It’s A Numbers Game
One of the easiest mistakes to make when beginning real estate investing is assuming a property will perform. Always buy properties by the numbers. Learn to make and use good comps, both for property value, rental value, and ARV (after repair value). If you are doing a flip or repair, assume construction will cost more than you calculate by factoring in contingencies of at least 10%. At the same time, assume your ARV might be less than you calculate. Work margin into your plan because you will need it.
If you are planning a long-term rental, calculate good quality rental comps by using several different sources. Make sure the numbers still work even if you make a bit less than market rent. Don’t forget to factor in vacancy and repairs. Property tax is one of the most important expenses in some areas and can increase when a house sells, so verify with your county before calculating.
Follow the Rules
Over the years, investors have created a number of rules to use when building wealth with real estate. These rules cover house renovation projects, buy-and-hold strategies, and home construction. As a beginner, you need to know the rules, understand what they mean and why they are used, and choose which ones you will follow. Don’t assume that you can succeed by ignoring the long-held advice of thousands.
While some of the rules no longer apply in some areas or are considered outdated in today’s market, you should still understand the theory behind them. Even if some of the rules are no longer applicable to your market, you should know why they worked at one time and why they are no longer used.
Examples of real estate investing number rules you should research:
- The 50% Rule
- The 1% (or 2%) Rule
- The 70% Rule
Be Cautious…
Many beginning real estate investors will spend more money on a single purchase than they ever have before. (Other than the purchase of their personal home.) This shouldn’t be taken lightly. Even though many real estate gurus make it sound easy and foolproof, you can lose huge amounts of money investing in real estate, and you can lose it very quickly.
Beginning investors should educate themselves on all things real estate, market, and housing. They should join local real estate groups if possible. They should always build margin into their numbers before deciding if a deal is good. And they should ask for advice: They should ask a trusted real estate agent to check their estimated after-repair value. Find a property manager and verify current rental rates for your house and neighborhood.
But Not Too Cautious
While you should be careful when considering properties, you shouldn’t let that caution stop you. Committing to that first property is so hard and scary that many investors never get past the dreaming stage. The first purchase is the hardest. Once you have made your first large purchase, the next one is easier.
If you accept that at some point you will make a big mistake and lose money, you will be in a better position to invest. Understand that you will learn more from your mistakes than from your successes and welcome them. No one ever invested successfully without also losing money at some point. Be careful, but don’t let caution stop you from getting started.
Never Stop Learning
The best way to protect yourself against loss is to learn, learn, learn. Study everything you can about both real estate investing in general and your specific market. Don’t limit your self-education to real estate topics but learn what you can about everything that might be involved in the process, from construction to the role of the title company, to how to file self-employment taxes.
Questions you should ask: What do renovations cost in your area? Are contractors hard to find and hard to schedule? What is happening in the construction and home improvement markets? How long do assessments take in your neighborhood? Are real estate agents having a hard time keeping up with the market? At what rate are market rents rising in your area? What finishes, amenities, and styles are most in demand? There is no end to the things you should learn about. Your best strategy: Never stop learning. Be curious about everything.
Don’t Give Up
You will make mistakes and you will lose money. That fact is inevitable and the sooner you accept it, the sooner you will start making money. Remember, the money you lose when you make a mistake is the price you paid for the best education of your life.
Don’t quit when you lose money or make a bad investment. You might need some time to regroup and recoup your losses, and that’s okay. Mental space to recover from frustration and disappointment is helpful. But don’t stay there. As the old cowboys said, you have to get back on the horse or the fear will keep you away forever. The longer you wait, the harder it is to get back on.
You haven’t failed until you quit. Learn from your losses and try again.
