Let’s say you want to get into the real estate game. You’ve heard it can be a way to side hustle into a comfortable nest egg. It’s a business you could eventually expand into a full-time gig or at least another venture you could add to your portfolio.
While investing in real estate can be (and often is) profitable, it’s not a get-rich-quick scheme. You may see shows about home flippers telling tales of making thousands on each deal. However, they’ve learned what works and what doesn’t along the way. Despite how TV productions make it seem, profits don’t pour in overnight. Plus, there’s usually some element of risk involved with each flipper-property.
If you’re thinking of becoming a real estate investor or building up your expertise, it helps to know what missteps to avoid. You might be relatively new to the game, but you don’t have to make every rookie mistake. Let’s look at three blunders detrimental to real estate investors.
1. Not Paying Attention to Zoning Laws
Zoning impacts what types of properties can be built, which influences a host of other factors. These include desirability, traffic congestion, and proximity to amenities. Some tenants won’t mind living in a condo adjacent to a shopping center, while others would prefer to be away from the noise and traffic any shopping center will likely bring.
Likewise, a single-family home next to an apartment building may appreciate less in value. Investing in the home and turning it into a rental may be a good idea if the monthly income meets your goals. However, the eventual sale price may not be enough to recoup your investment.
Zoning laws, including changes in the regulations over time, impact neighborhoods and investors’ ability to make a profit. The decision to invest in a mobile home park is an example. An area’s zoning may restrict where and how many parks can be established.
Regarding mobile home parks, Lifestyle Investing expert Justin Donald says, “One issue with an MH Zoning is that it’s where you can’t build any more mobile home parks — which sometimes ties back to the zoning issue and that homes can’t move. When homes can’t move, you have owners who will stay in the area.” Before investing, understand how local zoning laws may work in or against your favor.
2. Not Looking at a Property
This slip-up may seem obvious, but it can be tempting to buy a property sight unseen in competitive markets. It means you don’t physically tour the home or building before you place a bid. You might have looked at photos, videos, and virtual tours online. Yet, you never took the opportunity (and due diligence) to see the property in person until after you were under contract.
One of the reasons buying sight unseen can turn into regret is online visuals don’t show everything. Instead, they serve as only a highlight reel, designed to omit flaws and attract attention. The cracks in the foundation aren’t going to be featured. Neither are the raccoons nesting in the attic. On-site tours and inspections, however, are opportunities to see what you can’t observe through digital images.
Besides buying sight unseen, another related mistake is only touring the property once. When you walk through a building one time, it’s also easy to miss potential issues. You may not remember everything once you leave. You could get excited about some of the features you regard as subjectively valuable. And your emotions could make you forget about approaching the potential investment from a more practical angle.
It’s why paying a second or even third visit to the site can keep your head on straight. You might notice the siding will need to be replaced soon. Perhaps the neighborhood has a different vibe in the evenings. You could notice nearby properties are more unkempt than you recall or would want – which would impact the value of your investment. Taking a first and second look in person can save you from buying the wrong property for your goals.
3. Not Having a Long-Term Strategy
Your average Joe sometimes doesn’t invest in real estate because it requires expertise to manage the risks. You don’t have to reinvent the wheel again, but you must listen, read, learn, and obtain expert advice. And not having a strategy is something that makes real estate investing riskier than it already is. Imagine adding stocks to your portfolio without knowing average return rates. You might get lucky with your stocks and pad your bottom line. But chances are you’d shake your head at each quarterly portfolio review.
Before investing in anything, you must outline your objectives and what you’ll do if the market doesn’t go your way. For instance, with your rentals, do you want to focus on vacation rentals or build up an inventory of condo and apartment buildings? Sometimes, narrowing your focus ensures you learn how to leverage specific assets.
Say you decide residential isn’t where you want to be. Instead, you want to invest only in commercial properties like office buildings and shopping centers. You aim to achieve at least a 10% annual return and sell within 15 years. To meet your objectives, the research shows you should buy properties within metro areas with populations of 100,000 or more. In addition, the commercial sites must be in high-traffic areas.
Determining factors like these will help you in the long run. You should also have a built-in contingency plan. Say the population declines, dipping below 100,000, or zoning law changes diverting traffic away from your shopping center. Think about how you’ll handle these risks through diversification or liquidation.
Avoiding the Big Mistakes
Making an error here and there is part of the learning process. You’d be hard-pressed to find a seasoned real estate investor who hasn’t learned from their mistakes. But by heeding other investors’ advice, you can avoid the big ones that could stop you from achieving your goals.
Like any investment, real estate isn’t a sure bet. You’ve got to pay attention to local market dynamics, be hands-on, and have a plan. Otherwise, you’ll simply be rolling the dice.
