Investing in something, whether real estate or another asset, is a monumental decision for your financial future. At best, you begin the journey that will create generational wealth for you and your family to enjoy for decades to come.
At worst…well, we’re going to help you avoid the worst outcome! If you’re worried about the risks involved with investing in real estate – especially for the first time – you’re on the right track. Mitigating risk is the first key to success.
Here are some of the grave mistakes new investors make and how to avoid the same fate!
6 Serious Mistakes New Investors Make (And How to Avoid Them)
Mistake 1: Making assumptions
In this business, take nothing on faith. No one deserves your trust from the jump. As an investor, it’s your job to ask tough questions and be your own advocate. There are people out there who will take advantage of naivete. Don’t assume how things work, what services people provide, the quality of the work you pay for, or the promises they make. You will be disappointed.
Instead, make your partners – contractors, managers, advisors, turnkey companies, or other vendors – earn your trust. Put their feet to the fire!
Mistake 2: Neglecting the data
The importance of research can’t be understated. As a real estate investor, you must dig into the nuance of any market, deal, or service you pursue. Before you begin, research:
- Different investment strategies, along with their pros and cons.
- The process of investing using your chosen method.
- Any companies or services you’d like to work with.
- The individual investment markets you’re interested in. Focus on:
- Population Growth
- Real Estate Market Activity
- Economic Health
- Rental and Housing Demand (Including Price Trends)
- Ongoing Development Projects
- Your specific risk exposures.
- Your finances, risk tolerance, and starting capacity.
- Ongoing expenses.
While you don’t want to overwhelm yourself with too much information, you need to know what you’re getting yourself into.
Mistake 3: Going in without a game plan
This goes hand in hand with our second point. The information you gather needs to be utilized, not left to rattle around in your head. Once you know your preferred strategy – active versus passive investing, multifamily versus single-family, residential versus commercial – you need to devise your game plan. What are your goals? How often do you want to acquire new properties? What purpose do individual properties serve in your portfolio, and what gaps do you need to fill? How will you maximize efforts to diversify and mitigate risk?
These are all questions to consider.
Mistake 4: Trying to do it alone
Many new investors make the mistake of cutting the wrong expenses. While you can save money by going at it alone, you’ll still pay for it in other ways. For one, taking on the burden of property management isn’t something everyone can or wants to do. It can quickly turn into a full-time job and a full-time headache!
Paying for property management will eat into your profits a little, but the big picture, long-term benefits are well worth the cost. For one, they’re professionals. Their job is to address problems and utilize preventative measures to maintain the value of your property and minimize expenses, be they from turnover or maintenance.
They also allow you to scale your portfolio efficiently. A team can manage multiple properties for you, whereas acting alone severely limits your capacity.
Mistake 5: Disengaging from the process
New passive real estate investors may think they can “set it and forget it.” That’s simply not true. While the day-to-day operations may be handled, investors still have a job to do. They must stay in an ongoing conversation with their managers and advisors. You must analyze and evaluate your portfolio, plan for changes and future acquisitions, and strategize your next moves.
Investing doesn’t end when you buy a property and find rental residents. While you can be less actively involved, you drive your portfolio’s growth and long-term success.
Mistake 6: Not taking the numbers seriously
Investing in real estate is a numbers game. New investors often make the mistake of not correctly evaluating the numbers. They might focus on what the property costs and what they can charge for rent when there is a host of valuable metrics to consider. Investors need to calculate ongoing costs, including mortgage payments, insurance, utilities, maintenance, etc. They should know the maximum price they can consider to maintain a favorable price-to-income ratio.
Think about the cap rate, return on investment, net operating income, loan-to-value ratio, cash flow, etc. You may not need all of these metrics, but you do need to identify which ones matter to you and best serve your investment goals.
Understanding what your responsibilities are as an investor will bring you that much closer to achieving your goals.