If you are new to real estate investing, you likely know that it can produce the greatest rate of return and a path to financial independence. But what you should know is that the learning curve in this industry is quite intensive and requires a great deal of planning and preparation. Oftentimes, it’s the lending side of real estate investing that most people find intimidating. Here are five common mistakes to avoid as first-time investors.
Underestimating Costs
Whether you are flipping a home or prepping a property for rental, it’s important to get a precise estimate of the repair and renovation costs. It’s not uncommon for new investors to run up “surprise” expenses that significantly drive up the costs and affect the overall profitability of the investment home.
Over-improving
Over-improving means putting more money into a home than you can get in return. For instance, a home may never be worth more than a certain amount of money regardless of whether you add more high-end features and finishes because the location may not be as good. When improving on a home, consider looking at nearby “comps” to see how much buyers are willing to pay for a home with similar upgrades and square footage.
Overestimating Rental Income
Overestimating rental income is another common issue. While researching comparable homes in the area can help you understand rental prices for the home you are renting out, you should keep in mind that vacancy periods may significantly impact your profitability, which is contingent on being able to attract and retain tenants. In addition, rising taxes, utilities and insurance costs can cancel out profits from a stagnated rent.
Failing to Do Proper Due Diligence
In real estate, the period of time known as due diligence is the opportunity to investigate facts about the physical and financial conditions of the property and area the property is located in. Due diligence involves – among other things – walking the property, reviewing documents, conducting inspections, and calculating numbers such as insurance, taxes, and rental values.
Overlooking the Need for Training
As a budding real estate investor, the more training you receive, the less likely you are to commit costly mistakes along your journey. Training can come in a variety of forms, such as books, seminars, and coaching sessions. At Ridge Lending Group, our focus is almost exclusively on the non-owner-occupied sector of lending. We believe investment education is key and take great pride in piloting first-time investors through the waters of their first property.
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