3 Real Estate Investing Pitfalls to Avoid Like the Plague

So you’ve seen your umpteenth infomercial with the guy in his neatly pressed button-upped white T-Shirt, grinning ear-to-ear, waving his rock-solid no-money-down rags-to-riches real estate investment course for 3 easy payments of a gazillion dollars (but only if you call now).  And now, you are thinking, “Wow, this looks like a great deal, I better get it fast before the special offer expires.”  You notice how there’s always a special offer!  Anyway, I am not necessarily saying this guy isn’t telling the truth, however, regardless of which course or school of thought you buy into, there are several traps or pitfalls that every serious real estate investor must be aware of when engaging in any real-estate-related transactions.

Pitfall Number 1: Don’t Overpay!

The whole point in investing is to find properties that are undervalued.  That’s why you set buying criteria in the first place.  How does one find out what is undervalued versus overvalued?  Without getting into technical details, the bottom line is you need experience and a good education.  Yes, much like shopping for anything else, real estate is essentially one of the highest ticket items in the shopping center of life.  It’s advisable to stick with one market, perhaps the one closest to you, and learn it well.  Through your experience, education and, after asking all the right questions, you will eventually have a feel for the pulse of your market and, of course, identify what is considered a good buy.

Sometimes it can be tempting to compromise.  So what if I have to pay a little over market value.  It’s a great property, in a solid neighborhood, and I know that values are on the way up.  Therefore, I’m justified because I know I’ll make back my investment at a great profit.  But that “slippery slope” can be mighty treacherous, especially for newbie investors.  If it’s not your plan, then, don’t do it.  You’ve set your criteria for a reason and the reason is to buy right so you can be a successful investor.  Don’t compromise.  Don’t overpay.  Stay the course and you will do fine!

Pitfall Number 2: Know the Market

Yes, you are actually going to have to do more work!  This part is really common sense though, but executing it is where the beauty and the payoff comes in.   How do you make money in real estate?   One of the basic, most well-known ways is to buy low and sell high.   So, in addition to the cash flow you generate through rental income, you can accumulate equity by identifying general trends in home values and becoming good at spotting undervalued properties.   Assuming you acquire an undervalued property, you can profit from selling it off for a higher price.  How can you do this?  Well, there are many ways.  For one, most markets appreciate in value over time.  So, if you are just patient and continue to pay down the mortgage, you will see your equity increase.  To speed up the process, you can try to locate markets where properties are just starting to surge (at the bottom of the bell curve).  If you buy early enough, you can hold on until prices peak and then sell.  You can also make upgrades to the property that will automatically boost the value of the property as well.  Think in terms of what the market wants, not what you personally want.  You aren’t the one buying it; you are trying to sell it to someone else for a higher price than you bought it.

Pitfall Number 3: Know Your Budget

It may be a fine philosophy to go through life on a whim, but real estate is serious business.  Yes, it is a business!  And as such, diligent financial planning and budgeting is critical to your success.  Don’t worry, you don’t need to be an accountant to succeed, just a wise steward of the funds you have.  You do need to be disciplined and know and stick to your budget from the onset.   Otherwise, you may find yourself underwater when you need to make certain renovations or upgrades and didn’t anticipate it going over a certain cost.

Think ahead as to what is needed before actually spending the funds on your investment property.  Write a plan with a budget and stick to it.  You’ll be glad you did, especially as you see your profits grow and your real estate business flourish.

Bill Manassero is the founder/top dog at “The Old Dawg’s REI Network,” a blog, newsletter, and podcast for seniors and retirees, that teaches the art of real estate investing. His personal real estate investing goal, which will be chronicled at olddawgsreinetwork.com, is to own/control 1,000 units/doors in the next 6 years. Prior to that, Bill and his family lived in Haiti for 11 years as missionaries serving orphaned, abandoned and at-risk children.