5 Fatal Real Estate Investing mistakes

1. Planning as you go.

Lack of a plan is the biggest mistake we see new investors make. They buy a house because they think they got a good deal and then try to figure out what to do with it. That’s working backward First, you find the plan,then you find the house to fit the plan. Pick your investment model, and then go find property to match that. Don’t find the strategy after you find the home. The problem is that most people look at real estate as a transaction instead of as an investment strategy. Who cares about the property? The number is the number, and you don’t go above that. The best way to solve the problem is to have lots of activity and make offers on multiple properties. Then you don’t care which one you get — as long as the numbers work out in your favor.

2. Thinking you’ll “get rich quick.”

That kind of wrong-headed thinking is fueled by these self-appointed gurus who have infomercials and make it sound so easy to get rich in real estate. It’s not easy. It’s a good long-term investment, but so is putting your money in a mutual fund, which is a lot easier. These gurus don’t talk about all that hard work. You have to be smart, you have to be willing to work, and you have to understand your risk tolerance.

3. Playing Lone Ranger.

A key to success is building the right team of professionals. At the very least, you need good relationships with at least one real estate agent, an appraiser, a home inspector, a closing attorney and a lender, both for your own deals and to assist with financing for prospective buyers. In the remodeling and maintenance segment of the business, the team includes a plumber, an electrician, a roofer, a painter, a heating and air conditioning, or HVAC, contractor, a flooring installer, a lawn maintenance service, a cleaning service and an all-around handyman. You can’t build a business as an investor if you’re spending all your time fixing leaky faucets and putting up ceiling fans.

4. Misjudging cash flow.

If your strategy is to buy, hold and rent out properties, you need sufficient cash flow to cover maintenance. People think they can get a property manager. But many have never interviewed a property manager and have little idea about how they work. Managers, fees of 7 percent to 10 percent of the monthly rent are common. It’s a huge expense, you can put your money in a mutual fund and it costs a half-percent a year. It’s not uncommon for a property to sit on the market for 90 to 120 days before it’s leased. Meanwhile the owner has to pay the mortgage, the taxes, the insurance, the cost of advertising and homeowner or condo association dues, If the owner hasn’t budgeted for that, an asset can quickly become a liability.

5.Painting yourself into a corner.

Many people buy a property and get stuck with it because they only have one exit strategy. They’re going to sell it or they’re going to rent it out. What if it doesn’t sell? What if the rental market stalls? Always have two, if not three, ways to get out of any deal. For example, if plan A is to rehab the house, put it on the market and resell it, then plan B could be to offer a lease-purchase to a buyer. Plan C might be to hold the house and rent it out. And as a plan D, there is the wholesale option, which would involve selling to another investor at a below-market price. Hopefully, you’ll still make a profit, but at the very least, you’ll cut the losses you’re taking every month in carrying costs.