Three Common and Critical Mistakes Real Estate Investors Make that Costs them Money
October 15, 2019
Vice President, Realty Executives
Being a real estate agent often provides the inside track when it comes to investing in properties. Agents are generally well versed when it comes to determining the market value of a home, which gives them an edge when seeing a good opportunity.
Being an agent, however, doesn’t necessarily guarantee success when it comes to investing in real estate. There are three common mistakes people often make when investing which may cost them dearly in their long-term and short-term returns.
There are many ways to engage in real estate investing. Generally speaking, you can either take a long term approach by acquiring rental income properties or you could engage in a flip and sell approach. This short-term approach focuses on obtaining homes at a deep discount, making enhancements or repairs, and then selling at market value.
Here are the common missteps often made when investing in real estate for long term hold and rent strategy:
Trying to Do It All Yourself – Assuming that you can effectively do all the work necessary to run a real estate investment business is a common misconception. For example, many investors attempt to take on the role of a property manager in hopes to save the fees associated with hiring a professional firm, or someone with expertise in property management. In most cases, the opportunity cost lost by trying to save a couple of thousand dollars is insignificant to the potential money earned by focusing on the acquisition of quality properties to add to your portfolio. Another area investors overlook when it comes to building a power team is to underestimate the importance of having a strong lending and finance team. A group that specializes in lending and financing support can make all the difference when it comes to moving expeditiously when good investment opportunities emerge. Having an expert team with proven experience will help to minimize mistakes and reduce bad judgment calls. There is a learning curve to becoming effective in both these areas of the business, only through experience can you develop good judgment. Thinking of yourself as the CEO of a Real Estate Investing Team is the first critical step to success in real estate investing.
Trying to Time the Market – Waiting for perfect market conditions is like having the star quarterback on the sideline conserving energy and strength, waiting for the perfect play to enter the game. The only way of understanding the game is to be in it. That’s where opportunities present themselves. The average investor needs to be in the game. To be effective, you must be fully and 100% engaged in the business. In doing, so you will know the right moves, at the right time. Also, you must understand your true objective when it comes to investing for the purpose of holding property.
Not Having a Clear Financial Intent – It is not uncommon for real estate investors to look only at potential cash flow or the likelihood of property appreciation as their investment goal or criteria. These are relevant and important but there is another way of looking at the potential value of real estate as an investment.
The best way to illustrate how virtually any real estate investment allows for a consistent, double digital return on your money is by sharing an example. Let’s say you purchase a $100,000 property and put the typical 20% down (or $20,000). The cost of the loan factoring out interest, taxes, and fees is approximately
$223.00 per month or $2670 per year. Now, if your rental income only covers your costs of owning the property you are still making a 13.3% return on your
$20,000 investment ($2,670/$20,000). Also, factor in that after 30 years, your initial investment of $20,000, not including property appreciation, will be worth
$100,000 which is a 500% simple return over 30 years. Further, rent typically increases by 3% per year, so add another 15% to your annual cash flow on the property. Since this is a buy and hold approach, devaluation or downturns in the market doesn’t affect your ROI unless you sell while the market is down.
In conclusion, making a business of real estate investing can be incredibly lucrative provided you immerse yourself in the business, formulate the right team, and apply the right financial strategy.
DISCLAIMER: SecurityNational Mortgage Company, and its loan officers, unless individually licensed and specifically denoted in their credentials, are not qualified to, and are prohibited from representing themselves as accountants, attorneys, certified financial planners, estate planners, investment specialists or tax experts, and will not advise you in those matters. Always seek the advice of a licensed professional. This article is for informational purposes only, contains the opinion of the author, not necessarily the opinion of SecurityNational Mortgage Company, and should not be construed as lending advice. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet LTV requirements, and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on applicant’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over life of loan. Reduction in payments may reflect longer loan term. Terms of the loan may be subject to payment of points and fees by the applicant. Equal Housing Lender. SecurityNational Mortgage Company Inc. NMLS# 3116. Aaron B Chapman NMLS 267844. Any amounts, figures, payments or loan terms stated are based on continually changing markets, rates, loan programs and borrower specific qualifications, and subject to change without notice. See loan officers featured for a personal consultation and accurate pricing.
Eden Sunshine is an entrepreneur, the creator of The Level 7 System, a speaker, author and Vice President of Operations for Realty Executive in Phoenix Arizona. Eden has coached and consulted with over 300 of the top Real Estate agents and teams throughout the USA and Canada since 2003. Eden specializes in helping businesses become scalable, positioned for exponential growth and productivity while establishing a meaningful, high performing business culture.
Aaron Chapman, a veteran in the finance industry beginning 1997, exited Cattle Ranching, Mining, Heavy Equipment Operation, Welding and long haul truck driving. Since entering the finance industry his clientele has ranged from those purchasing their first home, building their dream home or investing in multiple properties for long term cash flow. His expertise is in the complicated. Presently ranked #14 in an industry of over 300,000 licensed loan originators for transactions closed annually (707 closed units for real estate investors in 2018 and 676 in 2017); Aaron is that battle-worn partner every real estate buyer needs to walk thru the tough parts of building a real estate business.