5 Critical Mistakes Real Estate Investor's Make That Costs Them $1,000s - by YourStreetDreams.com

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San Diego, California, United States of America (Free-Press-Release.com) January 1, 2011 -- In every real estate market, especially here in the San Diego real estate market, there are always thousands of people trying to jump into the real estate investment world with both feet. They hear about a friend or co-worker's great deal or read about someone making a killing in the real estate market with little or no money down and that motivates them to take the road to riches.

What I typically see in some new investors is the desire to make lots of money real fast. Naturally, almost everyone wants to make fast cash, unfortunately, it isn't always as easy as some make it sound and that's why I've decided to list the 5 critical mistakes I see investors make when trying to make money in the real estate market.

Mistake #1. Buying Property for Short Term Appreciation.

No one knows where the real estate market is actually going from week to week, especially in the next 2 to 4 months. Counting on appreciation that will cover your buying - selling costs and still having money left over as profit is very risky in the short term. Even buying the property below market value may not cover all the expenses of holding, repair and re-selling costs. Even experienced flippers are careful to only cherry pick the best deals.

Advice: Know your costs going in and remember that in this real estate market, anything can happen in a couple of weeks or a couple of months. Start out with a business plan and put together a task list in the order of importance and stick to it. Even though it’s hard to do, remember to leave emotion out of it and stick to the numbers.


Mistake #2. Real estate Investing Risk Factors

The risk of investing in real estate is directly related to the investor’s knowledge. Unlike mutual funds, there are no investment managers watching after your investment on a daily or weekly basis. There is an old saying in the real estate world "watch out for the deals that find you!" In this case there are many good deals, however, without the proper knowledge the buyer is either going to have to take someone's word for it or go in blindly and if the person giving the advise also lacks knowledge then it can get expensive very quickly. If you are using other people’s money then you could be unpopular real quick.

Advice: Education in all areas of real estate investing and being able to speak the same language as the professional is important. Having the ability to know a good deal when it appears makes all the difference. Don’t forget to spend time with an experienced escrow officer since you need to know how escrow works inside and out.

Mistake #3. Not Having Enough Cash Reserves on Hand.

The two most important words in real estate investing are "CASH FLOW." Without a good cash flow the investor is dead in the water if they don't have the cash reserves to handle the unexpected issues that usually come up. Just think about how many companies have gone out of business because their cash flow dried up. Circuit City comes to mind as a company that did really well until they spread themselves too thin.

Handling a negative cash flow can be the kiss of death in a flat or declining market and with as many real estate transactions that I've been involved with, there is usually unexpected costs that come up, which could also include vacancies, evictions, under estimated rehab costs, longer than expected holding costs, etc.

Advice: Knowing all the costs associated with a specify real estate transaction is vitally important. Professionals know when to walk away because the risk is too high or because the margin of profit is too small. Work the complete deal out using a spreadsheet and see what it looks like after all the numbers are plugged in and don’t forget to add a safety margin to your number to cover the unexpected. This is usually an eye opening experience and many times the deal looks great only to find that it was just good or it looked good only to find that it’s a “Walk Away” deal.

Mistake #4. Not Treating the Real Estate Business Like a business.

People are attracted to the real estate business for many reasons including making a fast buck. In this business hitting an out of the park home run could take 2 or more years to accomplish and more than 93% of the people that take real estate seminars quit after 3 months because of the number of obstacles in the way of becoming an overnight millionaire. Remember that obstacles can be overcome with experience and experience takes time.

Mistake #5 Not Getting the Right Professionals to Work with You.

Real estate is considered a big ticket purchase and many investors feel that they can run the show themselves or use family and friends for some of the critical issues I.e. property valuation, rehab costs and marketing the property for sale. I've seen many newer investors pay too much for a property, under estimate the rehab costs, didn't plan on 5 months of holding costs before the home sold or the investor didn't understand the lending process and the costs associated in insuring the home can be financed with all types of financing.

Advice: One of the first members of your team must be a Realtor that has solid experience in flips, buying and holding properties, wholesaling and retailing properties. This Realtor will help guide you through the maze of unknowns and will be able to recommend contractors, lenders, home inspectors and a variety of other professionals that are involved in real estate investing. Another old saying is "You get what you pay for" and in this business, one wrong move could cost you thousands of dollars. See our Realtor interview questions in the YourStreetDreams.com Library.

Summary:

If the real estate business was really as easy as the infomercials made it sound then every real estate agent would be a millionaire. The truth is that that majority of real estate agents that are good at finding a home and doing the paperwork to get the transaction closed, unfortunately they have never bought or managed rental property, never actually have done a rehab or flip project, correctly estimated value and holding times in a declining market. Fortunately, there are a smaller number of Realtors that actually do have the experience to calculate margins, cash flow, and know how to properly market an investment home for a faster sale in a highly competitive market.

For more information visit: www.YourStreetDreams.com or email any comments questions or opinions to: jeff@yourstreetdreams.com

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