Many people have learned that Investing in real estate is not as easy as it seems. At least that is true for investors trying to get a fair deal. For those of us who have been investing for years, and learned many hard and expensive lessons, here are issues you should think through, understand, and consider before jumping into the real estate investing arena. These are in no particular order, since an individual would be smart to read and think through each and every "lesson learned" in the list.
1. Not penciling out your real estate deal: This describes about 80 percent or more of real estate investors. They don't take the time to put pencil to paper and make sure that the rental revenue from the property will be more than all the property expenses -- and leave some monies left over to return to one's bank account.
A negative cash flow property will virtually guarantee a measly -- at best -- investment return on your money.
2. Not penciling out your deal with conservative numbers: For those few fortunate ones who do know how to pencil out a deal, many use unrealistic numbers. They overestimate rental income, underestimate the vacancy, then underestimate the expenses associated with operating a property. That turns into low or negative investment returns for the property owner.
3. Getting renovation costs wrong: Most buyers have little idea how much it costs to renovate a property. They listen to the home inspector, their real estate agent, and just throw out a number like $25,000 for everything. Then they start getting bids for the work and quickly see it will actually cost $80,000 for everything. Word to the wise: Always do a lot of homework and be very conservative in your renovation budget estimates.
4. Underestimating renovation time: Additionally, inexperienced investors believe a good renovation can be done in 30 days, or 60 days. Many times it takes much longer to finish these projects than originally estimated. As a real estate buyer, you should talk to others who are experienced to get a realistic expectation of the time involved in a property rehabilitation.
5. Thinking something can only cost 'that much': It never does, it always costs more; many times much much more. So whatever the expense, renovation, service, contract, capital item, etc; chances are it will cost more than you think.
6. Thinking that stocks, bonds and real estate are all comparable investments: People often say they want to buy real estate to get better returns than their stock, bond or bank account can provide. Real estate is a unique asset that comes with clogged toilets, challenging tenants, nebbish neighbors, etc. It's not an asset where you can invest and just look at an account statement every few months like you could with a stock, mutual fund or bond. Owning rental properties is a business, it can be time consuming and stressful. Make sure that makes sense for you before you buy.
7. Thinking it's a "turn-key" real estate deal: Earning money with almost no work on the investor's part? Never! Not going to happen!
8. Believing that flipping properties is investing: Flipping is "speculating" for most real estate buyers. Unfortunately, most lose money. Sure, it looks easy on TV and those shows are fascinating! I personally enjoy watching them; but they are not realistic. Not everything you see on TV or the Internet is true you know.....
9. Thinking that real estate is low risk: There are all kinds of risk issues that come along with owning real estate. Many an investor can mitigate and/or remove some of those with prudent behavior and the proper due diligence. Most investors do not do any of that, leaving them exposed to a myriad of items and issues that can and sometimes do become financially painful.
10. Believing what others say about their "profitable" real estate investing acumen: There is also no way to verify what someone else is telling you about how they did on their real estate investments -- unless they show you their tax returns and credit report. But since people love to boast, we often only hear about the winners, not the losers. Many times the statements from those supposed "winners" are embellished with questionable claims. Be careful, do your own homework, but verify your own conclusions.
Those are many mistakes that investors can make. Some are very challenging to mitigate. Experience will teach you a multitude of lessons over your real estate investing career. Just try to avoid the big expensive ones that could clobber you; and end your investing career before it even gets off the ground.
Leonard Baron, MBA, is America's Real Estate Professor®. His "Real Estate Ownership, Investment and Due Diligence 101" textbook is designed to teach real estate owners how to make smart and safe purchase decisions. He is a past lecturer at San Diego State University and teaches continuing education to California real estate agents at The Career Compass.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow or AOL.