Successful Real Estate Investors Know These Pitfalls
Not Giving It 100%
If you feel you are ready for your first real estate investment and you think it will be an easy source of passive income then I would recommend you sit this one out. There are certain asset classes such as Single Tenant Net Lease investments that have less risk, but most other investments come with a degree of risk and are definitely in need of supervision on a regular basis.
Your first investment is most likely the one that will set you on a solid path so if you do not give it 100% you may end up missing out on the future opportunity to really create some satisfying wealth
Knowing The Numbers
Over the years I have seen new Investors focus their attention on numbers that are less critical to your investing success, you must know what numbers are the true outliers to making a critical investment decision. Here’s some examples.
1) Rent Ratio - The rent ratio is calculated by dividing the monthly rent by total cost of the property (purchase price + financing costs + rehab costs);
2) Cap Rate - Cap Rate = Net Operating Income / Total Cost – This will show you what your investment will generate if you paid cash. Also, a lower cap rate compared to similar properties in the same asset class, with similar rent ratios, may show you that there are areas to decrease your expenses, and thus increase your income.
3) Cash on Cash Return -Cash on Cash Return = Pre-Tax Cash Flow / Total Cash Invested – This is the return you realize immediately on the cash invested. It does not take into account taxes or appreciation that you may receive. You should recalculate this as your investment hold time grows, so that you can take into account the appreciation of the property, so that you are maximizing your returns. It can show you when it is time to sell.
Underestimating Rehab Costs
If you buy an asset that is in need of a rehab you must know how much it’s going to cost, you will need to get multiple bids during your due diligence phase and when you receive your bids you will want to go item by item to compare.
When doing the rehab make sure you do it to your market, you don’t want to put cheap fixtures, appliances or flooring in a high end property and you don’t want to waste money on really high end fixtures, appliances and flooring on a mid level property as you won’t get the return back. Also remember to calculate rehab and capital expenditure costs into your cash investment/return, unless you are financing all of it.
Needed More Experience
This one catches many new investors and it’s also why I highly recommend you mentor with someone that is doing what you want to do before you go it alone.
If you are not confident that you know all the ins and outs maybe consider partnering with an experienced investor, buying your first investment and having to be responsible for tenants is a whole new ball game. I am a firm believer in jumping in the deep in and figuring it out but with a real estate investment there are many variables that can cost you thousand of dollars if you don’t know what to look for.