One of the biggest mistakes that new investors make is thinking they have everything figured out. They may have lined up financing and made a few contacts, but there is more to the business than meets the eye. There are pitfalls and traps around every turn. All it takes is one mistake to turn a good deal into a bad one. The best investors have knowledge of several different areas. You don’t need to be an expert in all of them, but you should have a basic understanding of how they work. There are potential mistakes around every turn, but if you know what to look out for you will be ready for them. Here are six common mistakes rookie real estate investors need to avoid:
1. Know Your Market: The real estate market 2,000 miles away has little impact on where you invest. Your local market changes with each sale that is made or new foreclosure filed. The value for a property six months ago may not be the same today. As an investor, you need to put the time and diligence in to stay on top of what is going on. The investors who know their market the best will make sharper offers and see greater profits. Using online real estate websites may give you a ballpark value, but they won’t give you the true number. Things can change a lot even within the town. It is important that you look at comparable sales and know which way your market is moving. If you treat your investing like a business, you will see the results.
2. Know Your Numbers: The numbers you use are the backbone of every deal. It is easy to plug numbers in to make a deal more attractive. If these numbers shift slightly, you are left with a deal that no longer makes sense. Your repair estimates make up a big part of your rehab budget. Many new investors think they have a good grasp on the estimate until they get started. They run into items that they did not plan for that sets off a series of negative events. On your first couple deals, you should lean on your contractor, realtor and any mentor you may have for advice. The numbers are too important just to guess at. You need to know where they come from and if they will continue at the same pace. Any investor can find numbers to use, but it is important to use the right ones.
3. Don’t Use Just Any Contractor: A good contractor can make your numbers a reality. By using someone that isn’t licensed or doesn’t know what they are doing you open the door for bigger problems. The best contractor isn’t always the least expensive option. If they end up costing you more to fix their work what are you really gaining? Every prospective contractor you meet you should treat like an interview. They should be willing to give you their license, references and past projects. You need a contractor that you can trust and you feel has your best interests in mind. You should take as much time finding a contractor as you do with anyone else on your team.
4. Understand the Contract: Every offer you make is a binding contract. As an investor, you never want to get stuck with a property you don’t really want. If the language of your contract is poor, you may not be able to get out once it is accepted. Instead of using a cookie cutter contract you find online, you should have an attorney review it for you. You should also use a realtor on your first few offers. Saving on commission is nice, but not as important as submitting an offer that protects you. Know what you are signing. If your name is on the contract, you are on the hook for whatever happens down the road.
5. Lead Generation: Declaring that you want to invest in real estate is a great first step. The joy will be short lived if you do not have deals to work on. Before you do anything, you need to have a lead generation system in place. This doesn’t need to be elaborate or expensive, but you need to do something. Deals will not just fall on your lap. A large part of the investing business is lead generation. The more leads you generate, the greater the chances that you will get some of those to closing. This starts with having a working budget and a plan of attack. Knowledge of the business won’t do you much good unless you have deals to work on.
6. Establish Goals: Most successful businesses have goals in place. These can be long term market goals or short term sales goals. As a new investor, it is easy to get caught up chasing the next deal that comes your way. Some of these deals may fall outside your comfort zone and offer more risk than you should take. By having goals, every decision you make will be done with a plan. You can use these goals as motivation when the business gets difficult. Goals give you something to work for every day. Without goals you can have a successful run, but eventually you will fall off track and lose focus.
The first year in any business is the most important. A majority of new investors do not make it past the first twelve months in the business. If you can avoid the most common rookie mistakes, you should make it through without any problems.