After years of Investing and working with clients we have identified the (7) most common traps or mistakes which many real estate investors fall into. In this article we will show you not only how to avoid them, but how to do the opposite, and grow your Real Estate income the smart way for lasting success.
#1. Playing Lone Ranger:
The #1 key to success is building the right team of professionals. At the very least (minimum), you need good relationships with one real estate agent, an appraiser and a home inspector (but this type of old thinking is extremely flawed).
At SIFF Investments we do things differently, when you work with us, not only do we provide the WHOLE team, we become your Real Estate Advisor. Because we are not the Salesperson (Realtor) we are able to provide an objective platform of investment options and resources (realtors). Acting as a Fiduciary to our investors allows us to make recommendations with zero conflict! Don’t make the mistake of just hiring one local Realtor and thinking your set (it’s not that simple). The more investment options you have and resources working for you the better.
#2. Planning as you go (OR) not planning at all:
Scott Fong, President of SIFF says, the lack of a plan is the biggest mistake he sees current investors make. Many investors purchase a property first without a plan as they get so excited about the opportunity. That’s working backwards. “First”, you should design a solid financial plan,” he says. “Then you find the property to fit the plan. Pick your investment model, then go find a property to match it. Don’t find the strategy after you find the property.”Unfortunately in the Real Estate industry there are too many salespeople and not enough advisors.”
Planning includes thinking about your age, income, current assets, liabilities and personal investment goals (before investing), and certainly if you already own investment properties. The real key to building a solid plan is having the right information, options available and team to help.
#3. Thinking you’ll (Get rich quick):
That kind of thinking is fueled by “self-appointed gurus who have infomercials and make it sound so easy to get rich in real estate,” says Brad Taylor, Director of Asset Management for “SIFF”, It’s not that easy. Real Estate can be a good long-term investment, but so can putting your money in gold or the stock market which is a lot easier. The gurus don’t talk about all the hard work. They are more interested in selling you books than your financial well being. You have to be smart, you have to be willing to work, and you have to understand your risk and reward tolerance.
#4. Not tracking your properties performance (Return On Investment):
If you already own an investment property (or properties), how are they performing (or not performing)? Most Investors purchase a piece of property and simply forget about it, or assume it’s doing well. Many Investors don’t realizing they can significantly increase their incomes and returns by simply exchanging their properties (1031’s) or selling.
You should look at your properties cash flow, expenses, tax advantages, net return on investment and so on. We know this may seem overwhelming at first, but tracking or at least looking at your properties performance once a year is a MUST if you plan on achieving any real success.
#5. Property Management Mistakes:
If your strategy is to buy, hold, and rent out properties, you need sufficient cash flow to cover maintenance cost. “Anyone can find a property manager but without insight on what questions to ask you are rolling the dice.” Brad says, but many have never interviewed a property manager and have little idea about how they work and what to look for. Most managers, for example, are reluctant to take on one single-family property or a duplex, preferring larger complexes, and fees of 7 percent to 10 percent of the monthly rent are common. No matter how great of a deal you received when purchasing the property, if it’s poorly managed, you will incur unneeded expenses and lose out on rental incomes.
Poorly managed properties means paying too much in management fees, prolonged vacancies, high maintenance cost, poor communication with tenants and so on. A property management company will NEVER care as much as you do (but many are great). Think about it, they have sometimes hundreds of properties to manage, and you are just one of those.
Solution Examples:
First, always read the whole property management agreement, then try to negotiate on some of the fees if you think they are high. . If their fee to fill a vacancy is 90% of the first months rent, ask for 70%, if their cancellation fee is 4 months rent, ask for 2, and so on. Simply asking for better terms can save you a lot of money of the life of the property and management term.
Always ask for (2) or more bids regarding maintenance projects like carpet, paint or any other repairs over say $200. The second bid almost always comes in lower than the first (thus saving you money).
Ask your property manager what their marketing plan is to promote your vacant unit(s), the more they advertise the faster they can fill (rent) a vacant unit (again saving you more money). I think you get the idea, there are many simple things that can be done to lower your expenses while increasing your return on investment!
One more thing, ALWAYS keep a backup bank account with funds for emergency repairs, it’s not a matter of if, but when something will happen. This means don’t spend all of your cash flow from the property, save some (a lot of it) for a rainy day when something breaks. This will help you sleep better at night knowing you can financially withstand any unforeseen events.
#6. Relying on Appreciation:
Sometimes, investors are buying properties just based on the idea that the property is going to appreciate, usually, they don’t have any information to substantiate that. Appreciation is a long term benefit, not an immediate payoff. Cash flow and tax advantages should be your two primary reasons for investing, if the property doesn’t have those first, don’t purchase it. After that if your property appreciates in 10 years it’s all that much better.
Another huge mistake with appreciation is when investors hold onto a property is an area they think will appreciate but do so at the highly expensive cost of LOST income (cash flow). If I told you that you could get $50,000 more per year in a different area would you consider it, I would hope so. When an investor chooses to “WAIT IT OUT”, they are potentially loosing that $50,000 EVERY year (x 10 years = $500,000 lost). Now you can see that taking the time to talk with a Real Estate Planner Advisor to look at your options can have huge rewards.
#7. Skipping Your Homework:
You wouldn’t think you’re qualified to perform open-heart surgery without years of education and training. Yet many real estate investors don’t think twice about putting their financial future in the hands of their local Realtor without even getting a second opinion. Educate yourself before you put your family’s financial security on the line.
Weather you are a first time investor or have a large portfolio, if you don’t know where to go, or what to do from here, contact a SIFF Advisor for a complementary consultation, it can be the best hour you spend on your financial future regarding your real estate holdings.
So How can SIFF help you?
SIFF provides a unique blend of Investment planning and Real Estate Services. We believe our greatest value is to act as an objective third party advisor between our clients and real estate partners (Realtors, Property Managers..etc) to ensure your investment returns are maximized.
We strive to create oversight and accountability, thus ensuring you receive the best service, pricing, and investment options.
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