Real estate investing can be a great equalizer: with a relatively low barrier for entry (especially given advantageous commercial lending terms) and a thriving Florida real estate market, strategic investments can help you build a healthy, diversified portfolio. From cash flow and tax benefits to appreciation and hedging against inflation, this can be a smart way to realize the results you need.
While a great equalizer, real estate investing is far from a no-brainer, can’t-lose proposition. Making critical missteps can drain your resources, erode your returns, and cause more than your fair share of hassles and headaches.
If you are new to real estate investing, or you find yourself right in the mix, be aware of these 10 don'ts.
#1. Staying at Home: Not Expanding into Other Markets
Many real estate investors opt to stick within their own home markets. They know the landscape; they know the players; it feels safe. But by adopting this strategy, you may miss out on hot markets outside your region.
Let’s look at an example. Say you live in San Francisco. This is an exorbitantly expensive area, and investing in real estate can be much more challenging financially and logistically. Expanding your reach to the advantageous Florida real estate market, for example, allows you to benefit from lower prices, low vacancy rates, healthy industry, a deep pool of trained employees, and business-friendly tax laws.
Looking outside your own region can be intimidating, but technology - paired with a knowledgeable local commercial realtor - can largely erase geographical challenges. You can leverage a local realtor’s knowledge of the area and enter markets that fit your needs, whether they are across town or across the country.
#2. Not Doing Your Homework
Due diligence. Research. Homework. Whatever you call it, do it! Failing to learn everything you can about a potential investment property is a major mistake, and despite all of the data and tools at your disposal, it is also a common one.
The first step is to figure out what type of investor you are. Do you want to flip a property? Purchase a multi-family unit and act as landlord? Develop a parcel of land? Do you want to make a larger profit on an accelerated timeline or earn steady, long-term passive income?
Are you unsure? Taking the time to give yourself a crash-course in real estate investing will pay off. Look into your local chapter of the National Real Estate Investors Association and/or talk to a commercial real estate expert for advice.
Then, of course, you have to delve into the details of prospective properties. This is where new investors can find themselves in trouble; but success is contingent on this groundwork. You don’t want to buy a property and then hope it performs. You need to know.
Look into market conditions, comparable property sales and prices, current mortgage rates, demographics, neighborhood details (services, amenities, safety, transportation, employment), and details specific to the property.
#3. Making Poor Debt Decisions
You can leverage debt to expand your buying power and to improve returns. But less experienced investors are liable to take on expensive debt; that is, debt in which the interest rates are higher than the investment returns. The result is negative cash flow.
In other words, you’ll pay more in debt service than you make in net income. Paying out of pocket to keep a loan/mortgage out of default isn’t quite the real estate success story we hope for!
When obtaining financing, go through the numbers with a fine tooth comb and be realistic when determining if the property will be able to generate enough revenue to cover expenses (and, hopefully, profit on top of that).
#4. Paying Too Much
There is no doubt that finding the right property, with the features you want, is time-consuming and stressful. When you finally find something that works, you want to jump on it. Unfortunately, this often leads new investors to overpay for properties. As a result, you may overextend yourself, take on too much debt, and end up paying more per month than you can realistically afford.
Again, this is why research matters so much. What type of prices did comparable properties sell for in the neighborhood? This will give you a good ballpark on which to base your bid.
Remember, there is always another opportunity out there. Make sure your bid reflects the objective value of the property, not your desire to end the search process!
#5. Not Accurately Forecasting Costs
On a related note, misjudging cash flow can be a catastrophic mistake. You will always need sufficient resources to cover maintenance. This is true even if you flip: you are never guaranteed a fast sale, and you need to be prepared if a property sits on the market longer than you wanted.
You are still responsible for the mortgage, taxes, insurance, advertising/marketing, upkeep, utilities, and other associated costs. If you’re not careful from the outset, your “asset” can turn into a big liability.
If you are rehabbing a property, you also need to accurately estimate costs. Plan on “unexpected” delays and overrages during the construction and inspection processes.
#6. Planning After the Purchase...
Here’s a common scenario new investors may find themselves in: they see a property, buy it because it’s a great deal, and then say, “Now, what do I do with it?”
This is backwards. You need a plan - a strategy - first, and then you find the property that will help you meet your goals. In other words, don’t find the plan after you find the property.
#7. ...And Not Having a Plan B
When you make a real estate investment, you need an exit strategy that aligns with your plan. For example, if you bought a house to rehab, your exit strategy is a flip. But what if the property sits on the market for months, with no end in sight? You will end up pulling cash out of your own pocket, or diverting it from other investments, just to keep on top of your expenses.
You need a plan B. If you can’t flip it, can you rent it? If the rental market is stagnant (not an issue in the Florida real estate market at the moment, but it happens), can you do a lease-to-purchase option? Could you sell it to another investor below market to cut your losses?
Some alternative plans are obviously not as attractive as the original, but it is important to have contingencies in place to accommodate for changes in the market.
#8. Falling for the “Get Rich Quick” Dream
Real estate investment can yield strong returns, but remember, it does take a lot of time, effort, and work. From research and due diligence (we can’t stress the importance of this enough!) to rehabbing and ongoing property management, there are a lot of aspects to consider.
Thinking of real estate as a golden ticket to wealth is dangerous. Remember the old adage: if it were easy, everyone would do it. You have to be smart, strategic, and cognizant of your own risk tolerance.
#9. Not Making Connections
Real estate is all about connections and networking. When you are investing, you need to surround yourself with a team of professionals and maintain good relationships. With whom? Real estate agents. Appraisers. Inspectors. Attorneys. Lenders. Contractors and subcontractors. Commercial buyers. You can lean on their knowledge and expertise to streamline the process and enhance your returns.
If you are a first-time real estate investor, you may be tempted to cut out the middle men and tackle the process yourself. If you happen to have the time, experience, and connections to successfully navigate the market, this is a fine idea. If, however, you lack these elements, relying on a professional is a must.
A commercial real estate agent helps you keep on top of the myriad details that accompany an investment: gathering and analyzing data, evaluating properties, advising on financing and funding ongoing costs, handling legalities, negotiating with buyers and sellers, and ensuring you develop a strong strategy to guide your investment(s).
The best way to avoid these common mistakes - and the many other obstacles that are out there waiting to trip you up - is to consult with an experienced commercial real estate partner. The expert team at Keller Williams Commercial Real Estate will assist you in navigating the process and meeting your portfolio- and wealth-building goals.