Managing your real estate investment business effectively is the key to continued profitability in this fast-paced industry. Knowing what not to do is just as important as understanding the positive principles of successful property investments. Here are six practices you need to think about when buying, selling or brokering real estate transactions in the modern marketplace.
#1. Failing to Perform Due Diligence
Doing your homework on the local real estate market is critical to your success as a real estate investor. Some of the most important things to consider before making a move in real estate include the following:
- Current number of homes on the market in your area
- Average sale prices & Average time on the market
- Number of distressed properties available for purchase
- Rental occupancy rates and average monthly revenues collected on rental units
- Purchase prices for comparable properties
- Neighborhood details to include demographics, crime stats, walkability, school district information and public transportation options
- Zoning restrictions applicable to the property
Intangibles can be as important as these practical factors. Determining whether a particular neighborhood is in decline or in demand, for instance, can help you decide on the likely value of a property now and into the future.
#2. Failing to Consider All Expenses
When calculating the likely return on investment for a property, remember to include maintenance costs, property taxes and homeowners’ association fees into your figures. According to the experts at Zillow, typical operating expenses can add up to between 35 and 80 percent of the revenues generated. Aiming for between 40 and 50 percent can provide you with a healthy profit on your ongoing investment.
#3. Misunderstanding the Element of Time
Especially when purchasing distressed properties, timing can be critical to your own success and to the financial well being of the seller. Rushing into a deal, however, can be counterproductive. Missing out on potential revenues is never as damaging as taking a loss on a real estate investment. By taking your time and analyzing the pros and cons of each potential transaction, you can avoid making a costly mistake when time is a critical element. You need to learn how to say “no” when it matters most (i.e. investing in anything.)
#4. Utilizing Outdated Technology
Do you rely on an outdated, mobile-UNfriendly site that takes forever to load? Clients today are tech-savvy and finicky. If they’re unimpressed with the ease-of-use ways you communicate, advertise, and respond to them, they’ll likely not give you a second chance. A recent survey showed that 45% of consumers say a bad website is WORSE than no site at all. Everything from applications, to rental payments, to advertising should be online and easily accessible for every party involved. If you’re not managing the properties make sure your property manager is up to speed.
#5. Overextending Yourself Financially
Adding properties to your portfolio can increase your potential revenues to help you build wealth. However, failing to maintain adequate cash in reserve can leave you in real financial trouble if unexpected setbacks occur. The loss of one or more tenants, unexpected repair costs or legal entanglements can drain your available cash on hand. By ensuring that you have sufficient monetary reserves to manage these expenses, you can maintain an even keel even when unexpected financial storms arise.
#6. Going against Your Gut
Intuition is a valuable tool for investors in any field of endeavor. In the real estate field, going against your gut instincts can saddle you with a bad investment that can drain away potential revenues. In general, always listen to that internal voice and walk away when a property deal doesn’t seem quite right. The reverse is not always true, however; if a questionable investment appeals to you, it may be the wisest course of action to move on and examine other options — when all else fails, fall back on tip #1 and do your due diligence.
By avoiding these six pitfalls, you can increase your chances of long-term profitability in the field of real estate investment.