5 Little-Known Mistakes Real Estate Investors Make

Most educated investors know the main mistakes investors make, such as picking the right property manager, correctly underwriting deals, and choosing the correct location. We even wrote an article on this! But what are some mistakes investors need to be made aware of? Here are five little-known mistakes investors make that make a big difference in your real estate portfolio.

Number 1: Walking away from deals because of an inspection

This one may catch people by surprise as they see walking away from a deal because of an inspection as a good thing. This can be the case if a big ticket item comes up in the inspection, such as foundation issues, significant water damage, termites, and bedbugs. However, we see many first-time investors get spooked by an inspection report and walk away from an issue that could have been easily fixed for a few hundred dollars or an issue that was brought up in the report that may not be an issue at all. Home inspectors' jobs are to point out every single issue with the property, and many first-time real estate investors have their first 15-page inspection report and freak out. Every real estate property has its problems. And that is okay. As an investor, it is our job to note these issues and know which ones to be concerned about and which was we can leave in our back pocket and fix over time.

For example, once, we were selling a rental property, and the inspector wrote in the inspection report that there "may be major foundations issues." The buyers got very scared and wanted to walk away from the deal. We advised that a structural engineer give their expert option on this matter. After all, general home inspectors are not experts on foundation issues. Sure enough, the structural engineer said that wasn't a significant issue, and in the end, it would be $2,500 repair. This rental property makes our clients over $300 a month in cash flow, and they have over $40,000 in appreciation over three years. Good thing they didn't pass on this deal!

It is essential that after you review the inspection report, you talk with the professional home inspector about any questions you have and consult with an expert on the issues that arise. For example, consult a licensed plumber if there is a plumbing issue. If there are electric issues, consult with an electrician.

Number 2: Not understanding your investment goals

Understanding why you are investing in real estate and your long-term investment goals should be the first step in your investment journey. How do you know what a good investment is to you if you don't know your goals?

Is your goal to quit your W2 job and live off the cash flow? Is your goal to be able to take advantage of the deprecation so you can decrease your taxes? Understanding why you are investing in real estate and your goals with your investments is the foundation of your investment journey.

Below are a few key questions you should ask yourself before investing in real estate

1. 1. Where do I see myself in 3 to 5 years, and what is the fastest way to get there?
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3. 2. Which scenario is better for your future, $500 in cash flow a month, and your property is worth 10% more in 5 years? Or $50 in cash flow a month, and your property is worth 30% more in 5 years.
5. 3. Is my primary goal to decrease my current tax bill? Or to make as much money as possible?

Now that you have answered these questions, you should know, am I more focused on cash flow or appreciation? Am I more focused on getting the maximum tax deduction or making the most cash each year? Knowing this, what real estate investment vehicle will get me to my three to five-year goal the fastest?

Number 3: Only looking at current Performance and Not future performance

Frequently, investors will look at a real estate investment as what it is currently performing rather than what it will be performing after you update the property and increase rents. Here is an example,

Number 4: Negogiaing on a Deal When the Deal Already Works

Stephen Schwarzman co-founded of Black Rock, the world's largest asset manager with over $10 trillion in assets under management. In his book, Whatever It Takes Lessons in the Purse of Excellence, he wrote about how he negotiates Real Estate transactions. Here is a summary of what Schwarzman wrote

If the price works for our investor's goal, Schwarzman doesn't try to get the best possible deal on price. Schwarzman wrote that Real Estate is one of the best investment classes because of the cash flow, the depreciation, which reduces your tax bill, the appreciation of the building, and the leverage you can use. What happens to the four beautiful aspects of real estate if you beat the seller over price and don't get the deal? They go away. You don't have any of the benefits of real estate if you don't own real estate. If you constantly beat the seller over price when the deal already works for you, you will lose out on a great deal.

We refer to this as not cutting off the hand feeding you. As an agent, buyers only looking to lowball sellers and only buy deals that are "once in a lifetime opportunities" lose out on many good deals.

Number 5: Not Picking One Agent and Not Communicating with your Agent

Okay, so we are cheating here. These are two mistakes we see investors make. The first is not exclusively working with one agent. Often we hear investors say, "I want to work with a few different agents so I get more coverage on the market." We can see how this makes sense to some people, but in reality, if a buyer isn't going to work with an agent exclusively, why should an agent be spending time finding deals, collecting information, walking the property, and getting tenant information when you could be working with another agent? Good agents are busy, and busy agents don't waste their time with an investor who is working with multiple agents.

The other part of this is not fully communicating with your agent. You need to share what your goals are and make sure to communicate promptly. Firstly, you need to communicate with your real estate agent your three- or 5-year goal and your current strategy to achieve that goal. A good agent, who is also an investor, can help consult with you on this. This is important because, by better understanding where you want to go and what you need to do now, the agent can send you properties that better match your buy box.

The other aspect is timely communication. Real estate is a fast pace industry, and if your agent sends you properties and you take 24 hours to give them feedback, you will likely miss out on properties. When you are ready to buy, investors must be prepared to make the time, energy, and effort during this buying process.