|
Avoid These 13 Mistakes of The Beginner Investor
“Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.” Marshall Field (1835-1906)
Real estate can be a great source of positive cash flow, tax savings and the satisfaction of helping others with their need for shelter. However, real estate has market cycles that, if ignored, can cause an investor massive headaches and pitfalls from which it may take years to recover. Trust me.
Many investors (first-timers, especially) part with their capital without taking the time to do the “due diligence”. They rely on traditional trends and gut feeling. Before you risk your money, take the time to learn all you can about your market. By aligning yourself with the right professional, you can avoid these common mistakes and almost guarantee an excellent return on your investment capital.
-
Failure to determine your needs. Cost of capital, opportunity costs, asset appreciation, rent multipliers, vacancies, tax benefits, loss and cost of management, equity pay down and simple pride of ownership are a few of the things that must considered before you make that first purchase. A REALTOR can be a tremendous team member in helping you evaluate your needs and make sure you’ve got all your bases covered.
-
Not validating the seller or seller’s agent’s numbers. Be wary of extremely high rates of return claimed by the seller or the listing agent. Don’t let your emotional desires drive your decision process regarding a property. Check every detail - rents, vacancy rates, payment history, taxes, expenses, deposits, future modifications - everything regarding the finances of a potential investment. Working with a good REALTOR - it’s like an insurance policy. Verify rents by examining any and all rental surveys you can obtain. Some great sources for this kind of information are: Home Pointe ( www.HomePointe.com) – Their website contains rental surveys by zip code. Unless you are able and willing to survey the local area on your own, this information could be the most accurate for the cost (FREE). Investor’s Choice Property Management ( www.investorschoicepm.com) – Call to find out the going rental rates for the areas in which you are interested.
-
Failing to consider it a business. Owning rental property has a great potential for creating and holding wealth, but you may also be forced to make potentially difficult decisions. Evictions, re-investment into the property, and time management all need careful consideration. Real estate investment is not a “hands-off” type of business - it will require your vigilance. For that matter, discuss tax implications with your tax professional to ensure you have the proper entity structure to hold and protect the asset.
-
Accepting a continuous, negative cash flow. Property that doesn’t “pencil” (a.k.a., profit) will drain your working capital. This will create stress, frustration and can be financially debilitating over time. However, never expect constant appreciation and positive cash flow. This is unrealistic even for a seasoned investor. Constant losses may force you to sell the property before the benefits are ever fully realized.
-
Failure to do a thorough inspection. Don’t ever buy a property without an inspection. And inspect everything you can; a general home inspection, a roof inspection, a pest inspection, a pool/spa inspection (if present). Hire professional inspectors to perform this work. Ask the tenants about roof, plumbing, and pest problems, structural damage or recurring problems and don’t overlook anything. A value-driven REALTOR can suggest reputable inspectors and can help you avoid costly mistakes.
-
Failing to have adequate insurance. Investment properties are assets that include liabilities such as tenants, cars, parking lots, cleaning facilities, property liability - the list can be both extensive and daunting. Adequate insurance is an absolute must. Be sure to consult with an insurance professional to protect your assets. Also, the proper entity structure can protect your personal wealth and assets should someone file a lawsuit. Consult your tax professional for this asset preservation and protection advice.
-
Failing to inspect, approve, and confirm all documents. Building permits, zoning laws, rental and lease applications, health licenses, inspection reports, title policies - the list of documents that need to be validated can be overwhelming. You can’t risk oversights on any of these. The right REALTOR will work with you to make sure nothing gets overlooked.
-
Not getting a bill of sale for all personal property involved. When a purchase includes personal property (non-fixtures, furniture, draperies, etc.), be very detailed and know who owns what. Contracts for the conveyance of real property usually do not include personal property which is why a general or specific bill of sale is required.
-
Charge less than fair rents. Vacancies, turnovers and lease terminators are your biggest expenses. Charge fair rent, treat your tenants with respect and respond quickly to their needs. It’s a lot less costly in the long run to take care of the little problems while they are still little rather than waiting. A vacant property doesn’t make you money. Be careful that your rental property doesn’t become your nightmare. It may save you a lot of stress (and a marriage) if you hire a property manager who gets the calls at 2am because of noisy plumbing.
-
Quickly selecting tenants. It’s a business. Don’t assume that every tenant is responsible. Check their references. Previous landlords, employers, financial references, credit and judgments are all vitally important. If there are any questions, do a thorough investigation. Drive by their previous residence. A little work up front can save you all sorts of problems later on. Again, this is a task best accomplished by a seasoned property manager.
-
Failing to get estoppel letters. Confirm the tenants’ status of tenancy. Make sure all rental agreements or leases with the seller’s interpretation.
-
Spend positive cash flow. Re-invest in your property. Most successful investors have free and clear properties. Be sure your positive cash flow goes back into the debt load and speed up the amortization schedule. This decreases your leverage but increases your equity, which in turn increases your net worth. The rate at which you decrease your debt should be planned and discussed with your tax professional.
-
Choosing the wrong REALTOR. Working with a full-time REALTOR is a must. Choose your agent by asking questions of him or her. Find out how knowledgeable they are about houses currently for sale in your price range and also of houses that have recently sold. Can your agent suggest a good lender that has the reputation of excellent service and low rates to assist you in obtaining financing? Does your agent ask questions of you in order to have a full understanding of what you are looking for and to help you to find the best property for you?
As a bonus, I’m giving you access to proprietary tracking of market momentum. This is the best way to gauge the proximity of changes in slope (that’s a fancy way of saying “are we about to go up or down”).
Access this data on my Indicators page (http://JayEmerson.com/Indicators.asp). Nowhere in any market will you find a REALTOR that goes beyond tracking simple raw data. Call or email me for explanation of this critical trend watch and what it means in the current market.
Investment property can be one of the most rewarding aspects of your financial portfolio. Be sure to be as knowledgeable as possible before risking your money. Do your homework! Consult with a REALTOR and protect yourself from the hidden troubles that can plague first-time investors.
Please feel free to call me if you would like further explanation on any of these topics, or if you have any real estate questions at all. It is my goal to provide the best counsel, advice, and service as I possibly can. I hope this special report provides the information you need to be informed. If you know someone who would appreciate my service, I would love the referral.
|
|
