7 Investor Pitfalls & How to Avoid Them

By
Services for Real Estate Pros with Sunbelt Network

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7 Real Estate Investor Pitfalls and how avoid them.

Introduction

It's been reported that 97 of 100 self-made U.S. millionaires made their fortune in real estate. If that's true, then why do people hesitate?

Skewed Thinking

Many hypotheses and pitfalls surround real estate investing. In recent years, rapid appreciation, access to 100% financing and the lure of fast and easy profits brought many new investors into real estate. Add the multitude of self-proclaimed real estate investing gurus, books and DVD's promising you can make millions overnight - it's no wonder these misperceptions remain.

To build wealth in real estate and make informed decisions, get back to the basics by understanding and avoiding the following myths and pitfalls:

1. Real Estate = Get Rich Quick Mindset

2. Believing Cheapest is Best

3. Do-it-Yourself Investing

4. Thinking Markets Can Be Timed

5. Prioritizing Cash Flow Over Appreciation

6. Following Hearsay vs. Research

7. Sacrificing Profits Because of Proximity

1.  Real Estate = Get Rich Quick Mindset

There really isn't a shortcut to riches. It all starts with clear vision and a plan. First, prioritize the goals and financial milestones that are most important to you in order to build an actionable, scheduled plan to achieve them. Ultimately, your plan would include a number of long-term goals, such as:

  • Building your children's college funds
  • Retiring young & wealthy
  • Providing an inheritance legacy
  • Traveling the world

Next, develop your strategy on how to achieve them, taking into account numerous factors including:

  • Current equity and other invested funds
  • Savings vs. investment
  • Cash flow vs. appreciation
  • Tolerance to risk
  • Current debt

Just as you would seek out an attorney for legal advice, seek out a professional real estate investment company that can help you build a long-term plan to achieve your financial goals.

2.  Believing Cheapest Is Best

Don't sacrifice potential value for purchase price. If you talk to those that have been investing for any length of time, you will learn that very few made an instant fortune by buying property for less than it was worth.  Instead, they were successful in buying and holding over a long period of time - since the most predictable  wealth generated by real estate comes from appreciation.

For rock bottom prices, an investor may seek opportunities in ‘turn-around' areas, but at what cost? A good rule of thumb: don't buy an investment property you aren't willing to live in yourself. A beautiful home in a nice neighborhood ensures a quality tenant that will care for your property. This will save precious dollars on costs associated with maintenance, repairs, eviction and rent-recapturing services.

It's true - you want to pay the right price for a property, and it all ties back to the fundamentals of investing: buying the right property, in the right market at the right price.

3.  Do-It-Yourself Investing

Investing in real estate should not be approached as a hobby. It takes experience, understanding and knowledge to formulate and execute a plan. It's a mistake to think that you can watch a DVD or read a book and instantly gain enough knowledge to thoroughly research markets at the neighborhood level, obtain financing, market, lease, manage and maintain the integrity of your properties - and develop a viable exit strategy.

We seek professional services for most of the important decisions in our lives - real estate investing should be among them. But how do you go about vetting a company to ensure their capabilities match your needs?

Consider these key points when selecting an investment company:

  • Do they offer well-rounded investment planning services, taking into consideration capital management, leverage and your financial goals?
  • Do they research market fundamentals at a very deep level, to select the right markets?
  • Can they offer expertise on multiple micro-markets for opportunities that best fit your plan?
  • Do they have the clout and relationships with builders to offer opportunities in early phases of new developments typically unavailable to investors?
  • Can they strategically manage the intricacies of investment financing to ensure maximum return on investment?
  • Do they provide property management assistance to maintain the integrity and value of your investment and manage tenant concerns or emergencies?
  • Will they support you throughout the ownership of your investments, performing ongoing portfolio review?
  • Do they themselves own investment property? Where? Do they practice what they preach?

4.  Timing Markets

While some may be wary because of recent headlines, savvy investors are getting a jumpstart on their return on investment while the market is right. Unfortunately, novice or first-time investors may believe they can time the market - waiting for the full correction of the mortgage market or to see if we've reached the very bottom of the real estate market. Unfortunately that short-term view could have a high opportunity cost in the long run.

"You can't time real estate markets, but can time your investments" says Frank Richards, CEO of NorthPoint Real Estate Investment Services. "While we can use history as an example of trends, the present doesn't follow any example of history. What we can see is that over extended periods of time, real estate has performed exceptionally well. Therefore, the best quality an investor can posses is patience coupled with a long-term plan and sound market knowledge."

If markets can't be timed, how do you take advantage of an upward trend, and insulate yourself from market corrections? Through a big picture, long-term strategy. The big picture begins with 10 years, and the long view is your entire investment life.

5.  Prioritizing Cash Flow Over Appreciation

You can not get rich on cash flow. If you've owned your home from some time, you've probably built some wealth - through appreciation. While cash flow is an integral part of the decision to buy a property, it's important to balance cash flow expectations with long-term appreciation so you don't deny yourself an excellent opportunity. That's why you need an expert team behind you (See #3).

Based on your goals, the best investment property could be in an appreciating market with a smaller cash flow yield. Or, if your primary goal is cash flow, work with your investment company to buy the right property in a strong cash flow market.

6.  Hearsay vs. Research

It's easy to find comfort in following trends or the paths of others as a means to avoid mistakes. This can include everything from a hot stock tip to advice on restaurants. So, it seems logical that the same would hold true in real estate investing. This may not always be the case, particularly when following speculators or flippers. While there are no guarantees in investing, the best way to anticipate the viability and potential of a market is to have solid, empirically sound data and research.

While employment drives population growth, it's the intangibles that keep people in a particular neighborhood. So, in addition to market economics, the intangibles that make a community a highly-desirable place to live for a variety of demographic groups must be taken into consideration.

To thoroughly understand a market's potential takes time and expertise. There are a number of factors to be considered to determine the future economic viability of a market, including:

  • Population growth - short term and trends
  • An upward trend in job growth
  • The presence of large, sound, industry-diverse corporations
  • Future plans for additional corporate entities
  • Availability of state and local government jobs
  • The presence of cultural activities - music, art and nightlife
  • Leisure interest and recreational activities such as golf, hiking and athletics
  • The development of retail outlets and restaurants
  • The quality of local school systems
  • The natural path of growth within the metro
  • Social and political issues that impact supply and demand (i.e. urban growth boundaries)

Look for a national company that conducts exhaustive research in multiple markets - for up to two years - to recognize areas where real estate outperforms national and local averages so you invest ahead of the growth cycle, rather than follow it.

7.  Sacrificing Profits Because of Proximity

Real estate is local, but what's happening in your backyard isn't necessarily indicative of markets across the entire country. Despite the headlines, real estate is not universally decreasing. According to a report recently released by the National Association of Realtors (NAR), there are a number of fundamentally sound markets that have performed favorably year-over-year, including through the second quarter of 2007.

Approximately two-thirds of the 149 markets surveyed registered home pricing increases, thanks to strong local economic growth and affordable housing prices. Similar counter-cyclical markets can be found inside large market metros, where select micro-market neighborhoods defy the national downward cycle.

Among the strongest are the markets NorthPoint has researched and recommends as solid investment markets for our clients.

Conclusion

By far and away the biggest barrier to investing is fear - fear of making the wrong choice.

That is a valid concern. Prudent real estate investing requires study, research, a great understanding of economics and mortgage finance and a plan.

To quote Warren Buffett: "Risk comes from not knowing what you are doing."

About NorthPoint

NorthPoint is the only national real estate investment company that offers a complete solution for real estate investors. Drawing on years of experience, exhaustive research and a wealth of knowledge around real estate investment and financial strategies, NorthPoint is creating greater wealth for our clients. We achieve this by helping our clients build and manage well-performing real estate portfolios in exceptional markets and meeting exacting standards of quality. www.gotonorthpoint.com

Read more about NorthPoint at Realty Times: California Based Corporation -- "Personal Shopper Plus" for Best Real Estate Investments By Phoebe Chongchua

Service is becoming more than just a buzz word. Today, quality service is not only expected it's demanded by consumers in nearly every industry. In all stages of a real estate transaction consumers want to be assisted and cared for.  Read more here http://realtytimes.com/rtcpages/20070903_personalshop.htm

www.GoToNorthPoint.com

© 2007 NorthPoint

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Rainmaker
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Nancy Moeller
Seven Gables Real Estate - Anaheim Hills, CA
Great points, well written.
Oct 12, 2007 06:23 AM #1
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Doug Boedecker

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