Real Estate Investing: 4 Big Rookie Mistakes

Posted by Brook Walsh on Wednesday, November 15th, 2017 at 2:09pm.

Everyone Is Investing In Real Estate

Seemingly, there is a tremendous amount of "rookie" investors  jumping on the bandwagon trying to make a profit after losing big in the stock market. I meet them all the time, and many are making big mistakes!

Mistake #1: Stock Market Approach

You'd think after losing $7 trillion in the stock market, people would have learned! Nope, they are making the same mistake, which is assuming that what happened yesterday will happen tomorrow. Nine of ten new investors I meet say they are interested in real estate because they saw someone else make money from the rapid appreciation of the market over the last few years.

But, buying real estate solely for short-term appreciation is often a big gamble! If you buy real estate to hold for fifteen years or more, the chances are that you will come out on top. If you buy a property and flip it in within a year, you'll probably do fine, too however, that isn’t typical in the Northern Michigan market. And, despite the risk, many people can intelligently time the "boom" of a local market (or subdivision within a market) and make a profit.

But, if you buy a rental property for full-market price with break even or negative cash flow, you'd better have a backup plan if the market doesn't keep going up. Investing is a lot like surfing; if you don't know how to ride the wave, you will drown!

So, should you refrain from investing if you think the market has peaked? Absolutely not! You can find bargain-priced properties in every market, even the hottest. You can find low-interest rate financing that will increase your cash flow, so if values drop, you still are covered.

You can plan short-term (six to twelve months) because markets rise and fall slowly. And, if you keep a cash reserve for your business, you won't sweat when the market tanks. You know that in the long run, real estate markets virtually always come back.

Mistake #2: Blind Investment

You'd think after losing $7 trillion in the stock market people would have learned! Nope, they are making the same mistake--blindly buying real estate based on bogus advice due, in part, to dealing with a mass transaction broker/agent or complete lack of education.

Real estate is one of the few investments in which risk is directly proportional to knowledge. True, it has a higher learning curve than investing in the stock market, but there's no proof that having knowledge of the stock market reduces risk (just ask your mutual fund manager).

I read a comment on a real estate discussion group on the Internet. In response to an inquiry as to whether a particular seminar or training program was worth the money, someone answered, "Why waste your money on that stuff? Just use your money as a down payment and learn as you go."

This is probably the worst advice you could ever give a beginner. Money for deals is easy to find if you can find good deals. But, you won't know what a good deal is without having first invested in your education!

The more knowledge of investing techniques, financing, acquisition, negotiating and, of course, your local marketplace, the less risky your investments will be. A bargain real estate purchase will generally always be a safe investment; a bargain stock purchase isn't. After all, who says the company you bought into will be in business next year?

Mistake #3: Absence of Cash Reserve

Ask anyone in real estate long term (or any other business, for that matter), and they will tell you the two most important words for survival are: cash flow.

In order to stay in real estate long term, you need cash reserves. Buying real estate with nothing down is easy; handling negative cash flow, repairs, and other expenses in the meantime is the trick. In fact, if you can handle the bad times, you will always come out on top.

Lack of cash reserves puts unnecessary pressure on you to do substandard repairs, accept less than qualified tenants, and give into tenants' demands for fear of vacancy. When you have a sufficient cash reserve, you act rationally.

  • You hold out for a higher sales price.
  • You hold out for a qualified tenant.
  • You leave properties vacant rather than accepting unqualified tenants.
  • You call a tenant's bluff when they threaten to leave.
  • You take care of necessary repairs and improvements on your properties.

It's a whole different ball game than operating from a lack of cash. Consider accumulating cash reserves before investing in rental properties.

Mistake #4: Running Real Estate Investments Casually

People are lured to real estate because of the quick buck it promises. Don't hold your breath--you won't get rich quick. An "overnight sensation" usually takes about five years. More than 90% of the people who take a real estate seminar quit after three months.

Why the high fallout rate? Lack of action and unrealistic expectations. Investing should be treated with the seriousness of a career. It takes months, even years for a business to cultivate customers and have a life of its own. You need to treat real estate like any other business.

Give yourself at least six months to see if real estate works for you. It may even take a year before you buy your first property. Maybe in the second year you will buy three or four properties. If you work hard at it and keep your eyes and ears open, you may even find your first deal in 30 days. You will not make money by talking or thinking about it; you must go out and take action. 

"I'd like to help you find the right price and the right time to make your next move a successful one. Send me a message or give me a call at 231.459.3179 to learn more today."

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Brook Walsh is from Northern Michigan and understands lifestyle based real estate investing which is one of the reasons he's chosen to pursue his dream of helping real estate investors with their home buying needs. Learn more about Brook or start your home search now.

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