4500.00. I would have benefited in the long run by not deferring replacement.

Jim Rohn says “Life is about minimizing risk and maximizing opportunity”.

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Lisa September 3, 2012 at 9:08 am

Owning investment properties over the last 10 years, turnover costs is what really cuts the cashflow. One eviction, can take 45+ days without rent, and it is always left a mess with damage.

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Brad September 5, 2012 at 9:57 am

Great article Ken. I really agree with point #1. Buying a properties because it’s cheap is not the way to go. I think it comes down to ones mindset. Buy cheap and make more. However that is not always the case.

Point #3 is true also. People too many times are underestimating the cost of a house which results in them giving up the house. It’s important that you plan, plan, plan.

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