Investing in real estate can be a profitable business venture, but it is hardly a get-rich-quick scheme. Real estate investment can build wealth, provide an inheritance for your children, and can help you achieve the American Dream.
But it can also lead to financial frustration or more seriously, a phone call to a bankruptcy lawyer. Real estate investing is a highly competitive market. Whether you’re a novice investor or a real estate mogul, protecting yourself from investing mistakes is crucial. Avoiding the following missteps can set you on the path to profit and financial independence.
Finances and Budget Planning
Any successful investor knows that thoughtful planning is imperative. Dedicating the time and effort into devising a sound financial strategy is the best way to ensure a profitable venture.
The first consideration is whether you have enough equity and/or liquid assets to hold the property. Many real estate lawyers know that over-leveraging will put an investor at risk for future losses. Poor budget planning, a market downturn, unforeseen repairs, or delayed renovation timelines can seriously impact the bottom line. Another important consideration is to hire a real estate lawyer to assess local laws or an accountant to help track your finances.
To avoid these pitfalls, make a coherent budget plan to ensure you have the finances to support your investment. Ideally, a budget should include three to six months of mortgage payments, adequate resources for repair and upgrade costs, as well as a budget to hire lawyers or accountants.
That said, not everything goes according to plan. You should expect the unexpected and come up with a backup plan if things don’t work out the way you wanted.
Know Your Investment
Another step to success is to know as much as possible about the property. Researching its history, the overall market situation, and getting to know the surrounding area are good starting points. You should also ask yourself if the property fits into your overall investment and budget plan.
Being aware of key details will help you decide whether the property is a good investment overall, if the asking price is reasonable, and what expenses might come up in the future.
Some questions you should take into consideration are:
- What is the current state of the property? Are there major structural issues? What will need to be upgraded or replaced to make the property livable and return a profit?
- What is the neighborhood like? How is the property zoned? You may need to consult a real estate lawyer to figure out local laws.
- How is the market trending? Does it seem like a sensible long-term investment? Getting advice from a successful investor or a real estate broker might give you a better picture of where the market is headed.
- Why are you considering buying property in this particular area? Why is the property up for sale?
One of the biggest mistakes new investors make is being impulsive and not putting in the time or effort to ask the right questions. Investment decisions should be based on reliable knowledge and sound business calculations, rather than an emotional reaction or a gut-feeling.
Also avoid taking advice from individuals who may not have accurate knowledge of the local industry. Think about it: Would you ask your doctor for advice on a good lawyer in town? Probably not.
Be Aware of Laws and Regulations
Another imperative is to be educated on the legal and regulatory frameworks that will come into play. There is a lot to know and it varies greatly depending on the area where you invest. You must consider laws and liabilities, tax regulations, Fair Housing and discrimination, as well as national and regional implications.
Hiring a tax attorney who specializes in real estate, or consulting a real estate lawyer may be necessary to get the best advice on how to avoid legal trouble in the future. Rather than doing all the research on your own, hiring a professional will allow you to focus your attention on more urgent matters.
Planning For the Future
Many investors don’t properly plan for the future of their property and find themselves stuck with no profitable exit strategy. Their assumption is that they will either rent it or sell it outright at a profit. But what if the market forces don’t align, and there are no buyers or renters?
The best approach is to supplement your Plan A exit strategy with a Plan B and a Plan C. You might consider refurbishing and reselling, offering a lease-to-own option, or selling to another investor just below market price. Optimistically, you’ll still make a profit, but at the very least you’ll be able to cut future losses.
Make your Mark
Clearly there are many pitfalls to avoid when getting started in real estate investing. The reality is that it isn’t easy, because if it were, everyone would be doing it. Most mistakes can be avoided with careful planning, diligent research, and asking the right questions, leaving you with a profitable and sustainable return on your investment.