If you are reading this article, there is a good chance that you have decided to become a real estate investor, or at least you are flirting with the idea of investing. Novice investors are often overflowing with energy and enthusiasm and why not? You are about to embark on the first steps of what may well prove to be a life-changing venture. Enthusiasm will serve you well if it is tempered with a healthy dose of reality and a willingness to learn from your own mistakes and the mistakes of others. Here are five of the most common missteps made by newcomers to real estate investing of all types, along with tips for avoiding them.
1. Lack of Organization
Before you venture too far into the investment realm, devise an organizational system that works for you. Maintain your documents, research, notes and offering plans in a system that works for you. Whether it all ends up in files on your laptop or in an old-fashioned notebook or portfolio with sub-folders does not matter. In the beginning, you might think you will be able to remember everything, but after viewing several properties, facts, images and data will all start to run together in your mind. Remember that you are a student of real estate investing engaged in on-the-job training. Take good notes and file them carefully because you will be tested on what you’ve learned when it’s time to pull the trigger on your first investment.
2. Shoddy Research
It probably took you a while to decide to invest in real estate so don’t make the newbie error of moving too fast after jumping in. Take your time, verify facts, review reports carefully and do not hesitate to consult with others and obtain a second or third opinion if the situation calls for it. Bear in mind that there is a learning curve to complete and, in the early days of your investing career, you may be better served by sharing risk with others and leaving some of the tougher analysis and decisions to experienced real estate professionals who are also partners in the investment. Then listen and learn from the pros. Both REITs and crowdfunding platforms provide investors with the advantage of having professional management, but only IMBY allows entry into the market for as little as $1 per share.
3. Failure to Screen Tenants
We have all heard stories of the bad tenants – the ones who pay rent sporadically if at all and destroy your beautiful property before you can even have them evicted. Don’t be the newbie landlord who falls victim to the tenants from hell. The best defense against troublesome tenants is a tight screening system. Require each prospective tenant to fill out a detailed application, authorize a background check and credit report and provide copies of bank stubs, account information and at least three personal and business references – preferably none of whom is their mother or best friend. Most importantly, demand at least one landlord reference and conduct an in-depth interview with the would-be tenant. Use a comprehensive tenant screening checklist and do not sign a lease until you’ve checked all the boxes on the list. If possible, avoid leasing space to your relatives or friends. It’s always best to keep your business and personal lives separated. If you don’t believe me, imagine the horror of having to tell your parents that you’re evicting your brother!
4. House Flipping Nightmares
We’ve all seen the highly entertaining reality TV shows where house flippers compete to grab the best houses to rehab and then race against the clock (complete with dramatic background music) to cash in and turn a profit before the market swings or the one-hour time slot runs out (whichever occurs first). The attractive house flippers invariably encounter all types of unexpected problems in the form of hidden defects, building code deficiencies, etc. which they always manage to overcome before hosting a beautiful, staged open house and turning a tidy profit.
As you have probably guessed, the real world does not always work that way. Some problems cannot be cured in a speedy and inexpensive manner and, when this happens, house flippers are often happy to break even when they go to closing on the sale of the property. The TV shows have it right in stressing that any delay in renovating and going to market is problematic for the house flipper. The best way to avoid such delays is to (1) assiduously avoid the ever popular Mistake #2 (see above) and gather as much information as possible in the form of public records, inspection reports, demographic data and even anecdotal information from neighbors and local real estate professionals before acquiring the property and (2) have a contingency plan including back-up contractors and reserve funds to handle the curve balls that come your away. Anticipating the unexpected is always advisable.
5. Airbnb Fiascos
Almost everyone with a nice apartment or house has considered the prospect of listing their property as a vacation rental with Airbnb or one of the other online platforms. You’ve probably even done the math in your head. If I rent the property out for so many weeks a year for so many dollars per week, I can pay off my mortgage, buy another property, pay for college, etc., etc. It’s a wonderful concept with real potential for passive income, but there are also several common pitfalls in this formula that keep homeowners from realizing their dream. Before opening your home to strangers in this manner, check out the local zoning regulations and confirm exactly what is and is not allowed. Make sure the property is situated in an area that attracts visitors on a regular basis and do business only with guests who have already earned high approval ratings on the platform. Require guests to either put up a reasonable security deposit or purchase insurance to cover any damages during their stay.
Dale Carnegie, the famous 20th-century writer and self-improvement guru famously wrote, “The successful man will profit from his mistakes and try again in a different way.” Everyone makes mistakes and it is pretty much guaranteed that you will too. Failure does not result from mistakes but from the refusal to learn from them. Carnegie also wrote, “Take a chance! All life is a chance. The man who goes farthest is generally the one who is willing to do and dare.” Be that person, gather knowledge from missteps and be the best you can be.