Real estate has long been one of the great wealth creation vehicles in the U.S. Despite the seemingly endless success stories, real estate investing is not a simple get rich scheme. It's a risky endeavor that has the potential to make, or break, an investor. It requires many hours of research, planning, negotiations and physical effort. Even the most seasoned investor makes mistakes, and sometimes they're costly. In fact, there are two common mistakes experienced, and novice, investors make. Avoid them and you'll have a better chance of succeeding in the real estate investment arena.
Miscalculating Capital Needs
There are certain capital needs for every long-term investment property such as the purchase price, repairs and remodeling. What some investors fail to realize is that they will also be incurring long-term repair and maintenance costs. Budgeting for these expenses means setting realistic expectations and setting limits on remodeling projects to keep costs low.
- Wasting time, and money, on unnecessary, or excessive remodeling negatively impacts return on investment.
- Careful investors remodel properties with careful consideration of what the market dictates. They wouldn't put high-end fixtures in a mid-range home, it won't add any real value, or appeal to the property.
- Wise investors put aside 2% of the property's value, each year, to account for repairs and maintenance. Careful tenant screening and wise property management practices also apply.
The Wrong Financing
There are a myriad of financing options available to real estate investors, whether they're just starting out, or professionals. Investors with excellent credit, adequate assets, and a proven track-record often opt for the traditional route of obtaining a bank loan.
Those with credit problems, or who are new to real estate investing might rely more heavily upon alternative financing sources.
- Traditional loans typically carry a lower interest rate, and smaller monthly payments, but only for people who have excellent credit.
- Preference is also given to those with a portion of the capital needed already.
- It can take weeks, or even months, to gain approval and access to funds. Deals die in that time.
- Non-traditional funding sources, like a hard money lender, focus less on credit history of the investor, and more on their plan and previous investing experience.
- If an investor's plan is sound, the property is well-chosen, and the potential for return is high, the loan is likely to be made.
- Non-traditional lenders are more tuned into the need for speed. The turn-around time from requesting capital to receiving it is generally much shorter than other funding sources.
Investing in real estate can be daunting, especially when it comes to finding the right funding source. If you don't have a perfect credit score, but you know you're onto a great deal – seek out alternative financing.
Look for a hard money lender who knows a thing or two about creatively financing real estate investments and they will help you succeed. We love doing it for our investors and sure you can find one in your area.