All investors make mistakes, but the best investors never make the same mistake twice. Regardless of where you are in your business, here are five of the most common mistakes investors make, and how you can avoid falling victim to them yourself:
1. Not Understanding Expenses: Investing in real estate should be treated like a business. As a business owner, it is important to recognize and understand all of costs associated with running a company. There are a handful of costs in every step of a transaction, from the acquisition to the sale. There are also everyday expenses that cannot be ignored. How do you plan on marketing and finding deals? Do you need capital to improve your website or pay for networking fees? Your bottom line is based directly on the cost of your expenses. It is not enough to simply take an educated guess and hope you are in the ballpark. You need a detailed breakdown of where every dollar is going in your business. The goal isn’t to just bring revenue in, it is to keep as much of it as possible.
2. Tying Up Funds: There are many important decisions real estate investors make on a daily basis. Perhaps the most critical is where to allocate your purchase funds. Every decision you make impacts a different area of the company. You may think it is a good idea to pursue a rehab property in your local market, but understand that it is most likely the only deal you will have a chance to work on. If another deal comes along, your funds will already be dispersed.
Most investors do not have an unlimited supply of capital. Since there is only so much to go around, you need to choose your properties wisely. Not only do you need to make sound purchase decisions, but every large expense is important. You may think that it is OK to borrow from your reserve fund and replenish it after your next closing, but that isn’t always the case. What if something happens in the interim? Not having funds to cover emergency expenses can wipe your business out in no time. Regardless of what you do, you can never tie up all of your funds. Not only may there be an opportunity that comes your way, but the real estate business will often throw your unexpected curve balls.
3. Unjustified Buying: Before you make an offer, you should ask yourself how this acquisition impacts your business. Buying a property with little upside actually does more harm than good. You end up wasting time and energy that could be better served elsewhere. Additionally, you allocate funds for a property that could have been used to purchase something with more upside. There are a few reasons that investors buy just to buy. The first is because they do not know all of the expenses involved in the deal. As we mentioned earlier, you need to know where every dollar is going. The second reason is that they think they can add more value to the property than the market dictates. The numbers usually don’t lie when it comes to evaluating a property. You may have done a great job, but nothing will be more important than what the numbers say. You are not given extra credit for the number of deals you close, only what you are able to earn from them.
4. Neglecting Help: Investing in real estate is largely done by individuals. What separates good investors from great ones, however, is the ability to ask for help. There is only so much you can do on your own. Trying to tackle every task leaves you spread thin, and eventually can cause you to burn out. Fortunately, there are many people on your team that can help. Everyone from your real estate agent, attorney, mortgage broker and contractor have a vested interest in your success. They earn only if you close a transaction. If you have a question or need a hand, reach out to them to see if they can guide you in the right direction. Chances are that they will be more than willing to help you out. You don’t know if you don’t ask.
5. Work Commitment: Investing in real estate looks easy on TV. In reality, it takes a lot of work to become successful. The road will be full of peaks and valleys. Never assume the business is too easy. You will be confronted with challenges, It is at these points that you should work harder and longer than you ever imagined. To achieve everything you want from real estate, you need to be willing to work hard make the necessary commitment.
One of the best ways to avoid mistakes is by listening to others. Every mistake you make should be a learning experience. The real key to success is never making the same mistake twice.