The Number One Mistake The Beginner Real Estate Investor Make
Real estate investing can be a great way to build wealth, but it has its pitfalls for the beginner real estate investor. Surveys consistently show that Americans view real estate as a better investment than the stock market. While this may or may not be true, it’s clear that many Americans have an interest in investing in real estate. After speaking with ten successful real estate investors about their first deals, it became clear that one of the biggest causes of failure for new investors is paying too much money for a property.
Wanting Real Estate too Much
Many new would-be real estate investors want to get started, and if they have some money saved, they may be tempted to go out and buy an investment property. In fact, according to Census estimates, 70% of rental properties are owned by individual investors. However, if you don’t know what you’re doing, buying an entire property can result in a costly mistake that won’t make you money and may cost you a lot of time and money.
Focus on the Numbers
Real estate investing has to do with cold hard numbers. Understanding the numbers behind a property before you make a purchase is essential. You need to be able to calculate the return on investment (ROI), cash flow, and capitalization rate (cap rate) to determine whether or not the property is a good investment.
It’s Not Your Home
People often conflate buying their primary residence and purchasing an investment property. Buying a home for yourself and your family is an emotional decision. It’s a place where you will create memories and raise your family. You may pay a little more for a property you love because it has a great backyard or a beautiful kitchen.
Take the Emotion Out of It
While buying a home for yourself and your family to live in is an emotional decision, purchasing an investment property should be entirely emotionless. The numbers either pencil out or they do not. It is as simple as that. You need to be able to calculate the ROI, cash flow, and cap rate to determine whether or not the property is a good investment. You also need to be able to identify and analyze the market conditions to determine whether or not the property will be able to generate positive cash flow.
The Importance of Knowing Your “Buy Box”
In addition to the numbers, any investor needs to have a “buy box.” A buy box is a set of criteria that an investment property must meet to be considered a good investment. These criteria could include location, property type, price range, rental income, and projected appreciation.
Any buy box needs to be backed by some form of a hypothesis based on data. The chosen asset class, whether small multi-family, single-family, office space, or triple net, should be backed by a data-driven hypothesis and understanding of the asset class and the market in which the assets will be acquired.
Finally, discipline is a prerequisite. If emotion drives you rather than data and cold hard numbers, you are much more likely to make a costly mistake and then complain that it sucks to be a landlord. Stick to your buy box and ensure you don’t get pulled into deals that don’t fit your hypothesis or the numbers you need to reach your financial goals. Real estate investing is long-term, so be patient and stick to your strategy. With a clear understanding of the numbers and a disciplined approach, you can be on your way to successful real estate investing.