Real Estate investing is competitive especially these days as many investors chase the same types of deals. Still, it remains one of the most lucrative entrepreneurial ventures around and is a great source of secondary income and a powerful wealth building strategy for those who play the long game. However, any investor and especially new ones, need to be careful of the different costly mistakes that most entrepreneurs keep making thus slowing down their profitability, and in worst cases, driving them out of business before they can really get going. These include:
1. Limiting self to a single strategy
What part of real estate investing are you most comfortable with? Note that while flipping residential homes may feel safer, there won’t always be enough profitable houses to flip in this highly competitive world. Most importantly, making a serious business out of one line of trade can be quite daunting. You have to extend out of your comfort zone, learn, and master other fields. For example, if underwriting is a strength of yours, why not research each property for both a flip or long-term rental strategy since much of the data will overlap?
2. Not investing in a team
Every successful real estate deal is a process, not an event. This includes a lot of market research and due diligence, and there is only so much you can do individually. So naturally, to be successful, you will need to build a team. You need to work with individuals who understand their craft well and then implement their strengths as experts to add value to your overall investing strategy. This includes wholesalers, real estate agents, title officers, general contractors, property managers, maintenance technicians, and so on. Like in any other multifaceted business, your team’s talents and skills reflect in the quality of the output as well as maximizing your time and energy to make the best decisions possible helping you to achieve your desired goals with the least amount of stress and wasted time as possible!
3. Improper differentiating between investment and speculation
If the landscape has changed and you are now forcing investments, or even if you are just starting out and you feel like you are tweaking your plans to take on more risk in order to get going, you may be about to make a huge mistake! That mistake is essentially the difference between sound investing and speculating because you are now taking on more risk. It is perfectly okay to do a lot of work then ultimately decide to back out of a project. For example, if you underwrote a home for a flip, had an accepted offer on a contract, then during diligence learned your rehab might cost you more than you planned, it is perfectly okay to back out, especially if you can get your earnest money back and sometimes, even if you cannot! It’s like taking a loss on stock trade, sometimes you have to lose a little in order to stay in the game, and almost always those small losses that investors fail to take early often become much larger losses later. So take the hit and move on.
4. Lack of enough backup plans
To further the points made above, the real estate market can be shaky, thus the need for more backup plans and options. I prefer to know what my outs are ahead of time, so I am always analyzing the risk of investment along the way, even if it is a 10-year-old rental property with the same tenant who always pays on time. I simply ask myself, “what are my options at this point and what is the plan?” One example from the front end would be to look for units that can either be a flip or a solid rental. This allows you to pick up efficiency in underwriting while having a hedge for if the disposition market dries up, to not be stuck with a unit that cannot be sold but can be rented out to cover your expenses at a minimum. Of course, with scale this can all change including if you manage your rentals yourself, but my point here should not be ignored; having a backup plan that protects your long game is crucial. In this case, a flip, or several, that can also easily be rentals is a safe hedge in continuing to flip homes, especially this late in the cycle, while you can still maximize your time on the front end by researching potential investments.
Side note: keep in mind…late inning games can easily extend into extra innings!
The real estate industry is competitive and takes time to understand to the point that investing with confidence is your norm. The upside potential and a desire to learn and grow are just two of the many reasons investors are drawn to the various investing strategies associated with real estate investing. Finding a niche and leveraging your time are keys to building your confidence and hopefully avoiding some of these general pitfalls will help you get to your desired goal faster. I encourage you to take a long-term approach to learn the various skills required to becoming successful while building your knowledge and your teams so that you get past the point of survival and you begin to grow! Avoiding some of these common mistakes should help. Good luck!