If you’re going to invest in real estate, you need to prepare for the unexpected. While every investment class can have ups and downs, real estate has more than its fair share of unknowns. Learning from your mistakes is expensive in this game, potentially preventing you from maximizing your potential.
Although you’ll likely be dealing with incomplete information, there are some things you can do to prevent common mistakes. Learn from the pros who have seen what pitfalls and misconceptions to avoid, plus what opportunities you should seize. It’s time to dive into three things real estate investors can avoid—and those to keep in mind for maximum potential in 2024.
1. Not Having A Strategy
The late-night TV infomercials of decades past and home improvement shows make real estate investing look like a no-brainer. All it takes is a little cash and the right property to make millions. But the reality of investing in real estate is complex. It requires a well-thought-out approach.
Yes, you need a strategy. And your strategy should take into consideration several factors. For instance, what type of properties do you want to invest in? What can you initially afford, including cash for contingency funds, financing costs and renovations? You should also determine your desired ROI and whether you intend to flip or hold the property.
The average real estate investor makes an annual income between $70,000 and $124,000. It’s nothing to sneeze at, but annual incomes vary widely among investing niches. An example is rental properties. The yearly income can range from $27,500 to $121,000. It will depend on the properties, how many you have and the resources you can devote to your venture.
Knowing which niche makes the most sense for your ambitions starts with ample research. Map out the pros and cons of the niches, including real estate investment trusts, that pique your interest. Determine whether this will be a side hustle with growth potential or your full-time career. You also want to look at the market landscape, such as zoning laws, rental vacancy rates and competition from new developments. Get your plan in place before you make a move.
2. Underestimating Potential
There’s no doubt emotions factor into real estate purchases. First-time and seasoned home buyers can set their hearts on a property they see. They may get caught up in the idea of living in a home because it meets a top item on their wish list. However, they might forget to see the bigger picture. They could overlook the long-term impacts of the home’s location, overbidding and aspects of the property they can’t change.
Stigmas about specific property types and first impressions driven by emotions can work similarly. They might lead you to underestimate an investment’s potential. Mobile home parks are a prime example. Because there’s a well-known stigma about mobile home parks, you might not think the investment will bring in much cash flow.
You could be letting your emotions cloud your judgment, especially if you don’t take time to look at the data. When it comes to mobile home parks, Lifestyle Investing expert Justin Donald says, “The more you learn it, the more you understand it, you realize the stigma is actually not accurate. I remember my first park, and I was like, oh my goodness, this is unbelievable cash flow.”
The lesson is not to overlook an investment without digging a bit deeper. Get the data on everything you can, including cash flows, average returns and maintenance costs. Don’t skimp on the research, and talk to experts in the field before you let your initial impressions guide your decision.
3. Not Accounting For All Expenses
You’re aware real estate doesn’t come cheap. You’ve got down payments, closing costs and mortgage interest rates. In addition, you have the upkeep or maintenance expenses, insurance premiums and property taxes.
These liabilities on your balance sheet can be challenging to predict. You can’t always foresee a hail storm that leads to a roof leak or a furnace that suddenly stops firing up. Unless you invest solely in real estate investment trusts, you’re going to be directly footing the bill. Neglecting maintenance items can also lead to legal woes with renters and potential buyers.
Other possible expenses include paying for vendor contracts and utilities when properties remain empty. You might need to hire a property management company, a landscaper and a real estate attorney you keep on retainer. These ongoing expenses will impact your cash flow, as will the length of time units remain vacant. You may also have to spend money on repairs if tenants damage a property.
If you decide to flip homes, there are the unknown expenses that come with renovations. Purchasing properties unseen is a bigger gamble than not. But even if you check all the boxes with an inspection, you won’t know every detail you could find. Financially planning for worse-case investment scenarios is like saving for a rainy day with your personal budget. Conservatively estimate cash flows and have an emergency expense fund.
Maximizing Your Real Estate Investment Potential
Few investments are a sure thing. CDs and treasury bonds are among the safer bets, but the rate of return usually isn’t impressive. Real estate investments have higher potential, which is why they’re attractive.
Nonetheless, real estate isn’t as straightforward as depositing money into a CD and watching it grow by a few percentage points. You’ve got to determine your strategy, and not let your emotions get in the way and account for the unexpected. If you do these things, you can help maximize the potential of your investment choices.
