Real estate investment—a financial path fraught with blunders, trials and tribulations but a lucrative path nonetheless. Thankfully, it doesn’t have to be as tough, if you know what to avoid. Here we provide an expert’s insight regarding the top ten financial mistakes that can break your real estate investment, and how to avoid them!
Buying First and Thinking Later
Meet Richard: Richard is new to the real estate scene. He wants to invest in real estate, and stumbles across a great property: newly renovated, in a happening neighborhood and for an amazing deal. He can’t resist, and snags it for himself. Sounds like a promising start, right? Wrong—don’t be Richard: instead, be Steve, who decided he wants to invest in real estate, and then sat down and carefully constructed an investment plan with his trusty CPA. After deciding what works for his budget and his goals, he begins scouring the market for a piece of property that will match his needs.
A sweet deal will quickly sour if you haven’t developed an investment strategy first, so before snapping up that too-good-to-be-true property, make sure you’ve considered what will make for a good investment under your specific requirements and goals.
Moving Too Fast and Paying Too Much
It’s that dreaded “great property” again, except this time everything is great but the price. You buy it anyway, justifying the cost by calling it “a worthwhile investment.” Don’t do it—a better deal, attached to a just-as-nice property, is out there somewhere. Purchasing a property is the most important part of real estate investment, so don’t rush through it and spend a fortune, in hopes of getting to ‘the money-making part’. Invest the time necessary to find a great deal for a great price.
Decreasing Your Volume
The real estate investment world can be an intimidating one, and a newbie may feel the need to cross all their T’s and dot all their I’s on one property before delving into a new one. If this keeps you sane, go right ahead, but know that this strategy will most likely never become a particularly lucrative one. A veteran real estate investor will always have multiple deals working and moving simultaneously. This not only helps weed the bad deals out, but gives a clearer picture of the market. It also ensures one poor investment isn’t the death knell for your success.
Misjudging Your Cash Flow
Buy property, rent or sell property, make money—a pleasing, yet misleading, chain of events. Properties don’t always come in a ready-to-rent-or-sell condition; repairs and renovations may be necessary beforehand. A property may also sit on the market for a good while before it is rented or sold. Meanwhile, you are paying the mortgage, taxes, fees, insurance, cost of advertising, HOA or COA expenses and more. This turns your former asset into a major liability. Run the numbers—the right numbers—to determine what your true cash flow will be.
Having Only One Exit Strategy
As alluded to above, the real estate investment path is rarely a straight one. A savvy real estate investor will ensure their success by having multiple exit strategies. Think selling or renting a property to a tenant are the only options? Think again! Lease options, seller financing, 1031 exchanges, FSBO sales and wholesale are several other choices available to real estate investors. Establishing several end games means planning for an uncertain future— the only certainty real estate is the uncertainty of the market!
How The Real Estate CPA Can Help
But wait, we’ve forgotten the biggest mistake a fresh-faced real estate investor can make—not hiring a top-notch CPA! At The Real Estate CPA, our innovative, intelligent approaches to real estate accounting help make your investments become successes. We want to be a part of your team—drop me a line, and we’ll schedule an appointment!