Real Estate
Investment
Common mistakes that can be
avoided
Several
rookie investors are jumping on the bandwagon trying to make a profit in
spite of losing big in the stock market. Here are a few mistakes they have
been found to make; after all, what can be better than learning from
someone else's mistakes?
1. Wrong stock
market mentality
One might think that
after losing $7 trillion in the stock market, people would have learnt,
however, they are found to be making the same mistakes repeatedly! This is
because they assume that what happened the previous day not will happen
the next day. Nine of ten new investors say they are interested in real
estate because they saw someone else make money from the rapid
appreciation of the real estate market over the last few years.
However, buying real
estate solely for short-term appreciation is usually a big gamble! If you
buy real estate to hold for fifteen years or more, the chances are that
you will come out successful. If you buy a property and flip it in within
a year, you might probably do fine, too. And in spite of the risk, many
people can intelligently time the 'boom' of a local market or else a
subdivision within a market and make a substantial profit.
But, in case you buy a
rental property for full-market price with break even or negative cash
flow, it is better to have a backup plan if the market does not keep going
up. As a common analogy goes, investing is a lot like surfing; if you
don't know how to ride the wave, you are bound to drown!
Hence the question is
whether you should refrain from investing if you think the market has
peaked. The answer is 'absolutely not'! It is easy to find bargain-priced
properties in every market, even the hottest ones. So also, one can surely
find low-interest rate financing that will increase your cash flow, so
that if values do drop, you still are covered.
Another option is to
plan for a short-term ranging from six to twelve months, because markets
normally rise and fall slowly. And if you do keep a cash reserve for your
business, you will not need to worry when the market crashes. In the long
run, real estate markets virtually always come back and this is reason
enough not to panic.
2. The hazards
of Investing blind
Another often repeated
mistake is committed by blindly buying real estate based on bogus advice
or complete lack of education. It helps to learn from others mistakes here
too.
Real estate is one of
the few investments in which risk is directly proportional to the amount
of knowledge. It however is true that it has a higher learning curve than
investing in the stock market, but there is no proof that having knowledge
of the stock market does help reduce the risk; this can easily be
confirmed by asking any mutual fund manager.
There are several real
estate discussion groups and comments on the Internet that one can use to
one's own benefit. An instance of these was a response to an inquiry as to
whether a particular seminar or training program was worth the money,
someone had answered, that it was best not to waste your money on useless
stuff like that and instead simply use the same amount of money as a down
payment and learn as you conduct each deal.
What many fail to see
is that this is probably the worst advice one could ever give to a
beginner. Money for deals is easy to find only if you can find good deals;
but, you will never know what a good deal is without having first invested
in your basic education about property investing.
The more you gain
knowledge on investing techniques, acquisition, negotiating, financing
and, of course, your local marketplace, the less risky your investments
are likely to be. A bargain real estate purchase will normally always be a
safe investment to make; but with a bargain stock purchase this isn't
usually the case. After all, there's no way to ascertain that the company
you bought into will surely be in business next year!
3. Lack of
cash reserves
On asking anyone who
is in the real estate business for a long term or even any other business
for that matter, they will tell you that the two most important words for
survival are 'cash flow'.
In other words, in
order to stay in real estate business for a long term, you need adequate
amounts of cash reserves. Buying real estate is easy however handling
negative cash flow, repairs, and other expenses in the meantime is the
tricky part. In fact, if you can handle the tough times, you will always
come out successful.
The lack of cash
reserves puts unnecessary pressure on you to do substandard repairs,
accept unqualified tenants, and also give into tenants' demands for fear
of the premises being vacated. On the other hand, when you have a
sufficient cash reserves, you tend to act rationally. The positives of
having surplus cash flow are:
o Being able to hold out for a higher sales price
o Being
able to hold out for a qualified tenant
o Being able to leave
properties vacant rather than accepting unqualified
tenants
o Being able to call a tenant's bluff when they threaten
to leave
o Being able to take care
of necessary repairs and improvements on your property
It is an entirely
different situation as compared to operating when there is a lack of cash.
Buying a real estate property with no money down is not difficult; it is
handling the cash flow that is tough instead. In other words, you can
easily buy real estate without money, but you just can not survive in
business without adequate amounts of cash reserves. Hence it is necessary
to consider accumulating cash reserves before investing in rental
properties.
4. Do not be
greedy
Most investors get
started flipping properties to other investors, which is a good idea to
generate ample cash reserves. However, you need to be realistic about how
much profit is there for you in a deal.
If, for example, there
is a potential for a $20,000 profit in a rehab project, it would not be
possible to make $10,000 flipping that property to another rehabber. A
rehabber thus has a huge risk embarking upon such a project and would
hence require a large enough profit to justify the risk.
For instance, if a
house needs $10,000 for repairs and the investor rehabber wants to make at
least a $20,000 profit it would be next to impossible. So also, if you
find a deal with $20,000 in profit potential, it would be foolhardy to
expect to get $10,000 for flipping the property, if the rehab investor is
only going to make $10,000.
Instead, the flipper
should be happy making $2,500 and moving on to the next deal. In case the
investor wants to make more than $2,500 on such a deal, then you must find
and negotiate a better bargain that a higher profit potential.
5. Treat real
estate like any other business
Many people are lured
to real estate investment business because of the quick buck it promises.
This is a misconception however and it is no point holding your breath
because you will not necessarily get rich quickly since an 'overnight
sensation' usually takes about five years and this could be why more than
90% of the people who take a real estate seminar quit after three months.
It is interesting to
consider why there is this high fallout rate; the reasons are the lack of
action put together with the unrealistically high levels of expectation.
Investing should be treated at par with any other profession and the
seriousness of any other career. It takes months or even years for a
business to cultivate customers and have a life and profitability of its
own; and hence the need to treat real estate business just like any other
business.
It is imperative to take at least six
months to see if the real estate investment business works for you since
it may even take a year before you buy your first property. Maybe by the
second year you will be able to buy three or four properties. If you work
hard at it and keep your eyes and ears open, you may even find your first
deal in the very first month. It needs to be remembered that talking or
thinking about it will not make money; instead good financial returns call
for going out into the market and taking action.
