8 Classic Mistakes that Real Estate Investors Make
A failed investment is, mostly, the result of a mistake – and mistakes, especially in the world of investments, can be very expensive. In retrospect, we can always identify the mistake. However, it is cheaper and more beneficial to identify and avoid making mistakes before they happen.
Completely avoiding mistakes is unattainable. Yet, knowing what could be the major mistakes that investors may make is a great way to minimize their probability of happening.
It is important to be aware of those classic mistakes. It is even more important to have the ability to methodically strategize potential mistakes and where they could happen. Doing so in advance will help to avoid making them.
In the following section, we will go through the 8 most common mistakes that real estate investors make. Identifying them and knowing how to handle them can make a small, yet significant difference between a catastrophe and a “bonanza.” Practically, as part of the investment strategy, it is highly recommended to incorporate this thinking process, where one goes through this list of potential mistakes with respect to each investment.
- Flexible planning
One of the most common mistakes among real estate investors is lack of planning. Often, they buy a property and only then, they figure out how to make it profitable. Ideally, it should be the other way around; one should plan his or her investment strategy and then look for an investment opportunity. Finding your investment strategy only after you have invested in a property is a recipe for losing money. You start with a plan and end with execution, and not the other way around.
- Transaction is not a business
Another common mistake among real estate investors, beginners and veterans alike, is rooted in the belief that investing is a commercial activity. These investors tend to go after one investment at a time, rather than maintaining a pipeline of opportunities and purchase offers. Operating this way is simply making some transaction and not “running a business.” Investing is not trading, though it is very easy to confuse the two. Investing requires the relevant mindset that is based on building a vast portfolio of properties, learning the market, and making offers for a variety of properties. Investing through a wide portfolio allows neutralizing marginal investments and elevating the attractive investments.
- Making a hit
Unlike stories about real estate gurus who make a hit and live to tell about their experiences, making a profit from real estate investing is far more professional, complicated and demanding. Real estate investing is a long-term process that can make a growing profit throughout time. But it is also a process that requires patience, tolerance and rational behavior based on a built-in investing strategy.
- The Loan Rider
The volume of knowledge, both macro and micro, that real estate investors are facing is vast. Individual investors who choose to conduct their investments as loan riders tend to make more mistakes during the decision-making process. This may be because they pay less attention or lack the ability to analyze the situation more effectively. Forming a team of professionals around an investor is a key success factor for investing. At the very least, investors should set up a good and regularly maintained relationship with a real estate agent, an appraiser, an engineer, a lawyer and a financing body. A real estate analyst is always an important, if not critical, addition.
- ‘This looks good’
“This looks good,” “The property looks good,” and “the price looks good,” etc. are classic mistakes that reflect a lack of strategy and built-in methodology for investments’ due-diligence. Yet, the gap between “this looks good” and “it is good” is called a loss. Closing this gap is through setting a built-in investing strategy, a comprehensive due-diligence process, a professional value estimation / appraisal, and a thorough methodology for deals’ assessments. You should not make an investing decision before you make sure that the deal looks good on the inside and not just from the outside.
- Impulsive decisions
Making decision impulsively is probably the No.1 mistake that investors make. Impulsive decisions are decisions that are being made based on one’s mood or temporary personal state. These decisions are also based on partial information that is tapping into emotional weaknesses. Sometimes, everything may seem optimistic, and in other times, things may seem less rosy. New information that comes our way and /or a professional’s opinion can build or shake our confidence. Here too, the solution goes through a built-in investing strategy, and discipline is following it.
- Cash flow or something from Economics 101?
In order to be a successful real estate investor, one needs to possess a complete set of abilities and traits beyond the world of finance and numbers. Having said that, you cannot enter the world of real estate without knowing what cash flow is, its importance, and how it affects your investment portfolio. Mortgage payments, taxes, insurance, advertisement costs, and management costs, etc., are expenses that all need to be taken into consideration and calculated as part of the investment decision process. The cost of the property is important and the potential profit is important. However, negative cash flow that is not being taken into consideration can lead to the collapse of the investment entirely.
- On the brink of a cliff
Another common mistake when planning an investment is failing to take into consideration potential overhead expenses. To be on the safe side, a rule of thumb says that one should calculate all profits and losses and then double the potential losses, adding them to the calculation. In reality, such a generic rule can turn many investments unprofitable. Walking on the brink of a cliff may put you at risk, but standing far from the cliff may waste your time and also prevent you from seeing the view. The right attitude to deal with this issue is the Modular Scenarios Method, which allows you to work with manipulations and calculations different from the profits and losses model (e.g., giving some risk factors to several calculation lines), so that a margin of security that is real is created.
iintoo’s mode of operation is based on deep knowledge of and vast experience with the most professional aspects of the investment world, particularly real estate investment. iintoo’s Analysis and Business Development Departments are working with a set of built-in processes with the purpose of minimizing and even neutralizing the probabilities that these mistakes will occur. iintoo’s due-diligence process is composed of strict guidelines and a built-in, thorough and deep analysis method that is backed up by advanced and professional tools. These tools include:
- An updated real estate database used as an information source for the markets in which iintoo operates.
- Analysis programs for analyzing information and scenarios.
- A strictly guided due-diligence process.
- The due-diligence process that our entrepreneurs go through is crossed checked with Meridian Capital for additional risk mitigation and is brought before our investment committee prior to a project for raise.