Real Estate Investing Traps

I have been to several real estate seminars and read several real estate investment books promising untold riches in real estate. I have also experienced first hand the challenges of real estate ownership and have leant money to first time landlords who went on to find the game much more full of challenges than they ever anticipated. There are few instances of quick fortunes in real estate with the gains most typically being slow and steady. The average return is about 8% before maintenance and upkeep. Due to the labor intensive nature of real estate and the ongoing effort and cost associated with maintaining your investment, true returns may be significantly less.

To set yourself up for success avoid these traps…
Trap: Doing it alone. Find a mentor that will share his (her) experiences and knowledge, it can be invaluable. Find out if there is a local real estate association of seasoned investors. These associations are often comprised of seasoned investors and may include mortgage professionals, accountants, contractors and investors and may offer a wealth of knowledge. Take someone successful at what you want to accomplish to lunch and become a sponge of the tips they have to offer.

You can contact the National Real Estate Investors Association at www.nationaleria to find the closest affiliated group. The membership may range from $100 to $200 a year.

Trap: Starting to buy and sell properties too soon. You need to become a knowledgeable in many areas such as finding properties, valuing them, obtaining financing, handling tenants, managing repairs, knowing your legal rights, etc.

Learn the business and surround yourself with a network of professionals who you can count on to take care of the areas that you do not have the time or expertise to handle. Start small with a single family or two family property. Get your feet wet and see how well you do dealing with tenant issues, complaints, finding time to manage the units, etc.

Trap: Underestimating necessary cash on hand and underestimated carrying costs. The best way to set yourself up for success it to be diligent in using conservative cost and expense estimates. Too many would be investors look through rosy glasses and anticipate a monthly positive cash flow far greater than they will actually experience. Use conservative vacancy estimates, pad maintenance costs and expect costs to rise as far as taxes, insurance, water/sewer, etc. You will not always be able to pass these increases on to the tenant and will quickly turn a profit into a loss if your income/expense analysis was too aggressive. It is not a great feeling working your tail off every weekend keeping the properties in order, collecting rents, etc. to have a negative cash flow and have to pull money out of your personal account to carry the cash flow shortage.

When negotiating an offer on a multifamily I encourage you to ask for a copy of the sellers schedule E of their tax returns so that you can see what expenses they were claiming. Speaking of shortages, one of the most common traps that I see investors getting themselves into is being to cash deficient after purchasing a rental property. You must have solid cash reserves to fall back on should you have a vacancy, need to make repairs, or have to replace large ticket items such as a boiler, deck, roof, etc. Having to finance repairs, borrow to cover vacancies is a recipe for failure and at best is a set back in achieving your long term goals.

Trap: Buying Cute. Location is all important but don’t buy a property just because it fits your style and reflects where you would want to live. Buy because the location works, the property is solid and the numbers work.

Trap: Spending too much on cosmetics. When I bought my first apartment building I went in and made it just what I would want to live in. Wallpapered, refinished hardwood floors, overly meticulous with all kinds of things. Please believe me - you are wasting your time and money. Make things neat and clean but don’t go to the extent of making it your home. Tenants for the most part will not treat the property the way you would and your effort will be wasted. My experience was torn wallpaper, scratched floors, broken fixtures, etc. Paint and stencil can be easily touched up, inexpensive fixtures replaced and medium grade floor coverings replaced much less expensively than hard wood floors. You don’t need granite countertops and wool carpeting if comparable rentals in the area don’t have them.

The most cost-effective improvements are ones that add to a positive first impression. Consider items such as nice outdoor lamps, door handles, landscaping, mailboxes, etc. First impressions are key as most renters and buyers make their decision within the first minute of seeing property.

Trap: Paying too much. Sound investments most often are established at time of purchase. Successful investors make their money on the front end by buying correctly. If you have to get into a bidding war, you are paying too much. Restrict purchases were you are confident you are getting a good deal to prevent a costly mistake. It can be very disheartening to use your available cash to purchase a property that is at best an average deal just to find a great deal a couple of months later that could have been a great purchase. Patience is a virtue!

Related Links:
Investing
Real Estate Investing
Stock Investing
Newsletters