You have probably already heard that the first real estate investment is the hardest. If not, then you have not yet fully understood the pitfalls and shenanigans of real estate investing. Although real estate is a very safe investment, we would like to share the five biggest mistakes you can make when investing in real estate for the first time. Please use this as a checklist to avoid the aftereffects of your first investment adventure.
Mistake #1: Poor Location
A property’s value always starts with its location. People and companies who rent or buy first look at the site and then evaluate other conditions, such as land and property.
Always research the area you want to invest in and consider it more than attractively priced. For example, looking for tenants in a place that is completely unattractive to live in is a waste of time.
Mistake #2: Improper Financing
Bad financing is one of the most dangerous mistakes you can make. Many real estate investors are already in the crosshairs because they did not properly finance their investments.
What is a bad loan? It is a combination of:
1. high interest rates
2. adjustable interest rates
3. high monthly payments
4. staggered payments
Private bank mortgages usually avoid the above four mistakes. This is due to their low-interest rates, fixed interest rates for 30 years, and no staggered payments. However, most require a personal guarantee. That is, you guarantee the loan with your other assets and future income. This would be a reasonable compromise.
Mistake #3: Underestimating Maintenance Costs
Sooner or later, it is inevitable that you will incur maintenance costs on your real estate. Therefore, it is advisable to budget for maintenance costs. By doing so, they try to avoid excessive cost overruns that could lead to, for example, insufficient funds.
Mistake #4: Making Decisions Driven by Emotion
Make no mistake, real estate investing involves emotion. However, you need to balance that enthusiasm with rigorous, objective analysis. This is a big mistake for beginners, and it is understandable.
Enthusiasm is important. It is essential when participating in an investment project. It helps you overcome the obstacles you encounter.
Also, experience has shown that you should not make important financial decisions based on emotion alone. Use the analysis process. You should also have someone review each transaction. Consider including family and friends as well as outside advisors.
A good starting point is to analyze basic criteria such as location, neighborhood, type of housing, and construction quality.
The deal analysis process then allows you to analyze the numbers. In this way, a system for selecting and deselecting deals can be established.
It is also vital to calculate several metrics, such as cap rate (or return on assets), cash return, discount to total value, and internal rate of return.
Mistake #5: Choosing a Bad Builder
Buying a home, renovating it, and reselling it is a popular investment strategy. Finding a contractor who does a good job, finishes on time, cleans up after themselves, and has reasonable rates is more challenging than finding a treasure on the beach. So, take the time to find a good contractor.
This also applies to property management. When outsourcing rental services, outsource to a professional organization. The organization that manages your property will make or break your investment.
If you do not want to spend time and effort on rental services and want to enjoy a secure investment, you can invest in hotel rooms.
Once you have purchased your hotel property, let a professional property manager handle all the work and worry.
Real estate investing has many possibilities and pitfalls and is not an overnight decision. The key to a successful real estate investment begins with solid preparation. Gather information through various channels and take to heart the golden rule of successful real estate investing: “A good investment begins in a privileged position”.
