Investing in real estate is a great gig. We absolutely love this business. If we didn’t, we wouldn’t be here! Not only is it one of the most rewarding and engaging ways to invest, but it’s also people-centered and people-driven. How often do you find that?
Unfortunately, like any investment, there’s a fair bit of sensationalism that’s grown up alongside "real" real estate investment.
There are gurus out there claiming some variation of ‘get rich quick’ and promising overnight success if you follow their programs and buy their books and attend their expensive seminars.
Some people out there will try to tell you only the good about investing in real estate without telling you about some of the things you have to be careful of. We’ve always talked about due diligence in this business and that’s because it’s crucial. There are risks associated with any investment! Ignoring them is dangerous.
For many new real estate investors who step into this business unprepared, it’s a disaster! It’s sad to see because someone somewhere probably just told them they didn’t have to do their due diligence. They just had to watch the money roll in. Because real estate is risk-free, right?
At Memphis Invest, we want to see real estate investment done right. So we want you to avoid these common pitfalls that plague unprepared real estate investors:
4 Major Pitfalls New Real Estate Investors Should Avoid
1. Bad Financing
In the headlong rush to get that property and start investing, some investors are too quick with their financing and make fatal errors. Bad financing can come from a combination of factors that increase your risk, but it usually has to do with some mix of high-interest rates, adjustable interest rates, balloon payments, personal recourse, and a high monthly payment.
For the most part, a standard bank loan won’t have you worrying about anything besides personal recourse. But if you’re financing your investments by alternative means? Watch out! Be sure you’re very clear on the terms of your financing, whether it’s another type of bank loan, from a private money lender, or hard money.
We have to be wary of potential fluctuations in financing during potential fluctuations in different stages for our properties (like periods of negative cash flow during turnover). For some investors, this could be a nail in the coffin!
Don’t be afraid to negotiate to get the best terms you can. Shop around. Don’t be so eager to invest that you fall into bad financing—you may be setting yourself up for failure before you start!
2. Wrong Market, Bad Location
A poor choice of location and market can doom investments from the very beginning. While there is a rental demand of some kind just about everywhere, it’s a lot more difficult to translate an investment in a slow and difficult market into momentum to scale and grow your business. What if you can’t find tenants? What if there’s no demand? What if the value of your property tanks and you can’t resell it?
Investors can’t just buy anywhere and expect success to find them. It’s about finding markets that are poised for growth: growing in population, economic success, and real estate value. It’s about finding where there is strong rental demand. It’s even about anticipating the next big thing. If you want success, you have to be in the right place.
3. Cutting the Wrong Corners
Part of successfully investing in real estate involves being smart and economical with your finances. Getting deals and saving money plays a big role in real estate investment—just not at the expense of the quality of property and services. There are some corners that you can cut. Example? You probably don’t need all granite countertops and solid hardwood floors in your rental property. Premium property upgrades aren’t going to be where you’re going to get the most value.
Where some investors mistakenly cut corners, however, is in their services. They pick cheaper property managers, maintenance crews, and contractors on the assumption that the bare minimum will suffice. Unfortunately, this usually increases turnover and negatively impacts not only their cash flow but their reputation and the lifespan and value of their properties.
Services matter. Invest in them!
There are plenty of places to miscalculate when it comes to real estate investment. We underestimate the cost of renovations. We overestimate the worth of the property. We don’t understand how our tenants see value and overshoot rental cost.
While we’re bound to misjudge things every once and awhile, doing it over and over again will be a drain on your resources. It can be enormously costly; leading to lemon properties, rushed rehabs, long vacancies, and other missed opportunities.
It’s so important to have the right numbers and the right market information.
Despite all of the potential pitfall that investors old and new can fall into, they can be avoided. It just takes knowing where they are! Equip yourself with the best guard against risk: knowledge. Arm yourself with everything you can to make the best decisions possible for your investment future.