Common Mistakes New Real Estate Investors Make

Investing in real estate can be incredibly rewarding, but it's not without its pitfalls. Many new investors make mistakes that can cost them time and money. By understanding these common errors, you can avoid them and make smarter investment decisions. In this blog post, we'll explore some of the most frequent mistakes new real estate investors make and how you can steer clear of them.

I'd like to review the top problems and what I did to overcome them.

Understand Your Why

Understanding the root reason why you want to get involved in real estate investing is crucial because it shapes your strategy, goals, and overall approach. Knowing your "why" provides clarity and motivation, helping you stay focused and committed even when challenges arise. Whether your goal is to achieve financial freedom, build a legacy, generate passive income, or pursue a passion for property development, having a clear purpose ensures that your investment decisions align with your long-term vision. It also helps you determine the type of properties to invest in, the markets to explore, and the amount of risk you're willing to take. In essence, a well-defined reason serves as a guiding compass, steering your actions and decisions towards meaningful and fulfilling outcomes.

My Why

I originally started investing at the tail end of 2020 because I had a bucket list item to own at least one rental unit. My original goal was to acquire five units in ten years so that I would have some passive income when I retired.

Having learned the power of creative financing and developed a number of great relationships along the way, I springboarded to 17 doors in just 3.5 years. Now why is a little bit more refined:

• Retire within five years
• Drop down to part-time in my W-2 in the next six month so I can both focus on being Product Manager of Reico.ai, invest in more real estate, golf more, and spend more time with family
• Create generational wealth for my child, who already has aspirations of buying one of my houses and "house hacking" by renting to his friends
• Pursue the challenge of lifelong learning that comes from real estate. Perhaps I'll eventually get into multi-family residential and even commercial real estate.

Lack of Balance between Research and Action

One of the biggest mistakes new investors make is either not doing enough research ... or doing too much research. While knowledge is power and knowing what you're gettting into is important, action is the greatest teacher.

Real estate markets can vary greatly from one area to another, and understanding the local market is crucial. You also need to understand how funding works and how either managing tenants or hiring a Property Management Company works. Without thorough research, you might end up overpaying for a property or investing in a declining area.

On the flip side, spending endless hours on research can paralyze you and delay your investment journey. Real estate markets can vary greatly, but the best way to learn is by diving in and taking action.

Tip: Research just enough to get going, then take the plunge. Start by analyzing market trends, property values, and neighborhood statistics to get a basic understanding. Use tools like Reico's Simulator to test different scenarios and see potential outcomes.

Squad up with an experienced investor and lead with value. Make sure the person you're teaming up with gets value from you, whether it's through your time, skills, or resources. You'll learn far more through real-world experience and mentorship than you will from endless research.

How I Found Balance

I live and die by the Pareto Principal - the 80/20 rule - that states that, almost universally, 80% of the effects come from 20% of the causes. So I researching on BiggerPockets and registered for a webinar that stated one could acquire their first rental property in 90 days. (It took me 107 due to silly closing schedules.) Later, when I understood about 20% of the general topic of Creative Financing (enough to roughly explain it to my wife), I joined the Subto Community and found partners to whom I could add value.

In the 18 months since I joined that community, I launched from 3 doors to 17. Stay tuned for a future blog post about the importance of community.

Underestimating Costs

Many new investors focus solely on the purchase price of a property and forget about the additional costs involved. These can include repair and maintenance costs, property taxes, insurance, and property management fees. One of the most hidden costs is Holding Costs, which are the costs you incur while owning a property you can't disposition - like when you still need to make loan, taxes, insurance, and utility payments while preparing a house to flip or rent. Underestimating these costs can quickly turn a profitable investment into a money pit.

Tip: Create a detailed budget that includes all potential expenses. Reico's Simulator can help you factor in these costs and understand your potential returns.

How I Estimated Costs

Contractor friends helped me estimate repair costs. Resources like BiggerPockets helped me estimate Operating Expenses like witholding 4% [monthly gross rent] for vacancy, 8% for property management, 2% for capital expenditures, and 2% for minor repair. Books like Mike Michalowicz' Profit First give you guildelines to partition your money effectively to promote your venture's health.

Over-Leveraging

Using leverage, or borrowed money, can be a powerful tool in real estate investing. However, over-leveraging can be risky. If the market turns or you face unexpected expenses, high levels of debt can lead to financial trouble.

Tip: Be cautious with borrowing and ensure you have a safety net in place.

My Finances

I had plenty of capital in reserves, and I also took out a Home Equity Line of Credit against my primary residence and used them to acquire my first three units. Understanding conventional financing could only take me so far, I went the creative financing route with Subto.com and was able to acquire more using Other People's Money (OPM).

Ignoring Revenue Streams

Some new investors focus too much on property appreciation and forget about cash flow; others do the opposite. Positive cash flow – the income remaining after expenses – is crucial for sustaining your investment and covering unexpected costs. But you also earn money by the equity accrued as tenants pay down rent, and you can save money from taxes in the form of depreciation.

Tip: Prioritize properties that generate positive cash flow from the start. Use Reico's Simulator to estimate your cash flow and ensure your investment is sound.

My Happy Mistake

See this Infographic for a real world example from one of my properties that, honestly, I paid too much for.

Failing to Screen Tenants

If you're investing in rental properties, your tenants can make or break your investment. Failing to screen tenants properly can lead to issues such as missed rent payments, property damage, and evictions.

Tip: Develop a thorough tenant screening process. Check credit scores, rental histories, and references to ensure you select reliable tenants.

Not a Sponsor, Just a Fan

I did a spot of research into services that help one self-manage properties and settled on TurboTenant. Their platform is free, though they make money through a la carte offerings like digital signatures and state-specific legal forms as well as paid premium tier, and they cover everything from advertising your rental to screening applications to developing lease agreements to payments and maintenance requests.

As my portfolio grows, I'm lookikng into Baselane, which not only offers property management services but also bookkeeping and virtual banking in ways that enable that Profit First model.

Neglecting Exit Strategies

Every investment should have an exit strategy, and I would argue you should have at least two. Whether you plan to sell the property, live in it and rent out rooms, hold it long-term, or try to have a short-term rental like AirBnB or vRBO, having a clear plan is essential. Without an exit strategy, you might find yourself stuck with an underperforming property.

Tip: Outline your exit strategy before you buy. Reico's Simulator can help you explore different exit scenarios and plan accordingly.

Always Have a Backup Plan

Right now, my primary disposition strategy is to resell on a Wrap (or a wraparound mortgage). Next is a Lease Option. After that is Long-Term-Rental. The most important thing is for me to have my strategies aligned with my Why.

Conclusion

Avoiding these common mistakes can set you on the path to success in real estate investing. Take the time to research, budget carefully, and use tools like Reico's Simulator to test your investment strategies in a risk-free environment. By doing so, you'll be better prepared to navigate the complexities of the real estate market and achieve your investment goals.

Ready to make smarter real estate investments? Start using Reico's Simulator today and see how different scenarios play out before you invest real money. Happy investing!