Real estate is an attractive investment. Depending on the market and investment method, the returns can be high. Investors can choose to go hands-on with flipping or owning a rental property, or they can be hands-off by simply investing in development.
But just like any other investment, there are risks. Make a few wrong moves and your investment may wind up down the drain.
1. Doing Everything Yourself
When investors have the intention of flipping or renting property, they often try to take on everything themselves. Whether it’s managing the property or doing the repairs themselves, first-time investors try to wear a lot of different hats.
And most of them try to wear these hats while working a full-time job.
It can be challenging enough to manage all of the moving pieces of a real estate investment when it’s your full-time job.
Even the pros on TV shows like Flipping Vegas (read Scott and Amie Yancey of Flipping Vegas – Their Full Story) don’t do everything themselves. Make sure that you understand the full scope of the work that needs to be done and that you have someone assigned to each task.
2. Not Investing Enough Time or Money
Money talks in the real estate world. Yes, you can dabble in real estate by making small investment through crowdfunding platforms, but larger returns come with purchasing and flipping or renting properties. If you have a bigger budget, development will bring even better returns without the hassle of having to be hands-on.
The biggest issue for many first-time real estate investors is that they don’t have enough cash or time.
Low/no money down financing is hard to come by in today’s lending market. And if you finance the acquisition, you have to keep in mind that you will be paying interest. The interest is tax-deductible, but not 100% deductible. Every dollar spent on interest is one less dollar in profit.
Even when paying cash, there are other costs to consider, such as taxes and utilities.
First-time investors also tend to underestimate the time it takes to renovate and flip or rent properties. It can take months to find a property, months to renovate and then even more time to sell it.
3. Not Understanding the True Costs of Flipping
Flipping is a popular real estate investment method, but many first-time investors underestimate the true cost of this type of venture.
Flipping shows on TV often make it look like the investors are making more money than they really are.
Repairs often go over-budget – rarely will they under- or on-budget. Older homes, which are popular with flippers, often come with serious repairs that can be very expensive to fix and may not be found until mid-way through the renovating process.
Instead of walking blindly into an investment, make sure that you understand the true cost of repairs and what needs to be done. This is yet another reason why real estate investors should not try to do everything on their own.