5 Profit-Killing Mistakes Real Estate Investors Need to Avoid

Real estate investing can be a great way to make money and build wealth – if you know what you’re doing. The thing is, many novice investors in the real estate market underestimate the work and risks associated with this type of investing.

Before you jump in with two feet on your next real estate deal, consider the following 5 mistakes to avoid so you don’t lose your shirt.

1. Not Doing All the Homework First

Throwing your hard-earned cash on a huge real estate investment needs to be done with a certain amount of due diligence first. When shopping around for a big screen TV or new car, for instance, a lot of questions are typically asked to find out if the purchase is definitely worth the money. In much the same way – yet on a larger scale – doing the necessary research absolutely needs to be part of the investment game.

There are a host of considerations that you have to make, depending on the type of real estate investor you want to be. Will you be a land developer? A landlord? A fix-and-flipper?

What about the property you’re investing in? Does it need work? What type of neighborhood is it in? What type of expenses are you looking at paying?

There are literally dozens of questions that need to be asked and answered before you start pounding the pavement in search of the perfect investment property. Failure to do so will nearly guarantee a sub-par investment.

2. Being Unrealistic About Expenses and Revenues

Doing a little math goes a long way when determining whether a certain investment will have you walking away with money in your pocket.

The scary thing is that about 80% of real estate investors don’t do the thorough number-crunching that’s necessary to ensure that the property’s revenue covers all its expenses. Over-inflating the rental income, underestimating the vacancy rate, and ignoring certain expenses can put investors in the hole when everything is said and done.

3. Getting Crappy Financing

Unless your bank account is well-padded, you’ll most likely have to get financing in order to secure title for a new investment property. But not all financing programs are the same. There are tons of exotic-looking mortgage options available to help buyers get into certain properties, especially after the real estate bubble famously popped in 2007.

The bad news is that there are lots of buyers who lock into variable loans or interest-only loans who will inevitably get shafted when interest rates eventually start to spike. It sounds highly attractive to secure a super-low interest rate when first getting approved for a mortgage, but do you have the financial flexibility necessary to pay up if interest rates rise? A seasoned mortgage broker can help you sort out all the nitty gritty.

4. Trying to Save a Buck by Doing Everything on your Own

Many investors – especially newbies – think they can save a bunch of money and increase their profits by completing a number of tasks on their own. From finding and buying the property, to making repairs, there are certain jobs that should be left in the hands of the professional.

At the very least, as a real estate investor, you would be wise to include a realtor, home inspector, attorney and contractor in your arsenal of experts. Sure, you might be paying them upfront for their services, but you’d be surprised at how having things done right the first time can actually put money back in your pocket instead of paying out the nose later on when mistakes are made.

These pros will be able to alert you of any flaws in the property or neighborhood, any defects in easements that could come back to haunt you, or get the proper permits needed to safely and lawfully make any repairs necessary. If anything, it’s worth the headaches saved in the long run.

5. Ignoring Risks in Real Estate Deals

Much like any other type of investment, real estate comes with a certain amount of risk. There are all types of risk issues that come along with owning property. While due diligence before purchasing real estate can significantly lower this risk, the reality is, there is still some there. It’s critical to estimate what these risks are, and their magnitude, before considering an investment.

The Bottom Line

As incredibly profitable as real estate investing can be, it’s can also often be tougher than it seems. Of course, proper planning and due diligence before investing can keep you out of hot water, but some situations can be hard to mitigate. Do your best to avoid the big ones that could put a dead halt on your investment career before it’s even given a chance to get started.