When done right, real estate investments often provide stable returns. A carefully chosen property can yield additional cash flow to help you diversify your portfolio.
Investors can pay for real estate properties for retail and industrial uses from purchasing a condominium, starting their journey toward financial independence.
But, before thinking of expanding, newbie investors must perform due diligence before parting from their hard-earned cash and savings. The step below outlines some of the most common mistakes beginners must avoid.
1. Skipping Professional Help
No matter how much knowledge you’ve taken from poring over real estate sites and reading books about investing, you’ll still need professional help to avoid a failed investment move. While it’s true that experience is the best teacher, investing in a property without expert help may increase the likelihood of a costly mistake.
Consider having a team to back you up. Start by contacting investment experts online, such as Millionacres by Motley Fool and other similar subscription services. If needed, seek the help of a property broker, real estate attorney, an accountant, and, subsequently, a property manager.
2. Rushing To Invest
Performing good research about the property you wish to invest in is vital before any transaction. Depending on the type of real estate investment you’re eyeing, review the property’s performance history, which may include rental returns and local market trends. Consider analyzing the socioeconomic market in the area, looking for things such as employment rates, up-and-coming offices, or economic zones to be established.
When investing in real estate, consider the factors that affect rental rates and growth potential, while also focusing on the community’s economic vibrancy. Doing this increases the chances of a successful venture.
3. Not Considering The Property’s Location
Location is detrimental to the success of real estate investing. Almost everything is tied to it, from the property price, to the general and specific laws and regulations applicable, and to the property’s potential yield from rentals. This is true even for real estate investment trust (REIT) investments, although it becomes less evident as a company keeps charge of everything.
As much as possible, look for a prime spot to invest in. Although this may require a higher buying price, it’ll also yield a more favorable return on investment (ROI). If the prime property is outside your budget, make sure that the area around it is groomed to become the next economic hub.
4. Making Emotional Decisions
First-time real estate investors may make the mistake of letting their hearts instead of their minds decide. Being less experienced with investing, beginners could easily fall in love with a specific property and forget about making some money.
Making an investment decision without considering the essential factors discussed earlier can lead to a costly mistake. Additionally, transforming a commercial property according to your preferences may lead to unnecessary expenses on cosmetic renovations.
5. Overcalculating Your Income
Eager investors often overlook the upfront costs related to investing in commercial properties. Besides the mortgage downpayment, you have to pay other out-of-pocket costs before and while leasing the asset. For instance, you’d have to spend for building inspections, licenses and permits, insurance, pest control, transfer fees, taxes, and legal costs.
Even when you’ve successfully leased your property, you have several responsibilities as a building owner. Most of the expenses will go to maintenance and repair works, especially if your property has been around for several years.
6. Forgetting About Depreciation
By definition, depreciation represents the decrease in the value of a particular asset over time. It tells how much of the property’s value has been used.
The Internal Revenue Services has set the commercial real estate depreciation at 39 years. To determine your property’s depreciation value, calculate the building’s total price and divide it by 39. While depreciation can reduce your tax liabilities, it can also reduce your property’s value should you decide to sell it.
7. Thinking That Investing Is Easy
This may be related to the first point, yet it deserves a separate discussion. Even if you have professionals on board, you’ll still make the final decision. To make intelligent investing moves, you have to know the right questions to ask. And, to come up with the right questions, you have to have a solid background on the subject.
Besides training, a rookie investor needs other experience-related tips, like screening tenants. Additionally, an investor must be aware of the area’s applicable real estate laws and tax regulations.
The Bottom Line
It may not look like it, but the path to successful investing isn’t as smooth as one would hope for. There are multiple elements that an investor has to consider before determining the profitability of a property, as discussed above.
Hopefully, an individual will gain confidence in taking the first step toward successful investing with this knowledge.