So you’ve decided to join the ranks of the real estate investor. Buy and Hold or Buy and Flip, you’ve got to make sure you minimize your mistakes, because in this business, mistakes almost always cost money. With that, I’ve compiled this list of the Top Ten Biggest Mistakes that first time and non-professional real estate investors make. I hope they help you get max stacks in your next deal:
10. NO PROTECTION- INSURANCE IS A MUST- Hazard, Title, Liability, there are a ton of ways to get burned….literally and figuratively. Imagine taking your 76k IRA and going out and buying a property with it and have it burn to the ground leaving you with a $15k lot. Then imagine coming home to your wife after that. Chilling.
9. DON’T FACTOR HOLDING COSTS- Rehabs aren’t just about materials, labor and acquisition. More than one investor has been sunk by 6 months of staggering power bills, water usage, interest charges, etc. Make sure you’ve accounted for all these costs when figuring out whether the deal is really a deal.
8. OVERREHABBING- you always want to be selling/renting the best house in the neighborhood. But you don’t want to be selling/renting the best house in the zip code, when all the houses in your neighborhood are selling/renting for lots less. Not only that, but even if you sell for what you will need to to recoup the excessive rehab cost, the appraisal probably won’t hold up.
7. PAYING TOO MUCH FOR MATERIALS: don’t get me wrong, there are plenty of areas that quality counts, but so many areas can be accomplished with carefully shopped builder seconds, sale items, bulk order discounts, and lower cost cosmetic items. You can go to Restoration Hardware for all your cabinet knobs, and similar level vendors for cabinets, carpet, granite, appliances, etc, but if you do you will be most likely be bled dry by your material costs, and have no good chance of profiting on the property, or being able to refi when done at a reasonable payment amount for acceptable cash flow.
6. USING HACKS TO DO YOUR WORK: that guy that approaches you from the street corner and says he can Sheetrock your whole house for $1000 may sound tempting, but unless you plan on being on top of the guy the whole time he is working to make sure he isn’t cutting 1000 corners requiring you to do the whole job over a few weeks later, then use professionals. Not to mention when he hurts himself on the job and decides to sue you for Workman’s comp, you will be wishing you were having an emergency root canal the day you ever met him.
5. OVERESTIMATING YOUR After repaired value (ARV): Walking into the property, everyone always wants to look at the potential for success…at least the new investor does. ‘Wow, I can make a bundle if everything goes right!’ is the mantra of the new investor. The experienced investor always looks at a property and says, ‘what is the worst case scenario’ for the sale price or desired refinance amount of the property. It basically falls into the ‘Plan for failure and hope for success’ category.
4. UNDERREHABBING: just as you can totally go overboard on rehab and put materials and dollars that are completely inappropriate and won’t hold up on appraisal, cheaping out on a rehab is also an unwise idea. Cutting corners, buying defect materials on the cheap, doing work yourself as a non-professional (unless you have really good skills), and other ‘cost savings’ measures generally result in low quality rehabs that look the part, and won’t sell or hold up to tenant treatment over time, increasing your maintenance spend.
3. NOT HAVING AN EXIT PLAN- many investors get to the end of the rehab with the unassailable belief that sale of the property is inevitable, or that refinance is in the bag. Don’t be left shocked at the end of the rehab that you can longer get financing to lock down the mortgage payment, or that the property takes 3-6 months to sell.
2. LACK OF BASIC SYSTEM KNOWLEDGE- this is the number one reason why I always endorse having a mentor if you are a new investor, or partnering with someone who does rehabbing for a living until the investor gets a solid idea of the cost of things, how the systems work, etc. When you are contracting for HVAC, you should know how many tons of cooling and heating capacity your house needs based on the sq footage and ceiling heights. You should know how to identify whether you really need that new breaker panel. You should be able to look at a roof and estimate how many years ago it was installed within a couple of years. If you don’t know these things, you leave yourself open to unscrupulous contractors who will tell you need something you don’t need.
1. PAYING TOO MUCH FOR THE PROPERTY- hands down, the number one reason why new investors fail on property investing… If you buy too high, you can do everything else right and still end up in the red when you are finished. When we are looking for our next property, we typically are simultaneously offering on 10-15 properties at a time with contingencies. This allows is to poke around for the property with the soft spot- a lender that has pretty much capitulated on selling due to too many buyers falling through, an unappraisable property to conventional financing due to condition, an overwrought quantity of REO’s tying up the banks assets in reserves, etc.
If you are feeling that you don’t have everything on this list covered, don’t just give up on investing, but try to get smart on as many as you can while looking. Also, if it is in your capability to do so, find yourself a real estate mentor/consultant, who can help you avoid the pitfalls and probably save you tons of money over top of their fee in finding the best but inexpensive materials, buying negotiations, and even picking contractors.
About the author: Jeff Sullivan has been buying, holding and selling investment property for over ten years. He currently has over 40 units in his private portfolio and consults others on doing the same through his Real Estate Investment Consultancy, Equity Momentum Investments. He can be reached at firstname.lastname@example.org.