For a new real estate investor, what are the FIVE biggest mistakes to avoid?
Posted by admin in Finance Thursday, 7 April 2011 16:02 6 Comments
For a new real estate investor, who has been studying a number of courses and is ready to get going with flips and rental property, what are the five biggest mistakes I should look to avoid that most investors make?
1. Choosing a really, really bad Realtor. I’m not saying bad in the sense of dirty or underhanded, but simply a nonchalant one whose only concern is getting the deal done even if it’s not a good investment for you.
2. Choosing a bad home inspector. Don’t go with one that your bank, Realtor, lawyer etc recommends. If they do recommend, make sure they’re throwing at least 2-3 in there for you to choose from. You want to make sure that they aren’t saying what those people with an interest in the transaction wants them to say to push the deal through.
3. Buying something and waiting for the market to pick up. The market is unpredictable and anyone who is silly enough to buy something to squat and wait could potentially be waiting for quite some time and losing money in the process.
4. Choosing a bad contractor. Always shop around. Never go with someone just because they’re cheap or they blow smoke up your @$$. Sometimes quality work and work delivered on time costs more.
Most people that did flips were fooling themselves and really making money because the general price of real estate was going up. It is extremely hard to make money that way now- I would stay away from that.
Buy property that you intend to keep for a long time and that will provide you with good cash flow as a rental.
Most long time real estate investors tell me that they believe most of their profit was made by buying at a very good price and buying a very good location.
I think you should stay away from high maintenance things like pools and such.
1. failing to have a written plan based on solid estimates with forecasted cash flows BEFORE you get serious about any property.
2. forecasting your rents/sale prices based on pie in the sky instead of what is actually happening out there in the local neighborhood.
3. shortage of capital. You are unlikely to be able to borrow from any hard money lender in the present market.
4. arrogantly assuming you know what you’re doing.
5. failing to understand why the seller wants out — if you don’t know this, you have no idea of what price he’ll actually accept to get shut of the bad situation you’re planning to take over. Ask. A surprising proportion of sellers don’t know enough to keep their mouth shut or lie about this.
Never “fall in love” with the property.
Run the numbers, if they don’t work the 1st time don’t keep running them until the do what you want them to do.
A flip will always cost you more than expected and return less than you expected.
If doing a flip make sure the numbers will support it as a rental if it fails to sell.
Don’t rob Peter to Pay Paul, the enterprise must be self supporting.
If you don’t have the stomach for the possibility of failure, find another business.
1. Getting over-extended. Plan on things going wrong. Be prepared.
2. Renting to bad tenants.The law is stacked on their side. They can not pay you for months before you get them booted out. In the meantime they wreak your property.
3. Buying high and leading up selling low.
4. Buying the wrong location at the wrong price.
5. Not considering ALL the costs
Trying to do flips in this market is going to be pretty difficult.
But, I’ve you’ve made up your mind to go ahead then here’s what you should avoid:
1. Realtors who don’t qualify. You want to hire a realtor that has had personal experience in flipping homes or represents investors who do what you want to do.
2. Have your financing lined up.
3. Have a plan B. More often than not, things will not go according to plan. You will buy a property that will take a long time to sell or you have to take a loss on. Allocate enough money for projects like that.
4. Don’t buy homes that have less then 3 bedrooms. Ideally, you want a home with a minimum of 3 bedrooms and 1.5 baths. Some markets are different, though.
5. Start very small and learn the ropes. Don’t expect to make a lot of money like the courses teach.
By starting small, even if you make mistakes, which you probably will, those mistakes will be small and may not knock you out of business right away.
Good luck to you!