Investing in real estate as a business can be a great way to make money. Your tenants, whether business or residential, will contribute to cash flow and operating profit every month, right? The property will appreciate for an eventual sale, and you’ll gain tax deductions connected to real estate property.
Yes, all these things can happen — but real estate investing can be complicated and unpredictable. It’s never more complex and unexpected than when the buyers are new to the real estate investment business. Mistakes for the unwary abound.
Here are five of the biggest mistakes real estate investors can make, and how to avoid them.
- Not Researching Enough
Never simply purchase a property that seems like a good deal, or that you’re told will only be available for a short time. You need to research, make sure it’s in good condition and is at a fair price for the area.
You also need to learn what your client base is like. Who are your potential renters? Are there enough to make sure your property will be fully rented? If they are commercial, will they be able to make a profit — and thus pay rent? If they are residential, is the market big enough to ensure your property will be fully rented?
To avoid this, make sure you know everything about a property there is to know. Familiarize yourself with the market and the likely renters.
- Not Planning Enough
Every commercial real estate investment needs a plan to make a profit. You need to have a specific plan for how your cash flow will come in every month. Be sure to assess the market conditions and strength of the economy in your area. Will your tenants be retail establishments requiring foot traffic? If so, you need to make sure your property will have foot traffic. Do you need an advertising campaign to let people know of it? If it’s a residential property, how will you ensure tenancy every month? Advertising? Discounts on the first month?
You need to crunch numbers on how much cash flow you can reasonably expect. Always be conservative in your estimates. It’s wise to plan for some vacancies. Draw up an expense and maintenance plan as well. All real estate requires some maintenance, so it’s important to project expenses. Compare these figures with your cash flow to make sure you will be profitable.
To avoid this mistake, make sure you plan both for income and expenses. Again, be very conservative in your projections. Some people believe that expense estimates should be doubled both in cost and time to be on the safe side. Repairs and maintenance frequently take more cash and weeks to complete than owners initially expect.
- Paying More Than the Property Is Worth
This may be the most painful mistake of all. If you pay more than your investment is worth, you lose money from the very beginning. That, in turn, can make expanding amenities or maintaining the property harder. Be sure to explore what similar properties in the same neighborhood are going for. Don’t just look at one or two. Get a sense of prices in your city and region overall.
Look at the economic forecasts for businesses in your area as well. The strength of jobs, the direction of interest rates and inflation all matter to property owners, because they matter to prospective tenants. Tenants, both commercial and residential, make plans based on their own financial situation. If technology firms tank and the building is occupied by multiple startups, they may fold. The building is left with empty offices. It can affect what the overall property is worth.
The key to avoiding this is to explore prices and be familiar with your local asking prices. Also, be a patient investor. Don’t let anyone talk you into jumping on a deal that’s overpriced.
- Assuming the Price Will Appreciate
Many new commercial real estate investors buy solely to realize appreciation on the property. That’s a very bad idea. While real estate appreciation can be very nice, it’s never assured. Property prices fluctuate. They can all go down as well as up. They can also remain stagnant for a number of years.
When considering a real estate purchase, always have a plan for ongoing profitability. That’s what will get you through the short and long term. If appreciation happens, it’s gravy.
To avoid unpleasant surprises about price appreciation, bear in mind the nature of real estate prices. Don’t expect 10 years of steadily rising real estate prices to mean that the price will never decline.
- Not Managing the Property Effectively
Many first-time investors may underestimate the time and complexity of property management. You could plan to manage the property yourself, as part of managing your investment. If you can do that, all well and good.
However, many people find that property management is a much bigger job than they anticipated. Tenants and buildings can have issues 24/7. Water pipes burst. Termites eat wood. Fires break out. Burglaries happen. Inspectors need to do their jobs. Regulations and codes need to be followed. Tenants need to be talked to. Properties need to be maintained. They need to be marketed.
The end result is that it might be ultimately cheaper and easier to hire a property manager.
To avoid finding out that you need much more time and expertise to manage the property, have a discussion either with the current owners or owners of similar properties. Find out their estimate for property management tasks, and solicit their advice.
Real estate investments can be a great way of maximizing your money, but beware of making these five mistakes. Attention to avoiding them will make your investment as lucrative and pain-free as possible.