Many investors get into the real estate game because they believe they can get rich quickly. They buy property, collect great amounts of rent for a couple of years, and then sell when prices appreciate. This is not how real estate investing works, however.
It takes time, even decades, to see significant returns. It also takes care, learning, and a willingness to put in years of effort to make the most of such an investment. When one is willing to invest all this in a real estate venture, returns can be far better than can be realized in the stock market. However, investors who believe they only need to throw money at a property and do little else usually do not do well. This is only one of several cardinal rules of successful real estate investment.
If you’re interested in real estate investing, you need to make sure you understand the way the world of property investment works. Here are the mistakes that you should stay clear of.
Taking on more than you can manage
A number of things go wrong when you take on far more property management than you have time for. You can take in tenants to fill up your rental units, but you aren’t able to pay attention to them to make sure they comply with the rules.
It also can be hard for you to comply with your end of the bargain too. Keeping up with calls for maintenance, and finding the cash to deal with maintenance needs, can take work. You can even find it hard to find new tenants when people move out.
The answer to some of these problems is to sign on with a qualified lettings agent to manage your properties. This will free you to do what you do best — find the resources to manage and maintain your investment. Specific tasks are usually best done by dedicated professionals.
The problem of inadequate management comes about when people get into real estate investment without giving adequate thought to the responsibilities involved.
Not creating a proper accounting system
Whether an investor owns one property or several, it’s a business, and it needs to be treated as such. Investors need accounting, record-keeping, and management systems. Without these in place, there’s likely to be much trouble during tax time; money will be lost to missed potential deductions and penalties for underpayment.
Not understanding cash flow
Many people believe that all they need to succeed at business is a great product. They think that “if you build it, they will come,”. This is hardly true, though. Dozens of businesses with successful products and full order books file for bankruptcy each year. This happens because owners are unable to understand the distinction between ensuring income and ensuring cash flow.
A full order book and plenty of sales will ensure that there is enough money coming into the business when income is averaged over a period of time. General accounting deals in averages. Cash flow accounting, on the other hand, deals with the availability of cash to pay bills and other obligations at specific moments when those obligations come due. If a businessman is unable to pay a supplier because he had been looking only at average cash inflow and not at whether he would have cash at a given time, he will be sued or will at least lose his reputation.
This is the problem that many inexperienced real estate investors face. If they have a couple of empty rental units in a given month, they may not have enough cash for maintenance or property tax when such needs come up. Any investor who hasn’t budgeted for enough savings to manage such lean periods can get into serious trouble.
Refusing to get advice
Many first-time investors get into real estate hoping to be the strong, silent, and independent type, who doesn’t need help. But no matter what appearances may suggest, it isn’t possible to do well in any kind of business, let alone real estate, without the help and intervention of advisers who have had success in the business. Advisers are needed for the business aspects of investment and property management. They also provide valuable information on how the physical work of maintaining property is done. The more advice you get, and the more you pay heed to it, the more successful you will be.
The best way to avoid serious mistakes in real estate investment is to do your homework. Not only do you need to read up, you need to work in a successful real estate investment firm to see how they deal with things. It’s hard to go wrong when you observe those who are successful.
Lauren Khan works as part of a property investment team. She enjoys sharing her experiences and suggestions with an online audience. She writes for a variety of investment and property websites on a regular basis.