Famous Thomas Edison once declared, “I have not failed. I’ve just found 10,000 ways that won’t work.”
All humans make mistakes, even around money. How much energy, time and frustrations could be saved by learning about the simple mistakes that others have previously made in real estate investments?
Real Estate investments can be a big money-making business, regardless whether buying and flipping houses, acting as a broker, earning fees as an agent, or periodically dabbling in real estate to make extra money. Investing in properties is very attractive when the housing market is strong enough to blow in a windfall.
Like most commodities, there are correct and wrong ways to invest in real estate.
What’s most important is this simple fact: real estate investors and usually first time home buyers face obstacles in a slow real estate market.
When buying and reselling properties it’s still possible to make money even when there’s a weak market.
Overall, the game play in real estate investments is to create a permanent cash flow that will bring wealth.
But it may not be easy.
While nothing is guaranteed, one key to avoiding huge mistakes is to first conduct thorough research into the fluctuating property market to determine if a deal is really good for the financial portfolio.
Andy Heller, co-author of the book: “Buy Even Lower: The Regular People’s Guide to Real Estate Riches,” recently wrote a Bankrate published article, “The biggest mistake new investors make is not having a plan. 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 backwards,” Heller explained.
Highly experienced investors usually point out how new investors on the block feel they must hurriedly act on deals that appear good.
Laolu Davies-Yemitan, a Houston-TX based real estate adviser and government relations consultant, also said in an article published by Bankrate, “They don’t do their due diligence about the deal, the costs, nor the market conditions, the current mortgage rates, and they wind up draining their personal savings because the house needs extensive repairs or they can’t sell it.”
Property Investment and Home Buying Education
Many wannabe real estate investors forego educating themselves on how to become a sharp investor.
Warning: please educate your brain before placing your financial security on the line.
First, read the best, most up to date material pertaining to real estate investments. Books and videos are good unless you already have a mentor or expert team.
Better yet, find a local chapter of the National Real Estate Investors Association.
This organization has well-experienced speakers who have either been or are current investors. They will discuss several topics like buying foreclosures, creative investing, flipping properties and screening tenants.
The Street is a valuable resource that specializes in publishing the best investment books of the year. Read 15 best real estate investment books for 2019.
Bigger Pockets is another great online educational outlet for real estate investors, replete with videos, webinars, blogs, including other educational tools.
So, let’s discuss how to zero in on what to do prior to purchasing an investment property and how to handle the work after the property is finalized for a ‘flip sale’ or rented to tenants.
Each investor or house buyer must have any property inspected. Property inspections are mandatory to determine if the investor has a good deal on hand or there is a deal-breaker.
Therefore don’t try to save a few bucks by neglecting to have an inspection done on a property, otherwise, you may have to pay for costly repairs later. What helps a buyer when a property has been inspected and problematic repairs are found the investor can use this angle to re-negotiate the sale price.
Consider Paying For Sewer Scoop
Many people don’t place too much emphasis on having a property’s sewage cleaned out. A sewer clean can eliminate lots of trash and conk in the lines that can jam up and cause a terrible problem.
Imagine paying up to $3000.00 or more to have a professional unclog your sewage.
Here is a list of questions real estate investors should ask when planning to purchase a property:
- Is the property located within close proximity to a commercial site or will long-term construction take place in the near future?
- Does it appear to be a “good property deal” located in a flood zone or in an obvious problematic area infested with termites, radon, or bed bugs?
- Does a property have a visible foundation problem or permit “issues” that eventually will need to be dealt with.
- Identify what’s new in the house and if fixtures, doors and windows need replacing
- Ask why the home owner must sell the property?
- Ask how much the owner paid for the property including the estimated date when the property was purchased.
- Expect Additional Expenses
Homeowners are cognizant of the reality there are extra related expenses with owning property. For example, there are costs for maintenance, mowing the lawn, doing some painting, installing a new roof, or making structural modifications to a house, including buying insurance and paying property taxes.
My specific point: new investors usually don’t calculate additional expenses when searching for investment properties.
Experienced real estate investors who have been there, done that, and are back on track for more action forewarn that when an inexperienced investor underestimates extra costs when purchasing property for investment or personal ownership that simple mistakes can wreak havoc on their finances.
Making expense assessments prior to purchasing a property is very important for house flippers and investors because their profits are connected into the amount paid for the property and the amount of time it takes to first buy a property, fix it up, and try to sell it.
On top of that, investors must pay “big eyes” attention to short-term financing costs, prepayment penalties and possible cancellation fees for utilities or insurance that may incur if the house is flipped and resold quickly.
Protecting Your Assets
When the portfolio gradually increases, asset protection is vital. Still many rookie investors either put it off until later or forget it altogether. To start this important phase investors must locate qualified and competent legal assistance to protect their personal assets.
Most real estate companies form LLCs; Limited Liability Companies. Limited Liability can protect the investor from lawsuits as long as they act in good faith.
For example, if a person is involved in an accident at the property, the individual is only allowed to sue the owning entity. Without the entity in place, the owner can be sued directly. An LLC protects personal wealth and limits personal exposure to lawsuits.
Although LLC’s help safeguard against liabilities and business debts it doesn’t mean an LLC doesn’t carry adverse effects, because it does. Understand whether an LLC is right for you. If not, consider umbrella insurance or use a combination of both.
It is also a must for tenants to have renters insurance; make sure a tenant provides a copy of their insurance and keep it on file.
How to Follow the Money Game
A key concept in the investment game is to establish and follow money rules. These rules can be as simple or complex as the investor desires. Whichever options are chosen, exercise them ritually because specific leverage may be needed for each project.For example, consider not exceeding more than 15-30 percent of the investable income on a single project.
Discuss Projects with Experienced Consultants, Experts
Everyone needs a sounding board. Mega successful real estate investors like Donald Trump, George Argyros, former L.A. Clippers owner Donald Sterling, Galveston’s George Mitchell and many others consult with their expert team.
There is no reason that small investors should not duplicate the business practices of big-time investors.
Develop a network of mentors, more experienced consultants and experts because having these people in your corner is an invaluable asset. If somehow you fail to consult with your advisory team prior to pouring finances into an investment property you could snag a bad deal and lose money.
A consultant team could include:
- Real Estate Attorney or Realtor
- Tax Strategist
- Appraisal Specialist
- Property Inspector
- Title Examiner
- Investment Consultant
Tax advantages are available for real estate investors. A prominent advantage is called the ‘1030 tax-deferred’ exchange. A tax-deferred exchange can be used to sell a property and simultaneously purchase another property without paying capital gains.
To repeat, learn every single thing there is to know about real estate investments by creating a solid business plan. A business plan can provide a clear path to help achieve goals.
Without a laser-focused plan, chances are high that important task may be overlooked. These plans can lead to making better purchases of investment properties.
Build an outstanding real estate portfolio and never rely on future appreciation because not even the most foretelling psychic can predict the future.
Follow the planned strategies, and, by doing so, this will alleviate fear, and prepare you to face risks. The aim of every investor is to win … win … win … no matter what.
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Newsblaze Reporter and Business Journalist Clarence Walker Can Be Reached At: [email protected]