How To Avoid Losing Money In Your Real Estate Investments
At some point in their careers, all investors make mistakes that end up costing them money, whether they realize it or not. From making a bad investment to planning an unnecessary renovation, there are dozens of missteps that will have you saying, “why didn’t I see that?”
The more you invest, the faster you learn how to identify and avoid those moments, but here are 4 of the most common way investors lose money, and how you can avoid making the same mistakes.
1. Paying too much for a property
The most important part of analyzing a potential investment is getting an accurate ARV. This helps you determine what price you should buy the property for in order to reach your profit goals. Doing the calculations manually can result in inaccurate values, which results in you overpaying for a property that depresses your returns when you flip it – in fact, it could even result in you losing money.
Using Backflip’s Returns Analyzer, you can easily do your due diligence and complete a quick, thorough valuation of properties to ensure whether a given investment is right for your portfolio. You’ll immediately know if the deal is strong (or not), and we’ll help you determine the right strategy for each individual property based on the predicted returns.
Pro Tip: Utilize our Live Driving for Dollars feature to help you identify good investments on-the-go!
2. Underestimating rehab costs
Whether you’re a first-timer or a seasoned pro, everybody makes this mistake at some point in their investing career. Eventually, all investors learn that you should expect to go over budget or over schedule. It’s easy to forget that you might need an extra $5K-$10K for unexpected costs, like a leaky roof or structure changes, and when you inevitably run into these issues, you’re left scrambling.
If you don’t plan for this in advance, you run the risk of going way over budget, or even running out of money before you finish your flip. As a general rule of thumb, we advise always adding 20% to your budget (and rehab schedule) as a buffer.
3. Not using leverage in your capital stack
The best investors in the world understand the power of using leverage to fund their deals and are able to increase their overall earnings by taking on more properties at the same time. For example, let’s assume you have $200K to invest. You could either (a) use all $200K to purchase and rehab a single property outright in cash, or (b) by utilizing leverage, you could invest that $200K across four separate down payments on four different investment properties and watch your returns multiply.
Utilizing debt will cost you more in the short-term, but you’ll ultimately expose yourself to larger potential profits by incorporating leverage into your stack. Repeat that multiple times a year, and your yearly earnings will explode. Backflip can help you determine the right financing options for your strategy, and ensure you don’t leave any potential money on the table!
4. Buying in a bad neighborhood
You’ve probably heard it before, but real estate is all about location, location, location. Sometimes a deal can appear too good to be true, and while a cheaper property may appear tempting on its face, it might be because it’s not in an ideal area. It’s worth it to spend time doing a little research on the neighborhood and how flips and rentals have been performing there. Here are some key signs to look for to determine if an area is up and coming.
When you buy in an area where good buyers or renters don’t want to live, the cons outweigh the pros. Having to pay for potential evictions, lowering the price of the flip, or even holding the property for a long period of time can cause investors to lose money. Avoid the temptation and only buy in areas where you know people want to live.
Building a real estate portfolio is no easy task, and every investor makes a mistake here and there. However, everyone can take the above steps to quickly mitigate the most common mistakes that are costing them money, so that they can start to increase their profits.