New real estate investors can sometimes get caught up in common pitfalls that end up costing them time and money and, ultimately, turning an investment into a bad deal. But not all of these pitfalls are self-evident. Being aware of the potential risks and knowing how to prevent them will help keep you from falling into these traps.
Pitfall 1: Emotion vs. Logic: Buying on emotion, not math.
Most business transactions and investment decisions are based on numbers and whether they make logical sense. Buying a home, however, is an emotional experience—it’s where lives are lived, families are raised, and memories are created. It’s natural for us to hold great emotional value in our dwellings, and we look for homes that are a good fit emotionally. When purchasing a home as an investment, however, it’s important to treat it as such and keep emotions at bay. To be successful in real estate investing, it’s best to think of the purchase as a business transaction or investment—focus on the returns. Calculating the numbers, such as the cash-on-cash return, for example, and determining if a property overall is a logical investment are the most important factors to consider.
Pitfall 2: Dealitis: Thinking that every property is a good deal.
There are plenty of inexpensive properties in the current market. Home prices have dropped drastically since 2007. Just because a home is significantly under priced doesn’t mean it’s a good investment. You need to take the same cautionary steps to evaluate the value of a property listed at $40,000 as you do for a property listed at $400,000. A low-priced property could have serious structural issues, the relative property values in the area could be low, or the property’s expenses could be too high to provide cash flow. Many people wanting to take advantage of the current market’s low home prices have been burned because they didn’t do their homework and acted too quickly. It pays to consider all elements of a real estate investment property. The return will dictate whether the price is right for you.
Pitfall 3: Analysis Paralysis: Spending too much time analyzing and missing opportunities.
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The flip side of Dealitis is Analysis Paralysis. Doing your due diligence is important, but you don’t want to take too long to make a decision. With a properly written contract, you’re allowed adequate time to back out if you decide the deal isn’t right. This is what contingency/ inspection periods are for—a thorough inspection and analysis. If you hesitate too long, you might miss a good opportunity.
Even experienced investors can fall into these traps, which is why it can be helpful to work with an agent who specializes in investment properties. There are risks involved with all types of investments, and real estate is no different. But being aware of these pitfalls and having a knowledgeable real estate agent on your side, along with his or her team of professional advisers, will help keep you safe.