While it is true that most people who become millionaires do so through real estate, this investing tool also creates its share of financial problems. Investing in real estate is just like any other type of investment, do your research to avoid mistakes. Here is a list of common errors new or wannabe real estate investors make.
1. Buying the first house you can. In the eagerness to get started investing, some investors jump on the first property that they find available. Some of this is due to over excitement, some due to laziness (not wanting to look any more) and some due to fear - that there won't be other deals. There are always deals to be made in the real estate market. Only buy that first property you see if the numbers work.
2. Being more eager to buy than the seller is to sell. Real estate investing is not like purchasing a home to live in. It is strictly a business transaction. Don't make the mistake of offering more than the numbers say will work just because you really like the house. And, a seller who is not truly motivated will only waste your time trying to get you to come up on your offer. Time better spent with someone who really does want to sell.
3. Not thoroughly inspecting the property. Buying an investment property is more than just how cheap you can get it. Some properties are cheap for a reason - they need a lot of work. You need to have a thorough inspection done on the property so there are no surprises when you start to work on it. Every day that you are having to add to your timeline to fix items is a day that you are losing money. Plus, you may be able to negotiate an even better price if you have a complete inspection to bargain with.
4. Underestimating fix up costs and time deadlines. It doesn't matter if you are buying the property to hold and rent, or to fix and flip. Going over budget is the biggest problem most investors have. Also, going over the expected time line eats into your bottom line and increases your carrying costs. Err on the side of caution when creating your numbers and then add at least 10% to that to give yourself a cushion. This is why it is critical that you actually have some cash reserves. Without cash reserves, you will be in big trouble if you go over budget, or cannot find a buyer/tenant for your renovated property.
5. Not having proper insurance. It doesn't matter if you plan on keeping the property to rent or if you are going to sell it, you need to have insurance while the property is in your name. It is especially critical if you will be having tenants. You need to protect yourself and your property. It is worth it to consult with a professional on this, the money you spend here can save you tons of money if someone were to try to sue you.
A lot of real estate investing involves trial and error, but avoiding these costly ones will give you a little room if you make mistakes in other areas.