Avoid These 3 Costly Mistakes New Real Estate Investors Make
Hey BiggerPockets community!
Jumping into real estate investing is exciting, but it's also a learning curve. I've seen many new investors stumble over the same hurdles, and I want to share the top three mistakes to help you avoid them:
1. Underestimating Your General Contractor (GC)
It’s easy to view a general contractor as just someone you hire to do a job, but that's a huge oversight. Think of your GC as your unofficial business partner. The success of your deal—whether it's a win or a flop—heavily depends on their performance. This includes the quality of work, keeping the project on time and within budget, and the caliber of subcontractors they bring in.
Vet your GCs thoroughly! Don't just go with the first person who gives you a bid, or worse - going with the person just because they gave you the lowest bid. Check references, look at past projects, and make sure their communication style aligns with yours. A great GC can be the difference between a profitable project and a money pit.
2. Forgetting a Contingency Budget
This is a big one. No matter how meticulously you plan, unexpected costs pop up. Material prices can increase, delays can lead to additional interest and extension expenses, and the market can shift. These things add up quickly and, without a contingency, they're coming straight out of your pocket before you see any proceeds.
Always add a contingency line to your budget for cost overruns. A good rule of thumb is to allocate 10-15% of your total project cost for contingencies. Sharpen your pencils and build in room for the unexpected. Best case, you don’t need it, and that’s just more profit for you!
3. Choosing a Lender Solely on the Lowest Closing Cost
While a low closing cost on a term sheet might seem appealing, it can be a trap. Overleveraging at the start of a project can severely limit your wiggle room later on, especially when it comes to refinancing or setting a sales price for flips. Those "low" costs might also be baked into higher interest rates or other fees elsewhere in the loan.
Even worse, some term sheets can be more aspirational than concrete. You might get to the eleventh hour, having already paid for appraisals and other closing costs, only for the terms to change unexpectedly. This not only costs you money but also valuable time.
Make sure you understand your true cost of borrowing. Look beyond just the closing costs and consider the overall interest rate, loan terms, and any hidden fees. A slightly higher closing cost upfront could save you a lot more in the long run.
What are some other mistakes you've seen new investors make, or lessons you've learned the hard way? Share your thoughts below!