Growing up, Monopoly had always been one of my favorite games. There were times when I thought to myself, “Buying real estate and collecting rent? I wonder if I can do this in real life?”
After graduating from university, that little wonder grew into a passion and real estate investing became my obsession.
Although I knew what I wanted to do, I had no idea where I should start. Then I remembered that someone once told me that the best way to learn is to learn from your mistakes. So I thought, “Why not learn from other people’s mistakes first?!” 💡
When you buy a rental property, especially your first one, it’s an overwhelming yet empowering feeling. It’s all those years of saving and researching finally being put into action. Most importantly, it’s YOU finally playing Monopoly in real life.
If you want to invest in real estate, you’ll have to recognize that mistakes are inevitable. It’s what makes us grow stronger and wiser, as cheesy as that sounds. 🙂
In real estate investing, every single property will have a different personality. In fact, each one of them will teach you valuable lessons that will help you along your journey.
So what are these mistakes made by real estate newbies?
Here are the 3 worst mistakes that many newbie investors make when buying real estate. Some of these mistakes are ones that I have made as well!
Let’s get into it, shall we? 🙂
1. Focusing Only On Appreciation
Appreciation is generally the only thing newbies think about when it comes to real estate investing. It is a part of the “buy-and-hold” and “buy-and-flip” strategy that many real estate investors and flippers like to use.
Of course, focusing only on appreciation can make you tons of money, but you’ll need to buy in and cash out at the right time.
Sounds simple enough, right? … Until you try to figure out when this “right” time is suppose to be.
Why Is “Focusing Only On Appreciation” A Mistake?
- Most newbie investors who bet on appreciation will have next to nothing in cash flow.
- You might have to pay out of your pocket each month to cover the cost to hold the property.
- Can’t predict the market; might end up overpaying in a high market or forced to sell low in a low market if you run out of money.
- Appreciation doesn’t give you a passive income.
- You need a lot of money to hold the property during recovery time if the market crashes.
- Missed opportunities to buy an awesome property since all your money is stuck in the bad one.
In addition, the goal of investing is to invest our money into something that pays us and not into something that costs us each month. This is exactly why owning a cash generating property is so important!
How Can We Avoid This Mistake?
- Put your focus on your cash flow per month first before putting your focus on appreciation.
- Look at appreciation as a bonus.
- Do the math and make sure the numbers make logical sense.
- Consult other investors, preferably experienced real estate investors, if you have no idea what you’re doing. Don’t be afraid to ask for help when you’re unsure of your next move.
- Read, research or network; educate yourself as much as you can.
When searching for a rental property, look for a property that has an awesome cash flow. Do the rental analysis based on how much cash flow it will give you NOW. Not in months or years from now!
This way, even if your property doesn’t appreciate in value over time, it will still give you a good chunk of cash flow per month. Remember, appreciation builds your wealth and cash flow gives you income to help you pay for your living expenses.
2. Underestimating Expenses
This is a common mistake that a lot of real estate investors make when they’re starting out. Even experienced investors still make this mistake too!
When you buy a rental property, there are many times you’ll need to do repairs before you can rent or sell it. Real estate investing newbies tend to underestimate the cost and time that it will take to do the repairs. Usually, they end up running out of money or having to get more money to cover the extra costs.
Why Is “Underestimating Expenses” A Mistake?
- Running out of money, due to unforeseen expenses, will turn your property from a good one to a bad one.
- Zero or negative monthly cash flow.
How Can We Avoid This Mistake?
- Before you even buy the property, try to get a second or third opinion on the repair costs.
- Compare the estimates between different contractors to get the best price and timeline.
- Add in buffer time and money on top of your estimates for worst case scenarios.
- Verify the monthly rent price with your property manager.
- Do your homework; consider all monthly expenses such as vacancy rate, insurances, maintenance/repairs, property management, utility costs/rentals or any costs to hold the property.
- Prepare a reserve fund for vacant months and surprise repairs. 🙂
- Try to minimize the work that you do on your own. Get an expert’s opinion and have them do the work. Remember, time = money; the more time you spend on figuring things out, the more money it’s going to cost you.
After that, try running through the numbers again and see if it still make sense. Do not buy anything unless you’ve done this. Trying to “make it work” is a sign to move on and keep looking. Just imagine what else you’ll have to do later on trying to “make it work”!
3. Not Doing Your Homework
Ever since I became a real estate investor, I often get asked this question, “How do I know when it’s a good deal?”
I hate to be the one that breaks it to you, but the answer is… You have to do your homework. *gasp* 😮 There is no magic formula or easy button when it comes to real estate investing.
You’ll need to learn about it just like you would when you learn about anything else. Whether you invest in real estate or not, you need to understand that mistakes are bound to happen. So it’s always important to do your research and avoid mistakes as much as you can.
Why is “Not Doing Your Homework” A Mistake?
- You can end up buying the wrong property.
- Paying too much for a property.
- Having all your money stuck in a bad investment property that could be giving you zero or negative cash flow.
- Underestimating the market price in the area. This could cause you to rent or sell at a lower price than you originally planned.
- Wasting time and money, causing you to delay even longer.
- Stuck in the mentality that real estate investing is a “get rich quick” scheme.
How Can We Avoid This Mistake?
- Make sure you shop around and look for the right financing options that would maximize your money.
- Have a reserve fund.
- Have an exit strategy ready.
- Research and validate the market prices with other professionals.
- Partner up, but only with someone you trust and are comfortable to work with.
- Be curious, be a sponge and learn from as many people as you can!
Most new investors fail because they didn’t do their homework. A majority of them end up buying that one bad rental property that scared them so much, that they swear to never invest in real estate again.
There is going to be times when you feel like the more you know, the more you realize how little you actually know. And that is completely normal! You just have to keep hustling towards your goal, because that’s all it matters in the end.
Real estate investing can be risky, but there are a lot of things that you can do to mitigate those risks. Educate yourself and ignore cynics who don’t understand enough about real estate. Keep an open mind and be ready to absorb knowledge from all sources. Learn from the mistakes of others and be sure to learn from your own mistakes as well.
Before I go, I’ll leave you with one of my favorite quotes:
A person who never made a mistake never tried something new. – Albert Einstein