Investing in real estate can be a great way to earn an extra income. It’s become a popular choice for many people to build their wealth. You can purchase another property to rent out, or if you have extra space in your own home, you can rent out a room to get a little extra cash. However, it’s not something you can study overnight and become an expert the next day.
Successful real estate investors have a few years of experience under their belts. It takes trial and error and a lot of research, but once you understand how it works, you’ll be growing your wealth in no time.
If you’re just starting out with real estate investing, check out these five common financial mistakes first-time real estate investors make so you can avoid them.
1. Enlisting the Help of a Property Manager Too Soon
While you don’t necessarily want to do everything on your own, you can skip a few of the steps in investing in real estate to save some money. The whole point of investing in real estate is making money, not losing money in the process.
If you want to rent out a property, you’ll have to be a landlord. However, you might not have the necessary skills or time. But if you practice those skills and better manage your time, you can skip hiring a property manager right off the bat. Property managers often handle daily maintenance and operations, which is nothing you aren’t capable of.
Hiring a property manager can set you back up to 12% of your revenue, even before you pay everything else, like the mortgage. Learning how to manage your property before hiring a property manager will save you money so you can invest more rather than spend it.
2. Not Doing Enough Research
When you make a big purchase, do you research various makes and models to decide on the one that’s worth your money? The same goes with real estate investing, except that it’s even more research-intensive.
To make sure your investment is worth it, you should do extensive research on the property, neighborhood, and price points within that neighborhood so you can purchase the property at the right price. Here are some questions to ask before buying a property:
- Why is the property being sold?
- How much is the house worth?
- Will there be problems with the house later on?
- How much money will I have to put into this property before renting it out?
Researching all of the financial aspects of a property will save you money later. Going in blindly can lead to you spending much more than you bargained for, and you could lose money rather than invest it.
3. Treating the Property Only as an Income
Once you step foot into real estate investing, you have to realize that it is a business, not just another stream of income. Disregarding that it is a business is a huge mistake that many first-time investors make. You must treat your rental property as you would if you owned a store.
Right from the moment you purchase your first property, think of it as a business. Sure, you will make an income from it, but you have to put effort into it as you would any other company.
From a legal standpoint, make sure the business is insured and protected. As a professional, know how to work with your tenants to ensure they stay at the property and are satisfied. This will secure your income and make sure you don’t lose money.
4. Paying Too Much for the Property
When you finally bid on a property you’ve been researching, you might get anxious as to whether the seller will accept the bid. This can cause you to overbid, and therefore pay too much.
It’s exciting when you find the perfect property to rent out. But if the price is either over your budget or is over the property’s value, you can end up strapped for cash. This ties into the research aspect, but make sure that the price is right.
If there’s a property you really want to invest in but aren’t sure if the price is too high, look at homes in that same area. Is the one you’re looking at thousands of dollars more? For even more insight, ask a real estate broker about the property’s value. Remember — you can always negotiate with the seller!
5. Neglecting to Look at All Expenses
You’re going to have more expenses than just the mortgage. As a property owner and landlord, you have to continue to maintain the home or complex for your tenants.
Think about your own home for a moment. You have to cut the grass, update appliances every so often, make minor or major repairs, and the list goes on. Each of those things needs to be paid for, and they’re often not something tenants are expected to worry about.
Make a list of everything you will need to do to maintain the rental home and figure out those expenses. This will help you figure out if you can actually afford the property long-term.
Avoid These Financial Mistakes for First-Time Investors
Knowing the common mistakes of first-time real estate investors can help you avoid them. With these tips, you’ll be a step ahead of others involved in investing.