Where do I start, which 10 to pick? Run a simple search online, or ask anyone- it seems like everyone has at least 10 pitfalls they can talk about, and the worst is each person’s 10 are different…so which ones actually matter, which ones do you actually pay attention to?
So I decided to talk about the ones that will simply have the hardest impact on your survival as a Real Estate Investor, and, unfortunately, the ones that I most struggled with when I started.
1.) Inaccurate $ Estimation
There are a lot of intangibles associated with estimation and it takes a good lot of intuition and experience to estimate properly. Keep it simple and calculate what makes sense, use your own experience, gut feeling, and ask other ‘greybeard’ investors in your area who are doing the same thing (and have been doing it longer than you).
2.) Lack of a Reserve
Don’t fall prey to not keeping any Cash Reserves on hand after the purchase of a property. Don’t become a new Investor if you have to eat Ramen Noodles or run up debt to afford the remodeling necessary to make the property profitable, plan ahead and keep Reserves.
3.) Calculation Paralysis
It is very easy to get caught up in fancy ROI calculators, tax numbers, and projections from so-called ‘experts’ living far away from your target area.
Keep the calculations simple to start with: Income-Expense=Profit. Continue adjusting Income and Expenses over the life of the project, and use that information for all future projects using actuals and percentages.
4.) Investing too far away
Be weary of online and ‘too-good-to-be-true’ deals. If you don’t know the area, and can’t check it out easily within a one day drive, pass, no matter how great the deal is. When you are starting off you need all the ‘hands-on’ experience you can get- that means physically inspecting as many properties as possible before buying until you can get a ‘feel’ for what is actually a good deal.
5.) Investing in the wrong area
Don’t buy in a bad area. Location is really really really EVERYTHING. Your fancy house in a mediocre or low value area isn’t going to return you the big bucks. Investigate where the desirable areas are thoroughly. Rule of thumb: If you wouldn’t rent there, don’t buy there.
6.) Picking projects that are too large
Don’t make the first deal your career breaker. Do not put all your eggs in that one first basket. If you buy a project house to flip in 6-9 months, and your invest 90%-100% of your capital in this one project, or loan against it, and the deal goes bad, it will be hard to recover financially; furthermore, you will kill your enthusiasm and confidence. Buy several smaller ‘practice’ projects or ones with little remodeling necessary. Don’t use ‘wholesaling’ as your exit strategy, practice that and other strategies when you don’t have to.
7.) Cutting timelines too short
Don’t cut your timeline too close from project Beginning to End. Buffer your timeline with plenty of extra weeks to account for any eventualities. Almost all construction projects I have ever been on, experienced delays, challenges, and problems. Don’t fret over them, factor them in from the beginning and count on them.
8.) Forgetting the ‘Human Factor’
Account for the ‘Human Factor’ in each project. If you are working with a new set of employees/ contractors/ partners/ banks, account for the fact that it takes time to ‘get to know’ each other, and get into a working groove which is productive.
9.) Buying ‘Restrictive’ Properties
Condo associations, historic district restrictions, and prohibitive covenants are often overlooked by new investors and can lead to big losses. For your first investment property always review any covenants and invest in a property that doesn’t restrict your plans.
10.) Freaking out over every Detail
I love to speak about this last pitfall. When I first became and investor and landlord I was freaking out every time a toilet leaked or my tenants were 2 days late with rent payments. My existence was full of horrific anxiety over things that I could not control at the time, and I only laugh about now. Yet if you are not having fun with the experience you are not likely to continue, and continuing in Volumes is the only way to make any worries worthwhile. So don’t fret the small stuff, get expert advice, and go with the flow.
Until next time: Happy Investing,
Julia M(oney) Spencer, Real Estate Advisor, Investor, and Enthusiast