If you have spent even a modest amount of time in the Real Estate field, there is a pretty good chance you have heard a few horror stories about investment properties; Investor loses money instead of making it, house never sells, over does the remodel and never recoups the investment, bums break in the house at night, they start a small fire in the middle of the living room to get warm, and the house burns down… True story, I promise.
So, what are some common mistakes investors make and how can we avoid them? I have compiled a small list of ten. There are more mistakes, believe me, but these are the most common that I encounter. The order of is of no relevance.
1. Overpaying for a house. Way too common. This generally happens because the buyer has no real idea of the true Fair Market Value (FMV) and the After Repair Value (ARV). Just because an agent says, “this house will sell for $200,000!” Doesn’t mean it will. Learn how to run comps and repairs and you will never have this problem.
2. Underestimating the cost, scale, and time for repairs. If you are not familiar with CURRENT costs of labor and materials, you NEED to get the opinion of a professional, preferably more than one. Once you are familiar with this process it becomes fairly easy to run the hard numbers in a matter of minutes. Thoroughly inspect the property before you purchase. You are in the money making business, not the “Oh crap I just opened up a giant Can-O-Worms” industry.
3. Not properly insuring the property. Remember that example about the bums breaking in and burning the house down? What if that was your property and your insurer didn’t cover your damages after you bought the property for $60,000 and already put $20,000 into it? That would suck. Don’t let it be you. Yes, it’s an extreme example but there are many things that can go wrong during the rehab process. Know what your policy does and doesn’t cover.
4. Living in the property while remodeling it. Sounds like a good idea, “I won’t have to pay rent. Someone will always be there. I will have more time to get things done.” But in actuality here is what happens; because you are waking up and falling asleep there every day, it starts to feel like home and you begin to get emotionally attached. Now you start to overdo your repairs and updates because you want the house to be up to par with your living standards. You end up putting more money into the project than you need to because your emotions have clouded the reality that not every “sizzle feature” raises a property’s value. Don’t do it.
5. Over pricing your finished work. This pretty much falls in line with number one. Know your market and the scale of the project. If you don’t catch anything from this blog, at least remember this; Value is not how much money YOU want, value is how much SOMEONE ELSE is willing to pay you. If other remodeled houses in your neighborhood are selling for $100,000, there is a pretty slim chance you are going to get $150,000. Now I just wish all sellers understood this.
6. No Financial/time plan. Time wasted is money lost. Why take six months to finish a house and only sell two in one year when you could do four or five with the same amount of money? Plan, plan, plan. Don’t get in over your head (number 2).s
7. Investing with emotion. I hear too many people who want to invest in certain areas or cities because “they have good schools.” Shut up. Remove your emotion, this is a numbers game. You have to understand that in certain areas, you will pay a premium for a property and the resell may not be much better than what you bought it for. People who live in highly desirable areas know it and they (usually) won’t allow their house to walk away for pennies on the dollar.
8. Cold feet. Again, this is a numbers game. If everything looks good and is in line with your objectives, go for it. Don’t wait to hear “I made a killing off that property you were too scared to buy.” Emotional investing, yet again…
9. Spending money and time on education but never putting it to use. Don’t be a spectator; get in while it’s hot. Even when it’s not hot, there is always money to be made. You are not getting any younger.
10. Jumping in without understanding Real Estate. The last nine mistakes fall right under this one. Know what you are doing. Period. If you truly know what you are doing you shouldn’t have those problems. Get the right education. You don’t need to spend thousands of dollars in education and seminars, I learned through a $10 book and A LOT of free stuff on the internet, and I am doing great!!!
What other mistakes have you made or heard of?
The Whole$ale Challenge 