Many real estate investors seek real estate experience without getting the required real estate knowledge and skill-sets essential to real estate investing success. In this article i would love to discuss some of the common real estate investing pit-falls that really can be avoided if investors take adequate precautionary measures and perform due diligence prior to investing.
I will also shed more light on why many investors don’t record much success in real estate investing which of course is often time as a result of their ineptitude, lack of skills, purpose and insight to what real estate investing is all about.
This article will help you and guide you against some of the most common mistakes that can make real estate investing frustrating, unattractive and sometimes regretable to investors. If absolute care is not taking some of these mistakes can also turn an asset to a liability. Here are some of the common real estate investing pit-falls that can be avoided.
1. Training /Education
This is the most important step every prospective real estate investor must take in order to be trained and educated in real estate investing and other aspect of real estate. Many investors don’t record much success in real estate investing due to lack of adequate training, mentoring and education. If you spend some time to acquire knowledge and skills by reading books and blogs on real estate investing you can avoid this pit-fall but many investors ignore this vital first step to a successful real estate investing. As an investor you must pay great attention to establishing good relationship with experienced real estate investors to clearly understand the principle of real estate investing, some accounting terms and math formulars you will need in your investing career. Some of the common accounting terms you need to understand are expenses, income, cash flow and returns on investment. Let us quickly go through this terms together.
Expenses are items and processes that cost you money on an investment such as loan principal and interest repayment, maintenance, taxes, management fees, issurance, holding cost, capital expenses and so on.
Income is the total amount of rent and additional fees that comes in.
Cash Flow is what you are left with in cash after deducting your total expenses from your total income. If it stays positive that indicates your business’s liquid asset is increasing.
Return On Investment simply represents the interest rate you make on your investment per year.
A real estate investor must be a skilled negotiator to successfully negotiate real estate deals and contracts to increase his/her profit margin. If you have poor negotiating skills you may find it difficult making profit from your real estate purchases because often times the profit is locked in the purchase price of the property. In other words you pay too much for the property and to avoid this pit-fall as an investor you need to up and sharpen your negotiating skills and be right about your estimate analysis on the maximum purchase price of every real estate purchases. Also ensure all cost associated with acquiring, rehabbing, holding, reselling, and profiting are deducted from the resale price. An investor must also understand the figures on his/her proforma, net operating income, capitalization rate, cash on cash and total return on investment of the property.
This is also a way of getting informed on what you want and what you can get out of real estate investing. Research focuses on specific topics or area you need answers to in order to solve a particular real estate problem at a particular time. Many real estate investors don’t do thorough research before investing in real estate. They often invest based on what they hear or see one or two investors do without taking it upon themselves to research, analyzed, evaluate to determine if the investment they want to embark on will work for them. The truth is an investing strategy that works for Mr. A may not likely work for Mr. B and that is the reason you constantly need to do some research. This pit-fall can be avoided by updating yourself on current trends through research, survey, discussion, interview and reading about real estate investing. This will assist you in making informed business and investment decisions in every real estate investing step you are undertaking.
4. Investing Strategy
Many real estate investors are at some point not happy with their real estate investment because they are not getting what they hoped for and are not enjoying all the benefits that come with investing in real estate due to poor real estate investing strategy. This is one of the technical aspect of real estate investing, every investor must have a good investing strategy or plan before setting out to invest in real estate. Investors must understand how proforma, net operating income, capitalization rate, cash on cash and total return on investment are computed to make good investment decisions. If you are right about these estimates then you can invest wisely but many newbies purchase property before looking for strategies to employ to maximize earnings which may not see the light of the day because of poor investing strategy. To avoid this pit-fall you must first define and write down your investing strategy before setting out to find a property that will fit into that strategy and your budget. Getting great deals is a function of good investing strategies, learn good real estate investing strategies to help you invest wisely.
It is ideal for every real estate investor to have good investing strategies and most importantly have great exit strategies or plans just in case of a market free fall , economy downturn or Introduction of new government policies beyond the control of investors that greatly affect the prices of properties and business activities in the real sector. An exit strategy keeps you abreast of the market trends and economy downturn which enable you to swiftly switch from one plan to another if your initial plan does not fit into current market realities. A smart investor can avoid this pit-fall by having a good investing exit strategy that enables you to make some profit even if you have to sell during adverse, unfavourable and harsh economy period. Here are some exit strategies you can adopt :fix and flip, lease – purchase, purchase and hold and finally if you decide to cut the losses incurred monthly on carrying cost then you can consider selling below the market price to another investor and still make some profit.
This represents the amount of cash left over after all expenses are paid, in other words your cash flow is what you are left with after deducting your total expenses from your total income. Many investors unknowingly over estimate their cash flow due to lack of understanding of elements and components of administrative operating expenses, income. An investor must be wary of cash flow estimation and must ensure that all the elements and components of income and expenses are captured accurately to cover maintenance, management fees, mortgage principal and interest repayment, taxes, issurance, cost of advertising. A smart investor will also consider the vacancy rate to make sure his/her cash flow is not overestimated.
7.Get Rich Quick Syndrome
Many new real estate investors actually think real estate investing is a get rich quick scheme. We don’t know where that idea came from but we are aware of some experienced real estate professionals and mentors out there who make real estate investing sound so easy through their very impressive blogs, imformecials, webinars but most time ignore the effort, steadfastness and hardwork required to be a successful real estate investor just to promote and sell their products and books to gain large followership. We are glad to inform you that real estate investing is a good long term investment that is capable of generating regular and constant cash flow if the property is leased or rented out. To be successful in real estate investing you need to be clever, motivated to work, possess high negotiating skills, consistent in your deals and also show great diligence in your approach to real estate investing.
We researched why most investors don’t record much success and profit in real estate investing and what we got inaccurate estimate analysis prior to investing. If you must make good profit and get excellent result in real estate investing you must learn the concept of getting great deals and purchasing at wholesale price with the aim of selling at retail price. Investors must accurately estimate the retail value of the property they want to invest on, this is the price you can realistically resell the property. Now, you can also accurately forecast the property’s net profit potential by deducting all associated cost with escrow, rehabbing, holding, reselling, acquiring, and profiting from the resale price of the property to arrive at the maximum purchase price or wholesale price that you offer the seller. If you pull through the purchase you can either resell or hold the property as a long term rental.
In today’s world of advance technology, it is easier to communicate and connect with investors and other professionals in the real estate industry. Many investors overlook and underestimate the importance, power and roles of good networking to the growth and success of any business. They go about their business all alone recording not much success and low productivity due to lack or poor networking, communication and relationship building. Investors can help themselves grow by sharing their knowledge, experience and adventures in real estate investing. This will enable them learn, understand and know other investors and contributors perspectives on current trends in the real estate market and the industry in general. As an investor you must learn the act of advertising, building and maintaining good relationship with other real estate investors, professionals and contractors such as real estate attorney, agents, financiers, inspectors, appraisers, plumbers, electricians, air conditioner technicians etc. All these people will form the nucleus of your network that will assist you in building a list of trusted professionals and contractors that can swiftly fix any real estate problem or concerns you might have as an investor in regards to sales, purchase, lease, rehabbing, remodeling and maintenance of property.
This is characterized by inability of a real estate investor to close more deals due to lackluster attitude, lackadaisical approach or not having a clearer picture of what real estate investing is all about. Many investors handle real estate investing as mere transactions instead of running it like their lifes depend on it. Real estate investing is a business that requires proactive measures and high volume of deals to grow. As an investor you can avoid this pit-fall if you concentrate on learning new concepts that will result in high productivity by showing enough enthusiasm, steadfastness and great diligence in your approach to real estate investing that will turn occassional transactions into a fulfilling life changing business.
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