For four years, the news has been the same – housing prices across the country have increased. These steadily rising housing values might inspire you to invest in residential real estate.
Consider the latest numbers from the National Association of Realtors – the median sales price of existing homes in the United States stood at $210,800 in February. That’s up 4.4 percent from the same month in 2015. It also marks the 48th consecutive month in which housing prices showed a year-over-year increase.
The numbers suggest that investing in residential real estate is a sound financial move. Investors can hold onto the homes they buy, rent them out and then sell them for a profit when they increase enough in value.
If the thought of investing in real estate intrigues you, you’re not alone. The National Association of Realtors® reported that individual investors purchased 18 percent of the homes sold in February. That’s the highest this percentage has been since April of 2014.
The problem? Investing in real estate isn’t all that simple. Investors who don’t do their research before buying could lose money, and plenty of it.
“I think the biggest mistake that new investors in real estate make is thinking it will be a get-rich-quick investment, and it’s far from that,” said Hillary Legrain, vice president with First Savings Mortgage Corporation in Bethesda, MD. “Certain housing markets in the United States can experience downward fluctuations from time to time, so you may not earn as much as you were expecting when you go to sell the home.”
Here are four of the most common mistakes new investors make when sinking their dollars into real estate. Avoid these pitfalls and you’ll greatly increase your odds of a successful investment.
They Think Appreciation is Guaranteed
Mark Ferguson, a Realtor, housing flipper and founder of Invest Four More in Greeley, CO., said that too many investors think that the houses in which they invest will never lose value. Problem is, there’s no guarantee that any home will increase in value.
That’s why Greeley, who has bought 16 rentals in the last five years – properties that he says earn about $90,000 a year for him – recommends that investors buy homes that will also make good rentals. This way, investors can earn a steady cash flow from rental income, even if the homes they buy don’t appreciate as quickly as they had hoped.
“Try not to buy just for appreciation,” Ferguson said. “There is no guarantee prices will increase.”
And if a property you buy isn’t appreciating and isn’t bringing in enough rental income to earn you a profit? Don’t hold onto it hoping for better times.
Ferguson said that one of the most common mistakes he sees from new real estate investors is “investing in a property that loses money, hoping for appreciation.”
They Think Real Estate is a Passive Investment
Rocky Lalvani, a financial coach, founder of the Richer Soul financial blog and a real estate investor himself, says that many new investors think they can buy their properties and enjoy a new income stream without taking a hands-on approach.
This, Lalvani says, is an incorrect assumption.
“Real estate is not a passive investment,” he said. “It requires your time and efforts.”
This means that you need to know how to get work done. You don’t necessarily have to know how to repair a leaky sink or fix a broken dishwasher. But you do need to develop a network of plumbers, carpenters, contractors and handymen who can resolve these problems.
Hiring these professionals isn’t cheap, and you’ll have to factor these costs into your investment. Spend too much on outside help and you might find yourself losing money on your real estate investment, Lalvani said.
You must also expect to be on-call 24 hours a day. You never know when a renter will call you at 2 a.m. because their furnace conked out.
They Don’t do Their Research
Investors will tell you that money isn’t made when you sell your investment property. It’s made when you buy it.
This means that you’ll increase your chances of a solid profit when you buy your investment property for a price that’s low enough at the start. If you spend too much on a home, you’ll struggle to make a good profit when you do decide to sell.
This is why Shawn Yesner, an attorney with Yesner Law in Tampa, FL, recommends that investors have a team of professionals in place to help them make the right investing decisions. This includes a real estate expert who can help them find an investment home at the best price.
Yesner recommends that investors be especially careful when it comes to buying foreclosed homes. Yes, these homes are usually priced lower. But they often come with serious damage – holes punched in walls, leaking roofs, structural issues – that can eat away at any savings investors think they are enjoying.
“Here in Florida, foreclosure sales are buyer-beware,” Yesner said. “Investors who buy at the courthouse steps without knowing what they are buying could be buying someone else’s title problem, code-violation problem or structural or repair issue.”
They Don’t Have Enough of a Financial Cushion
Too many investors don’t factor in the costs of owning and maintaining investment properties into their expenses. Others don’t factor in those gaps in rental income, the period after a renter leaves and before a new renter arrives.
And all too often, these same investors don’t have a big enough reserve fund of dollars to cover the unexpected costs of owning investment homes or to tide them over when they aren’t receiving monthly rent checks.
“Don’t push your budget to the max,” said Andrew Marshall, a financial planner and principal with Andrew Marshall Financial in Carlsbad, CA. “There are always unforeseen issues that arise with real estate. Make sure you have a comfortable cushion of reserve funds. This way, you will avoid any stress of not having enough money.”
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