It seems impossible to predict what the real estate market might do in the year to come with so much in flux. Many experts suggest that the market could be very active, due in part to the expected avalanche of evictions and foreclosures caused by the pandemic. Some regions of the country are already seeing increases in relative home values, fueled by a renewed interest in rural living.
With interest rates at historic lows, now is a great time to invest in real estate. With many foreclosure auctions and short sales, real estate investors will enjoy a richer inventory and potentially greater values.
Sounds perfect, right? You couldn’t possibly fail. Not so fast. If you want to succeed in real estate investing, you have to make good investments, and good investments don’t happen by accident. Let’s talk about the types of real estate deals you want to avoid in 2021.
The Too Much Too Fast
If you are just starting out in real estate investing, it can be tempting to spend big money to get started. Many new real estate investors succumb to the temptation of buying as much as they can, as fast as they can. These investors believe that the quickest path to success is to amass a huge portfolio from the start.
Don’t try to YOLO your way into real estate investing. Slow down. The best way to get started in real estate investing is to begin with something inexpensive and relatively simple. Perhaps it is a single-family home that needs some minor repairs before it can be resold. Starting with an easy flip will allow you to learn lessons that can help you make an even better deal later.
You will make mistakes when you start out in this business. In the process of working with your first property, you will learn about what you like and don’t like about the business and use that knowledge to inform your next purchase. If you made a mistake with your first purchase, and your first purchase was several properties, that mistake has now been compounded, further hurting your earning potential.
If you’ve ever had to replace two septic systems in the first year of real estate investing, you know exactly what we are talking about. One septic system would have been plenty, but YOLO, right? No. Not so much.
The Complicated Gambit
Similar to the Too Much Too Fast, the Complicated Gambit has too many moving parts. How many projects can you realistically handle at one time? The answer will depend on several factors. Are you purchasing properties that need renovations? How long can you afford to carry these properties, and what can you afford to spend on renovating them? Perhaps even most importantly, what is your margin for error?
If you’ve spent any time watching those flipping shows on TV, you know that expenses can easily get out of control due to unexpected complications. Even the most carefully planned budgets often end up being wishful thinking. What does that mean for you as a real estate investor? It means that whatever you think it is going to cost, you have to expect the unexpected and plan accordingly. Oftentimes, it helps to do your research and seek advice from a licensed real estate agent who knows the ins and outs of the property before you decide to take the plunge.
The best way to insulate yourself from unwelcome surprises is not to overextend yourself. Building a business requires careful planning and timing. Be realistic about what you can handle, and remember that life likes to throw lots of curveballs. Buying three turnkey properties is not the same thing as buying three fixer-uppers. Pace yourself. Better to invest six months in giving your best to one property than to run yourself into the ground trying to do too much – and failing in the process.
The Leap Before You Look
When competing for investments in a seller’s market, it can be easy to let your sense of urgency overrun your common sense. Let’s say you find a property that appears to be a great deal on its face. You know that other investors have expressed interest, so you think carefully about what kind of offer you want to make. You know that cash is king, but the best offers are cash offers without contingencies.
Now you will have a choice to make. Do you forego inspections to clinch the deal? The short answer is, only if you have the time and budget to tolerate the risk. If you are just starting out in real estate investing, the answer should almost certainly be no.
The smart investor knows that home inspection is critical for protecting your investment. Will you still think you got a good deal if the foundation is compromised? Are you ready to withstand unexpected expenses caused by faulty wiring or a leaking roof? By giving up your ability to inspect the property and surrendering your contractual off-ramp, you can box yourself into a bad deal. Please don’t do it. Remember, the goal is to get a good deal, not just any deal.
The Almost Perfect
Speaking of looking before you leap, it can be helpful to establish a baseline for evaluating properties. If you’ve been looking for your next property for a while and the market seems a little lackluster, it can be tempting to settle for less than the deal you deserve. Consider the characteristics that make up a good investment in your area. What are the most marketable neighborhoods?
We’ve all been there. We scope out a property that looks pretty good on paper. Acreage? Check. Good enough roof? Check. The disclosures reveal that the property is in a flood zone, but no big deal, right?
This is the time you want to slow down and revisit your purchasing criteria. Remember that you are in this business to make money. Will being in a flood zone make it difficult for you to sell the property later? What steps can you take to mitigate the problem, and do you have room for these improvements in your budget?
Consider how long the property has been on the market. If it has been sitting on the market for a while, think about what you will need to do to sell the property more quickly in the future. Can you afford to carry the property for a prolonged period if it doesn’t sell right away?
Take your Time and Stick to the Plan
Ultimately, the key to successful real estate investing is to take your time and stick to the plan. Once you have defined your real estate investing strategy, you owe it to yourself to stick to it until conditions on the ground force you to change it. If your goal is to invest in no more than two properties at a time, any exceptions to that rule should really be a unicorn. You must ask yourself: Is this really an offer I can’t refuse? Maybe it’s a great deal if everything goes perfectly, but what is the worst thing that could happen? Am I assuming an acceptable risk by investing in this property, or am I trying to do too much?
Can your plan change over time? Of course, and it needs to. Your plan should evolve as you learn more about the business. Smart investors are able to adjust their investment strategy as market conditions shift. For example, the events of the past year caused some interesting spikes in demand for undeveloped, rural land and suburban homes with home offices. Savvy real estate investors have already begun to pivot to include more of these properties in their portfolios, taking advantage of lower interest rates.
Creating a blueprint for how you want to build your business and sticking to it gives yourself the best chance for success. You can and should change your plan, but you shouldn’t change your plan to accommodate a purchase you want to make. By revisiting and proactively revising your plan, you can stay on the cutting edge and beat out the competition.