Find financial freedom through rentals<\/p>\n\n\n\n
Your first investment will be a learning process. While you\u2019ll likely make a couple of real estate mistakes along the way, there are a few common pitfalls that can be avoided if you educate yourself beforehand.<\/p>\n\n\n\n
From financing errors to underestimating repair costs, newbies are at risk to lose serious cash if they\u2019re not careful. Still, real-world education is invaluable, and this guide will help steer you down the best path possible to your very first real estate investment.<\/p>\n\n\n\n
You may have heard that your first real estate investment is the most difficult one. It\u2019s true.<\/p>\n\n\n\n
Your first deal is difficult because you don\u2019t know enough. How could you?<\/p>\n\n\n\n
Yet you still need to move forward and get started. If you wait until you\u2019re 100% ready, you\u2019ll never make progress.<\/p>\n\n\n\n
But even though your first deal won\u2019t be perfect, you still don\u2019t want it to be so bad that it will knock you out of the game.<\/p>\n\n\n\n
So, this article will help you avoid the 10 most lethal mistakes on your first real estate investment. Use this like a checklist of real estate mistakes to ensure that you avoid the worst-case scenarios.<\/p>\n\n\n\n
When you prevent the worst from happening, you will gain confidence so that you can buy your first deal, move forward, and begin your real-world education. With that in mind, here are the biggest mistakes you could make in real estate.<\/p>\n\n\n\n
Always remember: real estate investing is a long game. Simply buying the first property you can afford without planning on how it will make you money in the long term is a bad financial decision. Performing market research, learning about real estate comps, and building a pro forma<\/a> are all examples of good investment planning. Don\u2019t just rush into investing without understanding how it works.<\/p>\n\n\n\n What is bad financing? For me, it includes a combination of the following:<\/p>\n\n\n\n Most residential bank mortgages at least save you from the first four mistakes because the interest rates are low, fixed for 30 years, with amortizing payments, and there are no balloons.<\/p>\n\n\n\n But they almost always require personal recourse, meaning that you will personally guarantee the loan with your other assets and future earnings. This is probably a reasonable trade-off.<\/p>\n\n\n\n Many commercial, portfolio, hard money, and private lenders<\/a>, however, do not meet any of these criteria. And that could be a problem, especially on your first deal.<\/p>\n\n\n\n If you borrow at 12% interest with a large monthly payment, a balloon due in one to three years, and full personal recourse for the loan, you are likely taking too much risk.<\/p>\n\n\n\n Why? Because the property will probably have negative cash flow with the high-interest rate. A balloon note means you will have to refinance or sell in a very short time frame. As many learned in the 2008 credit crisis, trying to refinance when credit dries up is very difficult – even with perfect credit and good income.<\/p>\n\n\n\n And personal recourse means that if anything goes bad and your lender loses money, they could take ownership of your other assets to collect on the debt.<\/p>\n\n\n\n I have always used a lot of private and seller financing for my real estate deals<\/a>, and I keep this list of financing mistakes in mind. For example, I might trade off a little higher interest rate and a larger down payment in exchange for a longer loan term and no personal recourse.<\/p>\n\n\n\n Related: <\/i><\/strong>The Biggest Mistake I Made as a New Investor (& How You Can Avoid It)<\/i><\/a><\/p>\n\n\n\n Do you know what a real estate auction is? A form of gambling. If you take that route, you need to be very, very strict about your budget. Do not go over that budget no matter what, even if the property seems like an attractive investment opportunity.<\/p>\n\n\n\n This is a big no-no, even if you have some experience in investing. Even if the property is an investment and you\u2019ll never live in it, you need to know what it\u2019ll be like for your tenants. Online photos and tours can be misleading: always see for yourself.<\/p>\n\n\n\n Every property, no matter how good the condition you bought it in is, will come with unexpected expenses<\/a>. Most of them will come from repairs you don\u2019t yet know the house will need, but other things, like increased taxes or insurance premiums, should also be taken into account. Always allow extra (at least 5% of the home\u2019s rental income) to cover these unexpected costs.<\/p>\n\n\n\n This is a big real estate mistake. There\u2019s only so much you\u2019ll be able to raise rents to cover your losses if you make this mistake. Putting your rents up too much will result in increased vacancy periods, which will lose you money, making that gap you made with the splurge even harder to close.<\/p>\n\n\n\n Estimating rehab costs correctly is crucial to successfully flipping houses or becoming a successful BRRRR investor<\/a>. It is a process, though, and arriving at the amount you need to budget for is not a magic trick or a wild guess. Underestimating rehab costs<\/a> will inevitably eat into your cash flow and your profits, so avoid buying a distressed property if you don\u2019t have the budget for rehabbing it properly.<\/p>\n\n\n\n You\u2019ll have a hard time buying a home without a pre-approval letter from a lender as many sellers now only show to buyers who can demonstrate that they have been pre-approved for a loan.<\/p>\n\n\n\n And what does setting a realistic budget involve? Knowing how much you can afford on a property overall, not just on the mortgage payments. Always factor in taxes, maintenance expenses, and unexpected costs that may arise later on.<\/p>\n\n\n\n Your investment properties are like your race car. Cash is like your car\u2019s fuel. When out of fuel, even the most powerful race car in the world sits still. If you run out of cash, even the best investment property will hurt your wealth building.<\/p>\n\n\n\n So, you want to avoid running low or running out of cash.<\/p>\n\n\n\n This usually happens for a couple of reasons:<\/p>\n\n\n\n Capital expenses are big ticket items like a roof or a heating-air system replacement. If these costs hit you unexpectedly, it can become a big problem.<\/p>\n\n\n\n Related: <\/i><\/strong>Want to Lose All Your Money & Cry Yourself to Sleep? Make These 4 Newbie Mistakes!<\/i><\/a><\/p>\n\n\n\n While it\u2019s true that as an investor, you don\u2019t want to spend excessively on your property rehab, choosing poorly-rated or inexperienced contractors will cause far more problems than it will solve. Especially if you\u2019re investing in a rental property. Always choose the best contractor you can afford.<\/p>\n\n\n\n My business partner and I bought our very first fix-flip deal<\/a> in December 2003. We proceeded to go through three different painters, two different heating and air companies, and two different carpet installers before we got the house looking decent.<\/p>\n\n\n\n These were expensive mistakes. We were lucky to even make a small profit on that first deal!<\/p>\n\n\n\n Finding contractors who will do good work, finish up on time, clean up after themselves, and charge reasonable prices is harder than finding buried treasure on a beach. Yet the people who do work on your fix-flip or rental deal will make or break its success.<\/p>\n\n\n\n Related:<\/i><\/strong> Brandon Turner wrote a really good article about estimating capital expenses<\/a> and budgeting for them on your rental properties.<\/p>\n\n\n\n\n\n Making a hasty decision and not researching the property, the area, and the neighborhood will cost you. Apart from the obvious questions about the house, you should also ask and research a whole range of questions. First, consider the city and the area the property is located in. Is this a good area? Are there any developments nearby that could affect the property\u2019s value in the coming years? Are there any problems with utilities or local services? Next, ask very detailed questions about the property itself – are there problems with the property; when were the last major renovations made; and what is the reason for the sale? The more you know, the better investment decision you will make.<\/p>\n\n\n\n Some experienced investors make offers with fast closings, in as-is condition, and with no due diligence period. This may help them get a lower price, but for your first deal, this is probably not the best route to go.<\/p>\n\n\n\n Instead, include a short but reasonable due diligence period that allows you to get out of the purchase contract if you find a problem.<\/p>\n\n\n\n Here are a few of the important things I usually do during due diligence:<\/p>\n\n\n\n You will want to double-check all of the key assumptions you used to make your offer. If you find that you made a bad assumption, you may need to renegotiate or walk from the deal.<\/p>\n\n\n\n Real estate value always begins with location. The people and businesses who will rent or buy from you begin with location, and then they evaluate other criteria like the lot and the house.<\/p>\n\n\n\n Because it\u2019s so important, you should study the best and the worst locations in your area before buying. Some investors can make money in bad locations, but it\u2019s a challenging game that beginners should probably avoid.<\/p>\n\n\n\n Real estate advertising has its own jargon, and you should learn it before you make any decisions about your investment property. Is the house advertised as \u2018cozy\u2019? It\u2019s almost certainly very small. \u2018Quirky\u2019? It will need a lot of work. And so on. Never take what an ad says at face value.<\/p>\n\n\n\n We\u2019ll tell you a secret: no successful real estate investor makes it on their own. They always get there with the help of a well-chosen team of experts. At a bare minimum, you should build a real estate investing team<\/a> and tap into the expertise of experienced real estate agents, lawyers, property managers, insurance brokers, and many others.<\/p>\n\n\n\n This is especially important for investors who are new to a particular area. What worked for you as an investor in one place may not work so well in the new one. For example, if you\u2019re moving from a family-friendly area to an edgy, urban one popular with young professionals, you\u2019ll need to understand the local apartment rental market.<\/p>\n\n\n\n This is closely tied to our previous point. How well do you understand what your potential rental clientele is looking for? If you\u2019re renting in an area popular with families, you\u2019ll need to look for properties that are close to playgrounds, good schools, and have nice backyards. If you\u2019re buying a vacation home, do thorough research into the nearby area. Is it close to local attractions and amenities?<\/p>\n\n\n\n A home inspector will invariably find flaws and imperfections in areas you didn\u2019t even think to look at. They\u2019ll also take photographs as evidence. All of this will help you to avoid paying for costly repairs further down the line.<\/p>\n\n\n\n If you\u2019re buying your very first home, whether as an investment or for yourself, you should always see at least 3 comparable properties before you make a decision.<\/p>\n\n\n\n I bought a lower-priced single-family house once at a below-market price with excellent seller financing terms. But the location was awful. I could not consistently attract good tenants because the neighbors were not pleasant (or safe) to live around. On the other hand, buying at slightly above market value in a good neighborhood will attract good tenants and will help you with occupancy rates.<\/p>\n\n\n\n\n\n Buyers often have to rush to showings after work, or even take time off to make it to a showing. They need easy, quick access to a property, including a clear driveway. Otherwise, they may just choose to skip your house and go see the next one instead.<\/p>\n\n\n\n It may surprise you to hear that some sellers still just choose to put a \u2018\u2019for sale\u2019\u2019 sign in their front yard and that\u2019s it. Or if they advertise online, they only give a brief description and don\u2019t include pictures. Make sure you advertise on as many different platforms as possible, with as much information and as many photos as you can provide.<\/p>\n\n\n\n It\u2019s also a very common one. In the long run, this move is guaranteed to lose you money. Homes that are overpriced stay on the market longer and eventually sell for less. And overpriced rentals stay empty because renters always do their research on local rents.<\/p>\n\n\n\n While it\u2019s true that residential properties tend to sell better in spring and summer because that\u2019s when families move the most, you don\u2019t have to wait until spring to sell an investment property. Winter or fall, any time is a good time if you market and advertise it well.<\/p>\n\n\n\n This closely relates to the \u2018doing it all yourself\u2019 mistake. A real estate agent will have access to the Multiple Listings Service (MLS). When your property is on the MLS, it is available to a much wider community of potential buyers. And if you\u2019re buying an investment property, you will have many more properties to choose from than if you do your own research.<\/p>\n\n\n\n\n\n We\u2019ve said this before, and we\u2019ll say it again: real estate investing is a long game. Real estate prices fluctuate, but that doesn\u2019t mean you should sell your best properties when their values rise. In fact, it\u2019s the opposite. Your best-performing properties will continue generating long-term income, so don\u2019t treat them like shares on the stock exchange.<\/p>\n\n\n\n Does your real estate agent know the area you\u2019re buying\/selling in well? Have they dealt with the type of property you\u2019re interested in before? Real estate agents, like all other professionals, have specialisms. Don\u2019t go to a real estate agent who specializes in single-family homes for a commercial property, for example.<\/p>\n\n\n\n2. Getting Poor Financing When Investing in Real Estate<\/h2>\n\n\n\n
\n
3. Losing Money With Auctions<\/h2>\n\n\n\n
4. Buying Without Actually Seeing the Property<\/h2>\n\n\n\n
5. Overlooking the Extra and Hidden Costs<\/h2>\n\n\n\n
6. Overpaying for a Rental Property<\/h2>\n\n\n\n
7. Underestimating Rehab Expenses on an Investment Property<\/h2>\n\n\n\n
8. Skipping the Loan Pre-Approval Step<\/h2>\n\n\n\n
9. Not Having a Realistic Budget<\/h2>\n\n\n\n
10. Running Out of Cash<\/h2>\n\n\n\n
\n
11. Choosing Bad Contractors<\/h2>\n\n\n\n
12. Skimping on Research<\/h2>\n\n\n\n
13. Forgetting the Importance of Due Diligence<\/h2>\n\n\n\n
\n
14. Choosing a Bad Location<\/h2>\n\n\n\n
15. Believing Every Word in an Advertisement<\/h2>\n\n\n\n
16. Trying to Do Everything on Your Own<\/h2>\n\n\n\n
17. Not Doing Local Market Research<\/h2>\n\n\n\n
18. Ignoring What Tenants are Looking For<\/h2>\n\n\n\n
19. Buying a Home Without a Professional Inspection<\/h2>\n\n\n\n
20. Falling in Love With the First Property You See<\/h2>\n\n\n\n
21. Not Researching the Neighborhood<\/h2>\n\n\n\n
22. Not Providing Easy Access for Showings<\/h2>\n\n\n\n
23. Failing to Market Your Property in Different Ways<\/h2>\n\n\n\n
24. Pricing Your Rent Too High<\/h2>\n\n\n\n
25. Trying to Sell an Investment Property in the Spring<\/h2>\n\n\n\n
26. Not Using a Real Estate Agent<\/h2>\n\n\n\n
27. Treating Real Estate Investing Like the Stock Market<\/h2>\n\n\n\n
28. Picking the Wrong Real Estate Agent<\/h2>\n\n\n\n
29. Not Creating an Exit Strategy<\/h2>\n\n\n\n
![\"\"](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/rental-property-investing.jpeg\" "\\"\\"")
\n <\/div>\n <\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"