The internet is full of sites that review everything from restaurants to vacuum cleaners, and many consumers spend hours doing research and making comparisons for items that cost a few hundred dollars or less.
“Yet when it comes to investing six figures in real estate, we often see investors make fundamental mistakes, most of which could be avoided with a little research,” says Alex Baker, fund manager at Coastal Equity Group,a specialty lender for real estate investors.
“The result can be catastrophic economic losses if you don’t know what you’re doing,” he adds.
Before you begin your real estate investment venture, or if you’re early in the process, take special precautions to avoid these common pitfalls and save yourself some heartache, not to mention a fat chunk of your capital.
1. Failing to Do Your Research
When real estate investments go south, more often than not the red flags were visible right at the start. As a prospective buyer, demand answers to the critical questions before pulling the trigger on any purchase. Know the location and the market thoroughly; know how the property is zoned; the condition of the structure(s); the trajectory of the sale or rental market; legal and environmental concerns about the property; and much more.
2. Assuming Immediate Returns
The dramatic stories of quick riches are legendary precisely because they are so unusual. Most real estate investments require patience, hard work, further investment, and a longer time horizon than you probably assume. If you’re not in it for the long haul, you’re less likely to succeed.
3. Not understanding junk fees
Many mortgage companies will tack on extra fees, or raise the fees on some common areas of your closing costs. If you don’t know what to look for or are not aware of the going rate for these, you can find yourself paying excessive costs that subtract from your bottom line. Some of the areas to look for these charges are in the application fee, underwriting fee, mortgage lock rate fee, loan processing fee and broker rebates.
4. Not Following Your Plan
Before you embark on real estate investing, it’s critical to know your goals and understand your tolerance for risk. This will steer you towards certain types of investments and away from others. Don’t veer off the plan just because something looks like a great opportunity. It might be – and still bankrupt you.
Here’s an example: first time investors need some cash flow in order to pay off their loans. For them, rental property is likely a good choice; renovating and flipping a home might not be. Make a plan and stick to it.
5. Forgetting That it’s All Business
Emotions are great for love and war, where all is fair. But keep business….business, and don’t let your emotions rule. “Calm, rational cost-benefit analyses are always preferable to emotional decisions,” says Baker.
Engaging in sufficient due diligence, sticking to a plan and entering the business with the correct state of mind are a formula for success. Failure to do so, puts the investor at greater risk.
Coastal Equity Group is a professionally managed boutique investment firm providing real estate-based loans to borrowers in need of non-traditional financing. Because we are small and private, we can move quickly through the underwriting process and structure loans more creatively than conventional banks. Based in Charleston, South Carolina, Coastal Equity Group also lends in Kentucky and Florida. Apply for a loan today at CoastalEquityGroup.com.