In today’s economy, everyone is interested in buying real estate. The housing market is still appreciating on the national level, as well as most regional and local levels. However, while buying real estate is an attractive way to build wealth, there are pitfalls just like with any investment venture. Many would-be real estate investors don’t realize that not every real estate investment will turn a profit, nor is every piece of real estate guaranteed to increase in value over time. While most real estate appreciates, there are no short- or long-term guarantees, and a little education will go a long way in helping you buy real estate.
Can You Buy Bad Real Estate?
Many people think there is no such thing as bad real estate. However, if you base your process for buying real estate on the concept that every property and every deal is good if you can do it, your career as a real estate investor will be short. There are several things you need to know about what makes a real estate deal “bad” or “good” for a real estate investor.
Real Estate Quality Depends on Your Strategy
It is difficult to make a conclusive statement about whether a property is good or bad. Conventional wisdom states that all real estate has value because there is only so much land in the world. The common saying is, “They’re not making any more of it.” This inherent scarcity is what makes investing in real estate so attractive, and it’s what insulates the industry to a certain degree from the risks associated with most other asset classes.
However, there can be good and bad real estate deals, depending on your investment strategy. For example, if you are hoping to “flip” real estate by buying cheap properties, fixing them up, and selling them at a higher price down the road, then you must buy at a low enough price to accommodate all the expenses associated with the “flipping” process, including:
- The cost of acquisition
- The costs of repairs, both planned and unexpected
- The carrying costs, including property insurance and loan payments
- Your returns
However, if you are looking for a rental property, you might pay market value or only a little below market value to buy a solid property that has good value and is already performing. In that case, the concept of “buy low and sell high” is not as important in determining whether a piece of real estate is good or bad. With rental properties, you will need to consider:
- If you can get financing
- How you will pay for the property long-term
- Where to hold your real estate (personal property, in a business entity, etc.)
The Three Biggest Mistakes Made When Buying Real Estate
There are three big mistakes new investors often make when buying real estate for the first time. If you talk to experienced investors about their first experiences buying real estate, they will often tell you they made one or all of these errors.
Mistake 1: Underestimating Repairs and Maintenance Costs
When you are buying real estate, you must expect the unexpected. This means you need to figure out what repairs have to be addressed in your deal and allow plenty of financial “cushion” in case your financial projections were too low. Many real estate investors say when they are buying real estate they automatically assume they will encounter unforeseen issues. Some of the most common are:
- Hidden costs for repairs
- Issues with code violations
- Underbidding from contractors (which makes their repair estimates lower than the actual costs)
This mistake is best avoided by doing solid due diligence in every real estate deal and factoring in plenty financial cushion so that in a worst-case scenario, you will break even or make a smaller return than anticipated.
Mistake 2: Underestimating Project Time Frame
Thanks in part to “reality real estate” television, many people have the false notion that buying real estate is also a fast process. In the real world, the process of buying real estate, then turning that investment into an income-producing property or generating returns, is a slow, time-consuming process. Unless you are a wholesaler who buys properties under contract and then sells the contract, you are unlikely to see a return on your real estate investment in fewer than three months.
Unfortunately for most people who are buying real estate for the first time, underestimating the project’s time frame is practically inescapable. Even if another real estate professional tells you they can complete a project in just four months, for example, you should be financially able to support that project for several months longer and have a game plan in place for how you will generate returns on the project with the longer timeline in place.
Mistake 3: Overestimating Returns
Another side effect of reality real estate television is that many investors new to buying real estate think every deal will be a home run. In fact, most successful investors say their deals are base hits, doubles, or triples, but rarely a home run. Never rely on the brightest side of a potential outcome to pan out, as it may result in a tendency to overspend on real estate investments, which can create problems later on when you are trying to turn a profit.
What Can You Do If You Make One of These Mistakes?
Worried because you have already made one of these mistakes? Remain calm. One of the most wonderful things about buying real estate is that there are many, many variations on many, many strategies for investing in properties to turn a profit. Take a hard look at your books and your budget to determine if:
- You should stick to your original plan
- You need to adjust your strategy
- You need to sell quickly to avoid further losses
Education Yields the Best Returns
When it comes to buying real estate, one of the best ways to optimize your chances of getting a good return is to educate yourself about the process. Learn from the mistakes others have made when buying real estate, prepare for both the best and the worst-case scenarios, and then get out there and get started!