Purchasing a property could be a lucrative investment or a severe financial drain. Therefore, you need to get it right the first time around. In this article, real estate and business investor Michael Eisenga looks at the five real estate investing mistakes that you should avoid making.
There are three basic categories of real estate buyers. The most common category is people who aim to provide shelter for themselves and their families. Next are buyers who view the property as a source of rental income. Lastly, people who purchase property as an investment to be resold or flipped. While some of the top five mistakes apply across the board, they are geared explicitly toward investors that fit into the last two categories.
Failing to Act
This is the single biggest reason that more people never become real estate investors. Many individuals dream about investing in real estate but never actually pull the trigger. It is usually due to the fear of failure that prevents people from taking a risk.
Wayne Gretzky is attributed with saying, "You miss 100% of the shots you don't take." Because this is true, fear of failure is an insufficient reason not to try.
Risk-averse people need to proceed cautiously, or the stress associated with taking risks may be too great. But sufficient research and a careful examination of the costs will provide financial rewards in the end.
Beginning Without a Plan
While some people hesitate to act when the opportunity presents itself, others take action too quickly without planning appropriately.
A general understanding that real estate is a good investment is insufficient. The more you plan, the lower your risk will be. Every aspect of the investment should be planned out with contingency, or plan B, actions defined. If attempting to flip a home and unforeseen financial factors prevent home prices from rising as your primary plan requires, you should have a contingency plan in place. Plan B may dictate that you rent this property to cover your costs while waiting for prices to increase again.
Too Little Research
Never purchase real estate without doing due diligence. There is a myriad of factors that affect real estate prices. Each one of these should be researched thoroughly.
Zoning laws, nearby properties, freeway access, proximity to shopping, and a thousand other factors can influence real estate's current and future value. Make it a priority to learn what these factors are and understand them for the specific property being considered.
Attempting to Do it All
A common mistake is underestimating the value of a team. Agents, brokers, inspectors, accountants, contractors, stagers, and more all provide value to the real estate purchasing process. A beginner investor is likely to need a larger team than a more experienced buyer. These experts all cost money, so the profitability of early investments will be affected. As the investor learns more, some of these team members can be eliminated, or a portion of their work can be reduced.
The real value each team member provides is the knowledge and experience that a new investor simply does not yet have. Build their costs into the first deals and then learn from them.
It is easy to become too emotionally invested in a home or property. Wanting something to be a good investment is never a reasonable justification for investing hard-earned money.
Certainly, there is some risk involved in real estate investment, but setting emotion aside and realizing that it is a numbers game, helps prevent an emotional attachment to any particular property.
When you look for a home to live and raise a family in, emotion is justified. The kind of life you want to provide your children is worth more than money and should be considered. But an investment property doesn't work like that. Avoid getting attached to an investment property - there is no justification for the additional expense.
About Michael Eisenga
Michael Eisenga is a successful commercial real estate investor with a banking and finance background and is the former mayor of the City of Columbus. As a President of both American Lending Solutions, a mortgage lending company (he founded and operated from 2000 to 2018), and First American Properties, he has a track record of creating and operating successful businesses. Mr. Eisenga is also devoted to property development and construction, primarily serving smaller local communities. Especially in the senior housing sector.