Take the necessary steps with real estate investments to keep you in the green.
These missteps can cost real estate investors returns.
Owning property, either directly or indirectly, can add diversity to a portfolio and yield value to investors on several levels. “Real estate is a tangible asset with inherent value unlike many other investment vehicles such as stocks, which many consider as gambling,” says Adam Kaufman, co-founder and managing director of ArborCrowd. Tax benefits, enhanced transparency and the potential to hedge against stock market volatility add to its appeal. Avoiding these common mistakes is key to managing real estate successfully in a portfolio.
Buying without researching.
Rushing into real estate without understanding what you’re getting can lead to bad results, says Kyle Whipple, a financial advisor and registered investment at advisor at C. Curtis Financial Group in Plymouth, Michigan. “Just because real estate is doing well doesn’t mean it will turn out to be a good investment for you.”Stock investors are often told to “buy low, sell high” and that same rule can be put to use for property investments. “You want to make sure that you’re getting a good deal and not purchasing an overpriced piece of real estate which will lower your long-term returns,” Whipple says.
Developing a tunnel vision.
Real estate adds a new dimension to a portfolio, in terms of balancing against the risk and volatility associated with stocks. Kaufman says a common mistake is being too narrow about property focus. “Many individuals fail to diversify their real estate holdings,” he says, investing only in one local geographic area or property type. “This all-eggs-in-one-basket approach drastically increases downside risk, but investors do this because they are more comfortable investing in markets they’re familiar with.” Casting the net wider to incorporate crowdfunded investments or real estate investment trusts, known as REITs, can offer exposure to a broader group of properties and increase diversification.
Going it alone.
Owning a commercial or residential rental property can be both time- and capital-intensive. Trying to handle it all solo can require a level of focus and commitment that may not be realistic for every investor. A simple way to avoid that mistake is building a team from day one, says Kevin Ortner, president and CEO of Renters Warehouse in Minneapolis. That may involve investing with a partner or working with a broader group of individuals that includes an experienced real estate agent, an attorney who’s well-versed in property law, professional contractors and a property management company. Having support can make investing in real estate a smoother experience, with less room for error.
Relying on bad advice.
When seeking out help in making decisions regarding property investments it’s important to go to the right sources. “Making an investment in real estate, especially for first-time investors, can be daunting and nerve-wracking,” says Rowena Dasgupta, an agent at Warburg Realty in New York. “Often, people ask friends and family for their opinion more for reassurance than for legitimate guidance.” What they should be doing instead, Dasgupta says, is seeking counsel from real estate professionals or an investor with a lengthy track record of buying and selling properties. These individuals have the knowledge and experience to provide more reliable advice.
Assuming it’s easy.
Just like stocks, mutual funds, bonds or other investments, real estate requires a certain amount of know-how to navigate. Terrell Gates, founder and CEO of Virtus Real Estate Capital, says both large and small real estate investors can make the mistake of thinking that investing in property is easier than it is. This can be exacerbated in bull markets when real estate is going strong because people tend to forget about previous downturns. “Unfortunately, to be consistently successful in real estate over the long haul requires more skill than luck,” Gates says.
Ortner says another common pitfall among real estate investors is only looking for a deal when buying a property. “If you’re going to make long-term real estate investments, you don’t need to buy at a major discount,” Ortner says. “You just need to do deals that make sense, because, over time, you’re going to be building equity.” He says many investors limit the properties they can buy because they’re hoping to land a major discount with value, which isn’t a realistic target in the current market environment. By maintaining a long-term outlook, investors can avoid the bargain hunter mentality and focus instead on growing their property portfolio.
Not having an exit strategy.
Real estate can be a good buy-and-hold option but failing to develop an exit strategy can be damaging. Whipple has seen this scenario play out firsthand, with investors selling a highly appreciated piece of property without a plan in place for what to do with the funds. “They feel they are done with the real estate game and want out,” he says. “Unfortunately, they end up getting hit with a lot of taxes.” Having an end-play for real estate investments from day one can help avoid costly situations when it’s time to sell.
Overlooking the bigger picture.
The worst mistake with real estate investing may simply be not considering how to utilize it within a broader portfolio. “Many investors make mistakes when they don’t understand how real estate fits into their overall strategy that includes diversification, long-term appreciation, liquidity needs and cash flow,” says Brent Weiss, co-founder and chief evangelist of Facet Wealth. Having a financial plan that incorporates real estate begins with understanding investment goals, risk tolerance and time horizon. These are things a financial advisor can help with. “Once investors understand what strategy will support their plan, they can determine the right mix of asset classes to create success,” Weiss says.
The eight mistakes to avoid with real estate investing are:
- Buying without researching.
- Developing a tunnel vision.
- Going it alone.
- Relying on bad advice.
- Assuming it’s easy.
- Chasing bargains.
- Not having an exit strategy.
- Overlooking the bigger picture.