What are the biggest mistakes real estate investors make when they buy their first property? Today we‘ll go over how to make your first acquisition in order to cash flow and grow your portfolio – while avoiding some mistakes that many beginners make.
Real estate is an investment sector that attracts a lot of people. The barrier of entry seems low and there are countless success stories of people who made it big in real estate.
Now that being said, as a real estate investor, you might come across some major problems. Maybe you can‘t find deals, can‘t get financing, or have no money for a downpayment. We get you!
We are now known for our real estate mentorship program where we teach others how to invest in real estate with none of their own money. Or some may know our story of how we bought 12 properties in less than 12 months with no joint ventures or partners.
But we had humble beginnings. We didn’t come from rich families. Yet, we wanted to change our lives. So we decided to teach ourselves about real estate investing. Today we own over 200 units and we both quit our full-time jobs in our 30s.
The thing is, it wasn‘t always an easy journey. That’s why we want to go over the 7 biggest mistakes real estate investors make – especially at the beginning of their career.
You don’t have to repeat the same mistakes. Instead, you can learn from us, now that we are a bit wiser. Let‘s get right into it.
1. Not Being Pre-Approved
The first mistake real estate investors make is not getting pre-approved.
You want to make sure you get pre-approved before buying your first property. It will make the whole process much easier.
Having your finances lined up can help you avoid painful situations. In addition, it will also give you a clearer picture of how much can afford to buy with your rental property.
Don‘t go into your first deal blindly. Do the legwork for your financing ahead of time.
But you might wonder, how can you get pre-approved?
Here’s how: find a financial institution that will likely approve your deal. Provide them all the documents they will require – and yes, it can be a lot.
The financial institution will put forward the application. The underwriter will usually take a look at you and your scenario. Then, they‘ll let you know your situation with financing.
It sounds a bit daunting and it can take some time. But, doing all this ahead of time will make sure you aren‘t wasting your precious time. Because if you don’t inspect your financial situation, you might look at deals you can’t afford.
Plus, when you do find a perfect deal, all your paperwork is already done. So you can take action and close on that deal!
Increase Your Chances To Get Pre-Approved Faster
When you head out to get pre-approved, there are a few things you can do to speed up the process.
You want to make sure to have all your documents ready. Important documents include bills, income, expenses, and tax return statements.
Have those documents up to date and filed. That way, if the financial institution asks for it, it’s that much easier.
You don’t have to chase down your paperwork all of a sudden. Instead, you hand it over in a nice and complete package – which makes life easier for the people at the bank and in return, makes the process quicker for you.
2. Not Knowing What’s Behind The Walls
Imagine you walk through a property and everything just seems amazing. The tenant is nice, the place looks amazing and it’s simply the deal of your dreams.
But because everything is so exciting you forget to do your due diligence and don’t take a closer look at the property. That can cause huge problems and disappointment.
You definitely don’t want to buy a property and then be set back once you own it. So, make sure to properly inspect it before closing on the deal.
When walking through a property, put your investor glasses on. What do we mean by that? Start thinking about what could be wrong with the property. Consider structural issues, plumbing, electrical, HVAC system, or the roof.
All of those are big-ticket items that potentially cost you a lot of money. The place might seem beautiful with nice finishing… Yet, structural aspects are more important.
Save Yourself Some Headaches
Make sure to check things out that other investors might not look at because as we said, you don’t want to be stuck with problems after closing. You want to know what you are getting into ahead of time.
Don’t be afraid to get professionals to help you out. Maybe get an HVAC person to take a look at the system. Or get a roofer to estimate any costs on the roof in case you ever need to replace it.
As a real estate investor, always think about your return on investment. Inspecting a property ahead of time is a huge return on investment. If you don’t, you might spend $100,000 of dollars on that property later…
As hard as it sometimes might be, as an investor you want to think with your brain, not just with your heart. We have almost made this mistake a couple of times but we were able to catch ourselves. So keep in mind:
The looks can easily be upgraded but what’s behind the walls is where it gets expensive.
3. Undercalculate Expenses
When we sought to buy our first property we were taken a bit off guard by the numbers. To avoid this, make sure you take into account all your extra expenses.
There might be a lot of extra costs that you are not accounting for. Think about your expenses, because you are the one who has to set up those.
Consider electrical, hydro, water, gas, property taxes, internet, cable, security systems… all of these things require set-up fees with your service providers. Some of them will even have down payments, security payments, or similar fees.
It might just seem like $30 dollars here and there, but if you do this ten times without accounting for it, it can add up quickly.
Some real estate investors make the mistake of fooling themselves. Don’t be one of them – look at the numbers head-on.
4. Not Knowing The Market
Another common mistake real estate investors make is not knowing the market well enough. You want to know where the market is at, as there might be ups and downs.
Now the thing is, you can buy in every type of market. However, you have to make sure that your game plan is suited for that part of the market.
So, for example, if you are looking into flipping a place or buying an income property, and selling it a year later – you might not want to buy it when the market is up and sell when the market is at the bottom. Why? Because you’ll likely not get your money’s worth.
The best possible outcome would be to buy a property when the market is down as it will be cheaper for you. And consequently, you want to sell when the market is up.
Understanding that is going to be vital. It’s going to help you avoid mistakes and pitfalls.
How To Compare
What’s more, you want to know comparables. What did the last income property in that area sell for? Did that specific property have more space? More income? Which pros and cons did it have?
These are the aspects you have to compare in order to understand whether or not the deal you are looking at is good or not.
Checking all these details might take a bit of extra time, especially if you don’t know the market well. But it’s so worth it. So make sure to take your time, get to know it, and adjust accordingly.
5. Not Viewing The Property Often Enough
Another common mistake we see people make is visiting the property only once. You want to make sure to go there more than once.
Why is that so important? Because you are going to start seeing issues or potential issues. What’s more, you might meet some of the tenants.
Whenever we buy properties we like to talk to the tenants. Usually, they love to share stories – especially not so good information that is vital for you to know.
They often know what kind of work has been done on the property. If, for example, the foundation was leaking and had to be dug up- the neighbors will tell you about it. Or if there have been roofers around, patching leaks – guess what – the neighbors will tell you about it.
Also, it’s a good idea to visit the property at different times. For example, when it’s raining or at night. That’s when you’ll see different things.
You might also want to check the area during rush hours in the mornings and evenings. How is the traffic?
Are their airports or train tracks in the area? Will it be noisy at night?
All of these factors might lower the price of the property or cause trouble with tenants. So check this ahead of time.
For us, going more than once is imperative. We always visit a property several times. At first, we might take a look at the sizes of the rooms. Later, when we go back we might look for other issues or check if we missed anything.
When we visit a property the last time, we almost do so under the frame of “what makes me not want to buy this building.” If we still think buying is a good idea after all these inspections, we know we made a good decision.
6. Not Having An Emergency Plan
So, you want to make sure you have a plan and reserve some money in case something goes wrong.
We often see people who get so excited to buy a property but they don’t have any kind of backup money.
What happens if your tenant can’t pay rent for a couple of months? What if you need a new roof? Or what if there is a leak in the basement?
You want to have a reserve of funds to pay for those kinds of expenses.
We usually recommend having two to three months of rental income as a backup. We even recommend this to people who are buying brand new buildings.
You might think nothing can go wrong since the building is brand new but you know – Murphy’s law. Set yourself up for success and be disciplined when buying income properties. Have funds for emergencies.
Think about it this way: when a roof is damaged or you have electricity that is dangerous and needs to be replaced, you don’t have time to negotiate.
So, better have an emergency plan in place and be safe.
7. Not Reading The Contract Carefully
When it comes to contracts: read, read, re-read, and only when everything is clear, sign it.
Understanding the conditions and contracts is so important. So make sure not just to skim through it or read just the first couple of lines – read every word.
A signed document is a signed document – which means it’s legally binding.
What’s more, when you are going for financing and a financial institution is providing you with funding, letters of intent, or commitment letters – look at the terms.
This way you can make sure you aren’t locked into something. Imagine buying a building to sell or refinance it, and all of a sudden you broke a contract and owe money to the financial institution.
This can all be avoided if you read the terms. Read them and then read them again.
What if you are unclear about what you are reading? Ask questions!
It’s completely okay to ask your mortgage broker or even your lawyer if you don’t understand a certain part.
So these are the 7 biggest mistakes real estate investors make when buying their first income property. Avoiding these can save you money, headaches, and frustration.
We hope you keep learning and keep building your real estate portfolio. Discover more real estate investing tips on our YouTube channel here.
Was this article helpful? Leave a comment below so we can continue creating articles that are beneficial to you.
1 thought on “7 Deadly Mistakes Real Estate Investors Make When Buying Their First Property”
Great post! Thank you Mel and Dave for sharing your insights!