Humans are wired instinctually to seek pleasure and avoid pain. Believe it or not, the “pain-avoidance” instinct is actually a lot stronger in most people than the “pleasure-seeking” instinct.
More than we want to get it right, we really don’t want to get it wrong. The fear of making a rookie mistake stops many aspiring investors in their tracks. Actually making rookie mistakes could result in financial losses — possibly even knocking them out of the game entirely.
In other words, knowing what not to do is just as important, if not more so, than knowing what to do. Here is our list of the seven most expensive mistakes first-time real estate investors (or even experienced real estate investors) tend to make … and how to avoid them.
1. Not Starting
The biggest killer of financial dreams is “analysis paralysis.” You don’t have to hit a home run out of the park on your first at-bat, but you’ll never win if you don’t get in the game! Get educated, do your due diligence, manage your risk as best as possible, but you can never eliminate risk entirely, and we learn the most by doing.
Trust your advisors, trust your intuition, trust the numbers, and take the plunge! Every investor makes mistakes, but with enough preparation and the proper advice, they won’t be death blows. Any small lessons you learn the hard way will make your next investment even better.
2. Investing Emotionally
We get emotional about our homes; we can’t afford to get emotional about real estate investment. First and foremost, real estate investing is a financial activity, which means a good deal is hiding in the numbers, not your gut.
How does this manifest? Passing on an “ugly” house and missing the upside potential. Overpaying for a “beautiful” house because they would want to live there. Chasing FOMO into buying at the top of the market.
Cool your jets, recruit some advisors, and look at the numbers. That’s what the pros do.
3. Underestimating Expenses
It’s human nature to hope for the best. If a contractor (or realtor) throws out a lowball number of how much a repair, rehab, or upgrade will cost, we want to believe them. After all, the deal works at that lower number!
This is how real estate investors get in over their heads, with an over-budget renovation and no cash reserves to finish it. Uninhabitable and with no rental income, the property becomes a bonfire of money and a stain on your balance sheet.
Don’t fall victim to a lowball expense estimate. Shop around for estimates, pick the highest estimate, and then bump it up 20-30%. If your deal can survive this worst-case scenario, you may have a winner.
4. Being Too Cheap
Some first-time landlords get stingy with the purse strings, neglecting maintenance and only responding to service requests when something is on fire.
Even if this pinches a few pennies in the short term, it is short-sighted. A neglected tenant will bounce when the lease is up, and then you have to endure the cost of replacing them. Deferred maintenance often turns simple fixes into catastrophic system failures. Skip the step of flushing the water heater this year, and you may end up with the back-breaking expense of replacing it next year.
5. Not Being Cheap Enough
Some landlords turn their rentals into vanity projects, upgrading them with the same vigor as they would their own home. This is when you see modest duplexes with deluxe stone countertops and jacuzzi tubs.
Overkill! You won’t substantially outpace market rent for the area with luxury upgrades, not nearly enough to justify the expense. We beseech you — get a different hobby!
6. Only Looking in Their Own Backyard
Many first-time landlords think they are limited to the city in which they live. They think buying out-of-town or out-of-state is a hassle at best, risky at worst.
Actually, buying an out-of-state rental can be easier than you think … and the profits are worth it. If your local economy is stagnant or near a market-cycle peak, why not look farther afield for a city that is on an upswing and about to boom?
7. Trying to Do It All Themselves
Real estate investing is a team sport. You don’t know everything, and you can’t do everything. Pounding every nail in the renovation … making every decision in a vacuum … these are the marks of an amateur.
Pro real estate investors rely on carefully-chosen teams of experts. You don’t have to go it alone! Whole industries exist to help make you successful. Don’t turn your back on them out of pride — determine where you need help, and then go find it!
MartelTurnkey helps first-time and experienced investors alike avoid these seven deadly pitfalls. More than anything, we help with the first one — getting people in the game! If you want to invest in property and don’t know where to start, give us a call! Whether you work with us on one property or dozens, you won’t believe how easy it can be to realize cash flow, profits, and tax savings by buying turnkey rentals in booming markets.