It’s little wonder that so many people are interested in becoming real estate investors. It is, after all, probably the most tried-and-true pathway towards long-term intergenerational wealth in history.
If you’ve got the financial backing to invest in a property, then you have the capacity to succeed in real estate. And yet, that doesn’t always happen — there’s a long list of investors who entered the market, only to exit it a few years down the line because it simply wasn’t working out.
The good news, for new investors, is that most of those failures will have happened because of the same, predictable mistakes that we see time and time again. Being aware of those errors, as well as understanding how to avoid them, can go a long way towards ensuring your real estate investing journey is a success.
Real estate investing can be exciting, and it’s even more so when you believe that you’ve stumbled upon the perfect opportunity. There are some properties that are simply charming, and they can become even more appealing when you think they might just be your pathway towards financial success.
But real estate investing success is not driven by emotion: it’s driven by numbers. Even great properties can make for dud investments if the underlying numbers don’t stack up.
You’re allowed to feel emotions on the journey, but they shouldn’t be what drives the decision-making process. That should be made using a scorecard against which you measure all your potential investments; if it doesn’t score highly on that front, then it’ll be best to walk away. Remember, you’re not buying the property for personal reasons; you’re doing so for business reasons.
Once you get into real estate, you quickly realize that A. There are more costs than you thought there’d be, and B. There’s a lot more work involved.
Someone’s got to take care of the management of the rental property. In the early days, many new investors believe that they should do it, since that’s an easy way to save money and boost their bottom line.
But that can be a mistake, for multiple reasons. For one thing, you can spend a lot more time managing a property than you might expect. It’s also not something that you can do forever; while you might manage one property just fine, you won’t be able to manage multiple properties.
Finding a good property management company early on can help to save time, money, and stress. There’s a charge involved — often around 10% of rent collection — but there’s a reason why virtually every pro investor uses them: they’re worth it.
You’ll need to pay tax on your real estate investments, but how much you pay can vary widely. Many new real estate investors view their property-related tax obligations in the same way that they view personal tax, and try to do it themselves.
You can absolutely file your real estate investment taxes on your own, but unless you have expertise and experience, there’s a high chance that you’ll be paying more than you need to.
The truth is that there are some excellent property tax strategies that can seriously lower your tax bill and boost cash flow, but they’re not automatic. Working with a company that offers cost segregation services can be a game-changer for reducing your taxable income, allowing you to hold onto more of your money, which you can then put towards your next investment. For seasoned real estate investors, this is the only way they’d approach their tax duties, yet many who are new to the game simply don’t realize that it’s an option.
And while we’re talking about cash flow: many new real estate investors underestimate just how important it is.
That’s often because investors become too obsessed with appreciation. So long as the property is increasing in value, then they get lured into the trap of believing that everything’s going well.
But it’s not like that. If a property is losing hundreds of dollars a month, then that’s going to impact profitability massively — and cause a lot of stress along the way. There are many ways to improve cash flow as a real estate investor (including the tax strategies outlined above); doing so will ensure that you can hold onto your investments for long enough that you actually get the benefit of the property’s value going up.
Many new real estate investors believe that it’s better to have any tenants than to have no tenants.
You might get lucky and give the tenancy to a tenant that turns out to be perfect. But if you cut corners and don’t undertake screening, then there’s every chance that you end up with a bad tenant, and those can be a lot worse than having none at all. In the worst-case scenario, you might have to spend thousands of dollars and spend many months trying to evict them, at which point you’re left with a property that’s in such a condition that it can not easily be rented.
Putting together a tenant screening procedure that you apply to every applicant can help avoid this issue. With credit checks, employment checks, and proof of income/funds, you’ll filter out a big percentage of the tenants that could potentially cause you headaches.
You know to have a positive attitude to succeed in the real estate investment game, but there’s a big difference between being positive and being wildly optimistic. Many new investors focus on the possibilities of property, and in the process, downplay the risks that might just cause problems down the line. There’s no such thing as the perfect property, so it’s not so much about waiting for a property that doesn’t have any issues whatsoever, but it does mean that you should at least be aware of the issues before proceeding. Before investing, know the blindspots, and come up with a plan for managing them.
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