By Inglewood Business Magazine | July 25, 2018
Investors are flooded with advice about how to invest in real estate. The vast amount of that advice is about what you should be doing. Very little is about what not to do. A good businessperson understands both the good and the bad in their marketplace. New investors need to understand both the upside and the potential downside of their investment opportunities.
You don’t need to reinvent the wheel. You will make mistakes. And you can work your way through those mistakes. But make them your own unique mistakes. Real estate investing is among the oldest professions. You can and should learn from those that came before you.
1. Not thinking outside your home market.
It’s easy to become enamored with your home market because you are so familiar with it. And it’s critically important that you fully understand the market you are investing in. But it’s also important that you not be narrow sighted. Research and explore other possible markets. That doesn’t mean jumping into the most promising market before you understand it. However, it does broaden your vision to identify possibly bigger gold nuggets that you can learn the details about.
2. Not having an exit strategy.
A deal that appears to be a bargain at first blush isn’t worth a dime if you don’t know how you are going to make your profit. Remember that it’s a bargain for a reason. Investors are always looking for distressed properties but buying for dimes on the dollar will leave you with only dimes if you don’t have a solid plan to make the dollars.
3. Avoid too risky of financing.
There’s a lot of money out there to finance your investments. There are high interest loans and low interest loans. There personal recourse loans and non-recourse loans. There are balloon payments and 30-year loans. Each comes with trade-offs that lenders use to manage their risk. You need to carefully select your financing source to manage your own risk and to match your investing objective.
4. Underestimating cost and over estimating profits.
Beginning investors are typically zealous about the profit potential. This can lead to underestimating costs and overestimating profits. A good rule of thumb is to diligently include every possible cost. Then increase your cost estimate by 15% to 20%. Do the opposite with the profit calculation. Determine what you realistically think you can make. Then decrease that by 15% to 20%. If you still see a profit, you have a relatively low risk investment opportunity. The low-ball estimate doesn’t need to be very high. The purpose is minimizing the chance you will lose money.
5. Not managing cash flow.
This is part of both your financing and managing the property after the investment. Some loans come with milestones. Partial funds are only released as defined goals are completed. You need a backup plan if one part of a project runs over budget. This is why some lenders require you to have reserve funds that are separate from the primary loan. Another potential problem is not reserving cash for maintenance and repairs. After renovating a property, you may not plan to invest any more money for three years or more. But you need to have a maintenance and repair fund just the same. Another potential pitfall is not having cash for holding costs if the ready-to-occupy property sits vacant for 90 or 120 days.