Real estate investing is a tricky business, but it’s not rocket science. It can’t be — successful retail investors are far more numerous than actual rocket scientists, after all.
The trick for novice investors, according to Ralph (Rafael) Serrano, Miami real estate investor, is to anticipate the most common pitfalls and take steps to avoid them.
In practice, no real estate investor executes flawlessly, at least not on their first go-round. Knowing what to expect and having a plan in place to meet those expectations, though, can dramatically increase the likelihood of a successful outcome.
Without further ado, here’s a look at four common real estate investing pitfalls, plus some tips for avoiding them.
- Failing to Properly Research the Local Market
This all-too-common misstep is often born of overenthusiasm. It’s well and good to want to get the ball rolling on your first real estate investment, but diving in before you’ve done your homework could be a recipe for heartbreak.
What You Can Do: Take your time researching the local market, using publicly available and proprietary data and metrics as resources allow. Whenever possible, speak with experts on the ground.
- Taking on Too Much Leverage
Overextending your finances is not a good idea, especially not right out of the gate. If something goes wrong, you could find yourself in dire straits without an exit strategy — which, in turn, could jeopardize your real estate investing career before it really begins.
What You Can Do: See credit for what it is— a necessary tool that allows you to take measured investing risks. Unless you’re blessed with ample liquid resources, you’ll need to borrow to make your first real estate purchase, but you’ll need to resist the urge to take on too much leverage, too quickly.
- Biting Off More Than You Can Chew
Don’t be seduced by the radical transformations you see on home improvement shows. As a novice real estate investor, you’re better served by manageable improvement projects — not stud-to-stud gut jobs. Use those first projects to gain experience for more ambitious work down the line.
What You Can Do: Keep your expectations in check, and target properties that don’t require outrageous amounts of work (or serious remediation before they can be deemed livable).
- Failing to Properly Vet Tenants
Last, but not least, make sure to choose your tenants wisely. They’re your meal ticket, after all.
What You Can Do: Conduct thorough background checks pursuant to local law, make a point of meeting all prospective tenants in person, and find a property manager you can trust.
Practice Makes Perfect
No real estate investor is perfect, just as no individual is perfect. We’re all subject to the same rules of the road, the same laws of gravity.
This is especially true for real estate investors just getting into the game. Even if you have a great mentor and a knack for picking things up on the fly, you’re going to make some mistakes at the outset — count on it.
Does that mean you should get out of the real estate investing business after your first serious setback? Not at all. You have what it takes. And, as we’ve seen, successful real estate investors learn from their mistakes and return to the field more determined than before.