Sometimes the best deals are the ones you do not make. As a real estate investor, you have limited resources and want to make sure those resources are deployed wisely. “One bad deal can set you back considerably, off-setting the many successful investments you have secured,” says Steven Davis, CIO and CFO of 5 Arch.
It is hard to pinpoint the number of failed investments due to fledgling investors who enter the market and bow out before they make an impact, but a recent article puts the number at 87 percent. It’s a frightening number, but by avoiding these common real estate investment pitfalls, you can increase your chances of investment success.
Is there such a thing as a good deal in a bad location? Very rarely. While you might think you can swoop in and get a bargain, the problems with the location sooner or later will outweigh any of the positives.
“If it is an unsafe or undesirable neighborhood, property values and rent potential are not likely to be favorable to your investment goals,” says Davis. “Whatever you invest in the property, you are likely to have a hard time finding renters or another buyer if you opt to fix and flip. Getting stuck with the property longer than you expect is going to shoot down whatever you thought you would gain from your so-called bargain.”
A Property That Is Too Far Gone
You may think you have perfected the art of the fix and flip but too much “fix” may leave you at a disadvantage when you decide to flip.
“The whole idea of flipping is to get in and out quickly and efficiently,” says Davis. “You have to be careful that the property you are fixing is not too far gone to give you any real chance of a profitable flip.”
Overextending Yourself Financially
There is nothing worse for investors than getting into a deal they cannot comfortably afford. One false step, such as the fix-up taking longer than you thought, reconstruction costs exceeding your budget, or unexpected repairs, and you could be in dire straits.
“When managing your investments, you have to be realistic,” Davis says. “Do not just prepare for the best-case scenario. Prepare for the worst case as well. If your most optimistic scenario doesn’t come to pass, you still have to make sure you’ll be OK.”
It is important to anticipate such possibilities and package your deal accordingly. A good approach is to take a conservative approach to investing and then work up your risk tolerance as your cash flow situation allows.
There are a lot of good reasons to team up with a partner in real estate investing ventures. Perhaps you bring the financial talent to the table while your partner has general-contracting expertise. You are able to share the risks, the workload, and the decision-making.
However, sometimes the “two-heads-are-better-than-one” approach does not go well. It may turn out the two of you have different goals, or perhaps one partner does not live up to the promises that were made at the outset.
Even if you are partnering with a friend or a family member, a contentious business arrangement could make your personal relationship go sour.
“You might think, ‘But, hey, he’s my cousin. What could possibly go wrong?’ Unfortunately, partnerships often do go wrong, even among people who were previously close,” Davis warns.
Minimize the potential for problems by having a formal agreement in writing, advises Davis. “The time for hard decision-making is upfront before you ever get involved in business together. Make sure you understand the potential for pitfalls. Go into the partnership with your eyes wide open.”
Steering clear of bad investment choices is the best way to ensure that your investment choices will take you in a positive direction.
Financing Based on Realistic Goals and Expectations