Learn how to avoid your first real estate investment mistakes. Like anything new, your first investment becomes a learning process. Yet, educating yourself can avoid the most common pitfalls. We are here to help newbies understand real estate investing. Like our popular post: “How to Make Millions with Rental Properties”.
Poor financing, underestimating repairs, and misjudging rent value are important mistakes to avoid. Newbies risk losing serious cash by making mistakes. Allow us to help you make your first investment profitable.
How to Avoid Your First Real Estate Investment Mistakes
Let’s explore 10 common mistakes to avoid;
1. Poor Financing
The biggest mistake is poor financing that will make you lose money fast.
What is poor financing? It’s a combination of these five issues:
- High monthly payments;
- High-interest rate;
- Adjustable interest rates;
- Balloon payment; and
- Personal guarantees.
Tip: Avoid the first four issues by getting a residential bank mortgage because they usually offer low-interest rates, 30-year fixed, with amortized payments, and no balloon payments.
However, they require your guarantee (personal recourse). This means you guarantee the mortgage payments with your future earnings and other assets (like the real property). Normally, a reasonable trade-off. Learn how to “Get Pre-Approved for a Mortgage”
On the other hand, you can borrow from private or commercial lenders, or use “hard money”. This can get you into trouble. Borrowing at 12 percent interest with large monthly payments, a balloon due in a few years, and full personal recourse is very risky.
Why? The high-interest rate may result in negative cash flow. Add in unexpected repairs or vacancies for less cash flow. A looming balloon payment means having to refinance or doing a short sell for less (or no) profit. Essentially, you just lost everything.
To make matters worse, your “personal recourse” means if you fall short on repaying the loan the lender can sue you to go after your other assets to get paid.
Tip: However, this doesn’t mean that all private financing is wrong. Since private financing is negotiable, you can accept a larger down payment with a little higher interest rate in return for no personal recourse and a longer loan term. Hard negotiating will avoid the worst mistakes.
We also suggest reading our post: “How to Invest in Rental Property with Little Money”.
2. Poor Location
As the old real estate saying goes: “Location, location”. Real estate value starts with location. Poor neighborhoods reap low rents. Likewise, you won’t find good tenants if the neighbors are unpleasant or not safe to live nearby.
You need to study the worst and best locations in your vicinity before buying. Sure, some investors can profit in bad locations. Yet, such investments are too challenging for newbies.
Tip: Know that professional families prefer homes in good school districts. However, superior school districts demand higher property taxes requiring higher rents.
3. Not Using Your Due Diligence Period
Tip: Beware of fast closings on your purchases. Likewise, buying “as is” condition with no time for due diligence. Always include a reasonable time to do your due diligence before closing. If you discover defects or problems, you can walk away and get your earnest money deposit back. Read this recent blog post explaining “Earnest Money”.
Here are things to do during your due diligence period:
- Find a good professional property inspector;
- Get good repair estimates;
- Evaluate local ordinances and zoning laws to see what you can or can’t do with the property; and
- Get good rental comps and a third-party professional opinion of rent value.
Tip: You must double-check your estimates and assumptions when you made the offer. If you made a prior mistake either renegotiate a better deal or walk away.
Tip: Your due diligence should include every contingency in your purchase agreement. If a contingency is not met, you can cancel the purchase and recover your earnest money. Want to learn more? Read about “Real Estate Contingencies in California”.
4. Underestimating Repair Costs
As a newbie, you can’t avoid underestimating repair costs. Even a full inspection can’t guarantee what lies in wait behind walls, floors, and ceilings. However, you can avoid expensive cost overruns that make you run out of cash.
Houses in bad condition rent for less. So, repairs become essential. Also, to avoid costly replacements that a simple repair fixes before it gets worst.
Educate yourself about estimating repairs. Read good books or view videos about “How to Estimate House Repair Costs”
Tip: Reach out to experienced investors to recommend good contractors they used and like. Join local real estate clubs and forums to seek investors to mentor you.
5. Misjudging Rent Value
Tip: Investors need to understand how renters decide to lease and translate that into value. Determining full value potential or lack of becomes the difference between profit or loss.
Here are some tips on learning how to determine value:
- Focus your market to a small manageable vicinity;
- Research recent market transactions of similar houses;
- Work with an experienced Realtor who can help you understand local MLS data and prepare Comparative Market Analysis (CMA) of houses that interest you like SoCal Lifestyle Realty; and
- The best source for rental property values is an experienced property management company like WeLease where we are happy to help newbies.
6. Draining Your Cash
You set aside limited funds thinking they will cover all the investment costs. Then, the unexpected happens to require more cash. Your wealth-building depends on sufficient funds to keep your investment property functioning.
What causes a drain of cash? This often happens for two reasons:
- Underestimating repair costs; and
- Unexpected future rental property capital expenses.
Capital expenses include costly items like a new heating-air system or a replacing the roof. Big trouble occurs with unexpected large costs. Learn “How to Estimate Capital Expenses”.
7. Choosing Poor Contractors
So many contractors to choose from. Like doctors, they specialize in many fields from carpet installers, painters, wood finishers, and HVAC systems. Making the mistake of hiring bad contractors results in poor quality, bad installations, or defective products.
Then, you try to find a better contractor only to hire the worst one. What can you do?
Finding a contractor who does good work, finishes prompt clean-up afterward, and charges a reasonable price is not easy.
Tip: Success depends on hiring the best contractors at a good price. Learn about “How to Hire Good Contractors”.
8. Allowing Emotions to Influence Your Decisions
Newbies often make this mistake. They get caught up in the excitement of the deal.
Tip: You must balance your eagerness with objectivity and hard analysis. Consider these “Property Rental Valuation Metrics”.
9. Choosing Shortcuts to Wealth
Newcomers in the real estate industry often get influenced by self-proclaimed real estate consultants (gurus). These gurus spread false claims about real estate investments. They advertise “How to Get Rich with Real Estate”. Learn “How to Spot Real Estate Scams”.
In the real world, you need to understand it takes time and effort to build wealth through real estate investments.
Tip: The ones with patience willing to learn the industry and make wise decisions gain wealth.
10. Never Walk Alone
Newcomers can’t know everything about real estate investing.
Tip: The right way to succeed is to build up a team of real estate industry professionals who keep up with new trends and know your market area.
Your dream team should include a Realtor, general contractor, lender, property inspector, real estate lawyer, tax consultant, and a property management company.
How to Avoid Your First Real Estate Investment Mistakes – Conclusion
Understanding how to avoid your first real estate investment mistakes includes following our suggestions to avoid:
- Poor Financing;
- Poor Location;
- Not Using Your Due Diligence Period;
- Underestimating Repair Costs;
- Misjudging Rent Value;
- Draining Your Cash;
- Choosing Poor Contractors;
- Allowing Emotions to Influence Your Decisions;
- Choosing Shortcuts to Wealth; and
- Never Walk Alone.
How a Professional Property Management Company Helps San Diego Investors
Never walk alone when investing in San Diego real estate. WeLease can become an important member of your dream team.
If you do not want to manage your home rentals (or multiplexes) or do all the maintenance and repairs you will need professional property management services.
WeLease offers all the property management services you need. We service single-family home rentals or large apartment buildings and everything in between.
Contact us whether you are a newbie or a seasoned investor in San Diego County.
Steven Rich, MBA – Guest Blogger
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WeLease Property Management Company