In an uncertain world that’s getting more uncertain by the hour, real estate is arguably the smartest investment you might make. But all too many new investors end up broke, in debt, or saddled with properties that fail to fulfill their potential. And that’s usually because they’ve made a few basic, but damaging mistakes. Read on for a rundown of 5 potentially lethal investing mistakes, and how to avoid them.
You Don’t Do Your Homework
Your teachers said it, your mom said it, and it’s still true. Doing your homework – the research and study that’s needed to make a smart decision – is a key step in successful investing. As a matter of fact, that’s Commandment Number One of Jason Hartman’s 10 Commandments for Investing Success.
Call it due diligence, research, self-study … homework goes by many names. But they all mean the same thing: learning all you can about your chosen field of investing and the investment options within that field. Learn investing terminology, read up on laws and statutes governing the area where you want to buy a property, thoroughly research all aspects of a property and its history before you buy, take a course, consult an expert, find out what you don’t know – but need to know.
One aspect of ‘homework’ involves finding the right experts and advisors to help you make good decisions and avoid pitfalls. It’s far easier to spot bogus advice and bad deals if you’re armed with all the information you can find. And while it’s easier to just turn things over to a financial manager or investment counselor, you’re at the mercy of their decisions, not your own.
You Don’t Use Your Head
One reason it’s so important to do your homework before investing is to keep the process on a rational and objective level. While there may be a place for the subjective decision or the gut reaction, buying a property because of various emotional factors rather than the cold hard facts of outlay and ROI, can lead to trouble if an investor ends up with a pretty, but unrentable property.
Unscrupulous advisors, counselors and others involved in the transaction may be masters at, manipulating emotions – building trust and empathy to push a sale. Scammers, too, know al the right buttons to push – and a well-intentioned investor might easily get roped into a scheme that preys on sympathy with a hard luck tale.
The answer? Lead with the head, not the heart. Check out offers and advice before taking action. Stay alert for the latest scams making the rounds. You might consider joining an investing community or group that helps to keep members updated on new schemes and frauds making the rounds.
If you’ve done your homework, base investing decisions on the cold hard facts you’ve gathered. Compare properties based on the numbers, not on sentiment, for long-term success.
You Plan On the Fly
Plan? What plan? You’ll figure it out as you go – into the red. Having an overall plan for your investing endeavor is essential for the long term. A broad picture of where you want to be headed and how you ‘d like to get there can guide decisions and help you get the support you need while allowing for the short term tweaks that accommodate surprise twists and new opportunities.
Creating a master plan can be as simple as asking questions. What do you want to accomplish with your investments? Building a multi-property framework for generating wealth will look pretty different from generating some spare income for retirement. How much time can you devote to your investing career? What resources do you have – and what will you do when they’re gone?
Working with an experienced advisor can help clarify some stages in the process. And once you have that bigger framework mapped out, it’s time to start filling in the interim steps that get you there – and the concrete actions to take at every point.
Charting a path from beginning to end, even if it deviates, allows for better decision-making and resource management.
You’ve Got A Hobby, Not a Business
Successful investors see themselves as entrepreneurs, and they treat their investments as a business, not a hobby that gets the leftovers of their attention and effort. As the owner of income property, you qualify for a slew of home business tax deductions and perks, so it’s essential to keep good business records and to deal as a professional with tenants, contractors and other service providers connected with your investing endeavors.
Knowing what you want to achieve with your investments can help you figure out where you are on the ‘hobby to business” spectrum. And qualified advisors in areas ranging from taxes to home repair can help you establish – and maintain – a business identity for your investments.
You’re a Lousy Landlord
See Number 2 and Number 4, above. If you’re easily swayed by emotions and you don’t take your investment seriously as a business, it’s all too easy to end up with a host of landlord-tenant problems. Saying yes to problem tenants because you’re sympathetic to their plight, or failing to deal with issues like late rent or property upkeep because you’ve become something of a friend creates difficulties that can be hard to fix.
And if you aren’t seeing your property as a business, it’s hard to stay on top of all the things you need to do in order to keep it in top shape and generating income. That means dealing promptly and professionally with tenant issues, management problems or repair jobs. It also means learning and applying the 5 laws and statutes pertaining to everything from zoning to eviction procedures.
Housing has taken some hits in recent years. But as Jason Hartman points out, it’s still the best investing game in town. Everybody needs a place to live – and low interest rates and expert support make it easier than ever to start an investing career. Getting educated, staying objective, and being professional can keep that career headed in the right direction. (Top image: Flickr/adrianoaurelioaraujo)
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