Real estate investment can be a scary and exciting risk. Whether purchasing a commercial or residential property to build a project, investing to develop a rental portfolio, or purchasing a property to flip, there are some common mistakes that many newcomers make that discourage future real estate investment.
As both a real estate investor, and an academic authority on real estate development, I have seen first hand some effective strategies for reducing risk and avoiding pitfalls. The following is a list of do’s and don’ts based on experience, research, and interaction with other developers.
1. Don’t pay money for seminars or other get-rich-quick-on-real-estate schemes. The only person getting rich off these is the speaker.
2. Do your homework. Read the local newspaper, scour the regional business journals, and check out your library’s selection of real estate investment books. Real estate investing is like any other business. You have to know your market. It is surprising how many people don’t actually do this. I have met with real estate agents, mortgage brokers, lenders, and other developers who know nothing about the social, economic, and political climate in their region. Those are also the individuals who more often than not fail at their profession. By being an “expert” on your regional market (whether commercial or residential….but you should probably check out both, regardless) you will be able to make nuanced decisions of a seasoned pro.
3. Don’t forget that real estate investment is a business. And every good business needs a business plan. Road-mapping your future helps you stick to your guns. Real estate can be tricky, because there is the instinct of letting things slide (like inflated construction costs or a bad appraisal) once you feel you are in too deep. Your business plan will remind you of the game plan, and help you avoid making decisions based on the spur of the moment. Part of the business plan should also be a pro forma for every project, and strategies for how you will reinvest funds when you make a profit. A pro forma can be scary to newbies but it is the cornerstone of development. With some much information available a mouse click away, you can look at other people’s pro formas and even get templates to help you do the math.
4. Do talk to people. Networking is important in any industry, but the real name of the game in real estate. Networking also helps you find out about programs available to help you, like grants and first time buyer loans. It is also a component of knowing your market. Some of the best experts are people who are living and breathing real estate. They are also your lifeline to knowing changes in the markets-because it can and will change daily or weekly.
5. Don’t forget to dot your i’s and cross your t’s. A business plan will be the best reminder of steps you need to take and help ward off surprises. You will need to not only need to understand the appraisal and inspection process, but you should also be aware of lending procedure and different loans, local, state and federal compliance/regulation (permits, licenses and fees will become familiar territory) and insurance.
6. Do be prepared to deal with stress. Having a separate plan for stress coping and relaxation is vital.
7. Don’t spend too much money. Sounds obvious, but many real estate investors make the mistake of paying too much for property or a building that doesn’t pencil. Again, a pro forma will help guide you through that.
8. Finally, do quit if you aren’t having fun. Real estate investment should be a process you enjoy. If you don’t, chances are you are not going to be successful. Like most things, passion helps momentum and drive.
The secret to success with real estate investment is listening to your instincts and being deliberate. These two things will help guide you through the common mistakes made by new investors.