Make sure you read part 1 of the Top 10 Mistakes to Avoid in Real Estate Investing to find out the first 5 mistakes to avoid.
Again, these are listed in no particular order of importance because they are all equally important:
6. Negative cash flow. I’ve never met a single real estate investor in my life that said “I wish I did not have so much positive cash-flow coming in from my real estate investments.” However, I have met countless investors that purchased property with negative cash flows in hopes that the appreciation would counterbalance this negative, only to end up walking away from the property because they simply couldn’t afford it any more. That’s not to say that people haven’t made money investing in properties with negative cash flow, however it’s just a lot riskier and I’m not of the belief that risking your life savings and retirement is a good idea. It’s okay to target properties for appreciation, just make sure you also have positive cash flow each month to hold you over while you wait for the property to go up value over time. If it doesn’t cash flow with 20% down, then put 25% down.
7. Being unorganized. Being unorganized is a very costly mistake. Many people do not take the time to track the performance of their property. This leads to poor documentation, missing numerous tax write offs, overpaying for maintenance, and ultimately having difficultly determining how good or bad their Return on Investment (ROI) really is. Not to mention that being organized will save you countless hours of time when doing things like preparing for taxes and refinancing properties. Every successful real estate investor I have met that’s built a fortune over time has a very organized system for managing and tracking the performance of their real estate portfolio.
8. Not factoring in maintenance and vacancy. When it comes to maintenance and vacancy in rental property ownership, it’s not “IF” but “WHEN.” This should not be a surprise to you or cause for concern. It’s just a part of real estate investing that you need to factor in when calculating your potential ROI upfront. I recommend factoring in at least 5% of your monthly gross rent for maintenance and the same for vacancy, depending on the property location, age and condition. This is one of the biggest mistakes people overlook, but also one of the easiest mistakes to avoid.
9. Thinking you need to buy a primary residence before owning investment property. The majority of the time, your primary residence is not an investment. It is a roof over your head, the home you will raise your children in, and the place you and your wife entertain friends and family. I personally live in Newport Beach, CA. It is not the cheapest place to live, and you can rent a place for 25% to 50% less than what you can own it for. Sadly, many of my friends are buying condos or houses that they are not happy with simply because that’s all they can afford, but mainly all they know. They moved into this home knowing they can’t wait for the day they can move into a home they love. That just doesn’t make sense to me. Why not invest that money in real estate, make significant cash flow on the side, and rent a nicer place for less until you have enough money to buy a home that makes you happy?
Moving and selling real estate has tons of costs associated with it and should not happen often (10-15 years minimum per primary residence).
Also keep in mind that buying a primary residence first and incurring tremendous debt could prevent you from qualifying for investment property thereafter. Conversely, buying income producing properties first can actually lower your debt-to-income ratio and allow you to qualify for a larger loan on a future primary residence.
10. Not conducting proper due diligence. So many people do not read the contracts they sign, or glance through them and either don’t understand them or overlook certain things. Know what you are signing, know the fair market value of the property, and know the rent prior to buying a rental property. If you can’t find the answers yourself, then ask a Professional Real Estate Advisor.
Real estate investing is not rocket science, and you don’t need to know everything there is to know before getting started. However, if you can use these 10 pieces of wisdom as the foundation of your investing journey, you should be able to join the ranks of the thousands of people who have been successful investing in real estate.
Think we’ve left out any major mistakes? Let us know! Share your comments below.