MSN previously put out an article entitled “20 Common Investing Mistakes.” For today’s blog post, I thought we would take a few of these “mistakes” and see how they can be applied to the world of real estate. Although MSN’s article was mainly focused on the stock market, many of the same concepts can be applied to real estate in Ventura County as well.
1. Selling after the market falls
Since some people don’t have direct control over when they have to sell their house, this one may not be so much a mistake as a necessity. If a life situation happens that is out of your control, such as job relocation, medical issues, family emergency, etc., you may have no other choice but to sell your home. But if you are thinking about selling your home for no other reason than the housing market falling, this may not be the wisest choice. Historically, housing prices in Ventura County have risen over time, so this should indicate that the housing market will rebound at some point after it falls. If you can afford your monthly obligations and have no other reason to sell, you may be doing yourself a disservice if you sell your home just because prices are going down.
2. Failing to build an overall plan
Most experts would agree that you should have goals before starting any investment strategy. Since we are talking about real estate investing, you should have an understanding of what you are trying to do and why. If you are trying to build up passive income for retirement, flipping houses may not be the best strategy for you. Likewise, if you don’t have a lot of capital at your disposal, trying to build a large portfolio of rental properties may not be achievable without utilizing some other type of strategy. By laying out your investment goals, it will be easier to determine what investments you should pursue to meet those goals.
3. Ignoring costs
Any time you buy an investment property, you should be aware of all the associated costs. If you are flipping homes, there are a lot more costs than just the purchase price and rehab costs. You have holding costs, selling costs, and cost of money (if you are not using your own money). If you are buying rental properties, you need to take into account vacancy costs, property management, capital expenditures, etc. Many people make the mistake of thinking that the mortgage is the only expense, when this is far from the case.
4. Not understanding the risks
While this one does not need much explaining, the best way to overcome this is by educating yourself properly and doing your due diligence on any investment property. There will always be some level of risk in real estate investing, so just make sure that you understand that going into it. Oftentimes, these risks are able to be mitigated or greatly reduced once you understand them. Unfortunately, with the big focus on house flipping due to the TV shows and gurus promoting their programs, many new “investors” are only seeing the profits from flipping, but not understanding the risks.
5. Not diversifying properly
You will most likely hear many differing opinions on diversifying in real estate. For the most part, it seems to boil down to two different lines of thinking. Some feel you should diversify your portfolio in to different areas in the country while others think the best idea is to purchase different types of properties. Investing in different parts of the country allows you to withstand fluctuations in local markets that you wouldn’t be able to if you invested in only one city. For instance, if all your rental properties are located in Las Vegas, you most likely will run into issues every time the economy slows down, as that affects tourism and jobs and will most likely affects the amount of tenants looking for housing and what they can afford. As far as purchasing different types of properties is concerned, if you have a mix of residential and commercial properties, you can better withstand the fluctuations in their individual cycles. You can also look into other niches such as non-performing notes or private money lending.
6. Not saving enough
If you’re going to invest in real estate and be successful in the long term, you are going to need to have cash reserves. Whether if it’s to pay for unexpected expenses or to pay the mortgage when you have vacancies, having cash reserves is key. Most experts recommend that you have anywhere from 3 to 9 months of cash in reserves for each rental property that you own. You will have to figure out what level you will be comfortable with, but not having any cash available can quickly lead to you losing most/all of your portfolio.
7. Worrying about daily ups and downs.
We will end this post with the last “mistake” from the MSN article. If you have a long-term strategy in place, there is really no reason to be concerned with the short term highs and lows of the market. That’s great if the housing prices in Ventura increases 3% from last month, but if you have no intentions of selling your house, that doesn’t really matter. This concept may not exactly apply if you are buying commercial properties and repositioning them. In some cases, it may make more sense to sell sooner than you were expecting if you have already met the returns you were aiming for. But unless you are buying properties in hopes of appreciation, which some will say is more gambling than investing, you are probably better off sticking to your long term goals.