5 Most Common Mistakes Investors Make
Real estate investors need to be sharp in order to recognize good deals, analyze potential deals and maintain profitability. Even if you’re going to buy a turnkey rental, there are certain things you first need to look at and do before moving ahead. Some of the most common mistakes investors make can lead to making bad decisions, missing out on excellent real estate investment opportunities or ruining good deals by working with bad partners. Here are five of the most common mistakes investors make and how you can avoid them.
1. Not Using a Property Manager
A property manager makes all the difference between an enjoyable passive experience and feeling like you have a second job. When an investor doesn’t use a property manager, they often end up having such a bad experience that it turns them off the whole landlord experience. There’s no honor in taking the rough road and managing your rentals yourself. And when you consider that a property manager only costs between 8% and 10% of the monthly rent, there’s no reason you can’t afford it. Also, property management fees are tax deductible, which is yet another reason why you can easily avoid this investor mistake.
2. Incorporating Too Soon
Investors are understandably concerned about protecting personal assets. It’s wise to think about this whenever you’re thinking of becoming a landlord. But incorporating often isn’t the best solution for protecting your assets against legal action. What happens when you incorporate your real estate business is that you lose access to many different funding sources. And for the ones you still have access to, incorporating makes the application and approval process a lot more complicated. Instead of incorporating right away, get covered against legal action with an assortment of insurance policies. You’ll gain the protection and peace of mind that you want, yet still be able to take advantage of all the same investment funding sources. When the number of your investment properties has increased to at least 2-3; then you might consider incorporating.
3. Partnering With The Wrong Person
Sometimes friends and family members choose to go in together on a property. That can be a solid creative solution if one or both of the people can’t afford the entire down payment, or if one of the people have challenged credit and can’t qualify for a loan. There have been many successful joint ventures between two or more investors. But you do have to be careful about who you partner with. Even friends and family members don’t always make good real estate investment partners. Anything could go wrong; the partner gets cold feet at the last minute, backs out and wrecks the deal, they have contrasting ideas about how to manage the property, they want to raise rents too far above market rates, or you clash with each other about how to save or spend profits. Disagreements and differences like these can ruin relationships as well as endanger investments. The bottom line is, you should be just as careful about whom you partner with as you are about deciding which properties to invest in.
4. Not Conducting Due Diligence
No matter how great a turnkey rental company is, or how awesome a real estate deal looks on the surface, smart investors conduct their due diligence before handing over one dollar. The mistake that many investors make is not conducting due diligence for a number of reasons. Maybe they don’t have the time to spend learning how to analyze a deal, they’re taking someone’s word that a company, person or particular property is a good investment, or they’re looking for short cuts so they don’t have to “waste” time. Due diligence is a requirement for any investment you make, whether it’s a turnkey rental, a multi-family unit or just hiring a property manager. There are no shortcuts in real estate, and skipping due diligence is another investment mistake you can easily avoid.
5. Not Educating Yourself
There is a modicum of real estate terms that you need to know if you’re going to become a savvy investor. It’s a big mistake if a would-be investor believes they don’t need to know the “technical” side of things. Real estate investment terms aren’t only for the highly intelligent. Anyone can learn them if given enough time. At a minimum, you should understand:
– Cash flow
– Cap rate
– Cash on cash return
– Rent to value
There are more terms to know, too. Take the time to memorize key calculations so that you’re quickly able to recognize a good deal when you see it. If it all seems too foreign right now, don’t worry; it will get easier the more you practice. Just don’t make this common investor mistake of not bothering to learn the lingo.
The good news is, you don’t have to make any of these mistakes as an investor. Every single one of them is easily avoidable with some time, patience, and a little investment in your own education. When you work to become the best real estate investor possible, you can go forward with more confidence that you have the necessary skills to ensure your success. Please feel free to contact MartelTurnkey with any questions or comments that you have. We’re always ready to help you succeed with your real estate investment goals.