We™ve all seen, or at least heard about the TV shows that seek to teach us how to succeed in real estate investing. While many of these programs offer a decent education on the subject matter, they often fail to include critical elements that can, and will dictate the success, or failure of your real estate investments. Here are a few ‘Not To Dos’ for the would be investor:
1. Buying a home on speculation. Many new investors buy homes based on speculation that the market will increase in value quickly. Never buy an investment property hoping the market will change. Make your money on the front-end when the property make your money when the property is purchased.
2. Using a Realtor that does not understand iinvesting. Talk about the blind leading the blind! Make sure your Realtor has some experience in real estate investing. More importantly, make sure they can provide accurate comparables for your local market.
3. Buying an investment property at 90% – 100% of the Full Market Value. Buying an investment property at or close to Full Market Value is not sound real estate investing. Remember, closing costs could run up to 4%. There are also the costs associated with carrying the property, taxes, insurance, etc. Purchasing a property near 100% Full Market Value is likely to wind you upside down on your mortgage.
4. Not having a system for buying properties. You must have a system or formula in place to determine if a potential property is a good deal. Most investors we work with use the MAO formula or something similar. Although you may not use it 100% of the time it™s a great formula for new investors to use as a reference point.
5. Not getting a home inspection. The $150 or so you invest on a home inspection will pay for itself tens times over. Get a home inspection!
6. Not knowing the local or state laws. Real estate laws are constantly changing. Keeping abreast of local and state laws could save you a lot of money and prevent you from going to jail!
7. Not understanding the local market. One key to real estate investing is understanding your local real estate market. Why is this important? Columbus’ Downtown and a few of it’s surrounding areas are somewhat rare in that prices vary significantly block by block and sometimes only on one side of the street. Make sure you have an agent or Realtor that understands the uniqueness of your local market when looking for comparables in your area.
8. Trying to be cut costs by being cheap. It™s ok to bargain and to watch your budget closely but in the long run trying to cut to many corners will only lead to more expenses. Think about repairs and home improvement you’ve done on your own home where you attempted to cut corners and save money.
9. Taking on a big job as a new investor. As mentioned previously, I personally don™t recommend doing a full gut rehab or any big real estate investing project as a newbie. Why? The bigger the job, the bigger the headache. You™ll always run into obstacles even on the smallest project. Don™t bite off more than you can chew as a new investor. Start small and work with a Realtor or an experienced real estate investor.
10. Using second rate contractors. Oh how we love “The Hook Up!” Unlicensed and uninsured contractors are always ingredients for trouble. Family members are even bigger red flags. Be sure to confirm your contractor(s) have insurance, and check with your local Better Business Bureau on the company you selected. Ask to see a portfolio of the company’s work or better yet to visit the site of some of the projects they’ve worked on.
11. Not managing your contractors or GC. You must absolutely keep abreast of the project status and budget. If using a GC or General contractor, have them report to you daily on their progress and ask for an itemized list of materials purchased. A great way to manage material cost is to buy them yourself. If you choose to do so you’ll want to setup a contractor or remodeler’s account to take advantage of discounted pricing.
12. Not having any real estate investing knowledge. You should at least know the basics of real estate investing, i.e.; short sales, pre-foreclosures / foreclosures, subject-to, lease-options, deed-in-lieu, etc. You don™t have to be an expert, just make sure you understand the concepts and the different ways investors profit from the business of real estate investing.