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With the real estate industry booming many, main street investors are entering the fray. Unfortunately too many of them are ill-equipped, uneducated and fall into the same common traps over and over again.
Here are 4 common mistakes that real estate investors make. By being aware of these common traps, you can navigate the new real estate boom with knowledge and watch your portfolio soar.
Real Estate Investor Trap #1 – Buying a Property for the Wrong Reason
When we really get down to the nuts and bolts there are only 3 ways to make money from real estate investing.
1. The rental income exceeds your expenses and generates positive cash flow for you each month (cash flow).
2. The tenants will pay down your mortgage (equity growth).
3. The property is poised to grow in value over time (appreciation).
The ideal property is the one that is highly poised to deliver on all three. Unfortunately, far too many investors buy with solely the third reason (appreciation). When you adjust for inflation history has shown us time and time again that this is a very high risk game as it is speculation and not investment. Unless you are happy gambling or speculating, or you know how to create value through redevelopment, renovation or repurposing the use of a property, you should never buy for appreciation.
Focus on finding properties that will generate enough rent to cover the mortgage payments, taxes, insurance, maintenance and management of the property on a monthly basis and ideally, leave a little in the account afterwards.
If you are able to consistently focus on that formula, you’ll find that you are far less vulnerable to the volatile marketplace and you won’t be shelling out you profits from your good investments to cover the shortfalls of your bad speculations every month.
Real Estate Investor Trap #2 – Chasing Deals
Just like a bloodhound, most investors start out very focused with a clear destination in mind… until they see a squirrel.
Suddenly all attention is directed to the squirrel and they are no longer worried about their plan.
This is what seems to happen to a lot of investors. They either don’t have an investment plan to follow so they are always looking for squirrels or they allow themselves to get easily distracted from that plan when a new squirrel appears.
Sticking to a well thought out plan, based on the fundamentals of real estate investment (buying for cash flow in areas with good economic fundamentals), instead of chasing the latest deal destination will help you make more money, put in less effort and minimize the risks in your investments dramatically.
Real Estate Investor Trap #3 – Not Weighing the Risks and Rewards
All I ever hear anyone talk about is their return on investment. While there is no doubt that this is a critical variable; No one ever seems to consider their return on time. Time is money, so it is imperative that you weigh in the return on your time just as heavily as you do your return on money. Both of these constitute your return on investment.
It’s an important number to consider, but it’s actually not the first thought I have when I’m evaluating an investment. Instead, I am asking:
– What is my return on my time?
– Then, what are my returns relative to my risks?
Time is your most precious resource. You can’t create more time. You can create more money. Money for investment is unlimited when you know how to raise it. And making money isn’t that difficult – it’s keeping it that is tricky. That’s why your biggest consideration in a deal is the time you have to invest and the risks you have to take on to get the return.
When we focused only on return on investment we were drawn to deals with a lot of risk and that required a lot of time to manage and maintain. We weren’t weighing the risks against the returns though. The cash flow was gigantic – so the opportunities seemed great.
Unfortunately, deals with big returns tend to eat up a ton of your time and energy as you manage all the risks. And if something goes wrong, pretty soon you’ll find your funds draining too.
Many real estate investors do not think carefully about the risks and rewards before entering a new investment deal and then end up unable (or unwilling!) to grow their portfolio because of a problem property or two.
Real Estate Investor Trap #4 – Trying to do it alone
There is a temptation as a new real estate investor to pursue the exciting deals. Like a dog distracted by a squirrel, you can end up heading in the totally opposite direction than where you were going when you began. Real estate investing should not be exciting. If it is, you’re probably doing it wrong, or you’re taking huge risks that had better be coming with huge potential rewards.
Personally I would hire a real estate investing coach to help me with this part. Since we’ve started working with the right business coaches for us we work less and earn more. You can save time, stress and money by getting the right experts on your team. But regardless of WHO you work with you should get help with this part. Sit down with your coach, an experienced investor or at least someone who specializes in helping real estate investors finance their deals, to map out your investment master plan. Then, run that plan by your accountant and even your lawyer. Get input from key team members. Then, stick to that plan by focusing on minimizing risk and time investment and maximizing monthly cash flow and future potential.
A good option to look into is joining an association. There are local and national groups and associations that regularly meet and swap ideas, news, knowledge and support. Associations are chock full of coaches, mentors and tools that can take a huge chunk out of your learning curve.
The boom years of the 2000′s are behind us for now. However, so are the bust years. The new boom is starting now and experienced investors are gearing up for huge returns.
If you avoid these four mistakes as you build your portfolio, you’ll move closer to your goals a lot faster and easier too!