Mistake #1: Too much emotional attachment
Why is this a mistake:
As a real estate investor, it is important to have an affinity and passion for real estate, but it is also important to have passion for maintaining your bottom line. If you see a property that has no financial upside but fall in love with it, you may be tempted to make it one of your first investment projects. While that may lead to satisfaction, your wallet will not be happy about it. Emotional attachment can cause you to follow your passion over reason, and this can get you into serious trouble if you don't figure out how to balance the two early in your career.
What could this cost you:
Investing in your passion is important to stay excited about real estate investing. You just can't afford it if you don't have the resources to deal with a setback. If you invest your hard-earned money in real estate that you are unlikely to play quite on, it is not a wise decision. If you do, it may take you months or even years to recover from this. You may not recover at all from this one mistake.
How to prevent it:
Of course there is room for passion when you invest in real estate. Indeed, having faith in your own feelings can certainly move you forward. However, you can only afford to do so when you have enough assets to absorb a mistake. This is what you should do when you feel too attached to real estate:
1. Find out why you are feeling this way
Is it because it is a good investment opportunity? Or does it remind you of your childhood home? Answering these questions will help you further determine whether you think there is actually something to be gained from it, or because you make certain choices because you are emotionally attached to it.
2. Keep a close eye on potential investments
If it is not wise for you to invest in a particular property, there is a good chance that the property will still be available for some time. Keep a close eye on possible investments and wait for prices to come down. You may find that it becomes more profitable to wait a few months or years to buy.
3. Look for investment partners
If you just can't get the property out of your head, you can start looking for another investor to look at it together. With their help, you are not solely responsible for the financial risks.
4. Wait and see
You will encounter many real estate properties that elicit an emotional response in you during your career. Eventually, you may have the right to take on projects with a profit because that is where your passion lies. Wait and see, the time to satisfy these passions will surely still come your way.
Mistake # 2: No emergency fund
Why is this a mistake:
Even with perfect planning, there is always the chance that something can go wrong. Problems with the weather, contractor delays and shortages of materials can all lead to a project costing more than expected. If you don't set aside money to cover these unexpected costs, the project will grind to a halt and cost you even more.
What can it cost you:
If you cannot pay mortgages, contractor bills or other issues on time, you will face late fees and possibly even lawsuits. Moreover, it costs you a lot of time and energy to deal with the delays when you can't pay for a quick fix. Not having any flexibility in your budget is in a sure way to put your project in a metaphorical hold.
How to avoid:
The only way to avoid not having enough backup money in case of an emergency (you guessed it) is a backup! But this does not necessarily mean that you have to have the money physically in your bank account. Instead, make some contingency plans, about what you would do if you suddenly need a few thousand euros (or more) to maintain your timeline:
1. Keep an emergency fund
Create a bank account specifically for emergencies. Put a portion of your profits into this fund every time you make a sale. Eventually, this will be enough to protect your business even if a tragedy strikes one of your properties while you are working on it.
2. Know your loan options
When emergencies arise, getting a loan can be a good way to quickly cash in extra cash that you can then pay back once you complete the project. Keep a list of possible lenders and what their interest rates are and update this list quarterly. Always know what your options are when it comes to loans, as these options may save you in the future.
3. Keep in touch with other investors
There are many investors who only get involved in other people's projects instead of starting their own. These co-investors are more interested in financial gain and giving advice than actual project management. You will undoubtedly meet some of these investors during your career. Keep a list of these contacts and contact them quarterly to ask how they are doing. If one of your projects encounters financial difficulties, they can accompany you to complete the project.
Error # 3: Setting unrealistic time frames
Why is this a mistake:
As a new real estate investor, you are perfectly capable of recognizing why a project may be delayed. However, you may not be aware of how time estimates can change during the season. This makes you more likely to set unrealistic time allocations for your projects, which now only take up your physical workload, but it can become very stressful when you start to feel like you are falling behind.
What can it cost you:
If you set the wrong schedule, you won't have budgeted enough to pay monthly expenses, such as electricity costs, contractor fees, mortgages, equipment rentals and more. Depending on the scale of your project, your timeline problem could end up costing you a lot in terms of your budget. Not to mention that if you have additional investors in the project, they may not be happy with you when the timeline for completion is pushed back.
How to avoid:
The most important thing to help you get better at creating project timelines is experience. But experience is something you (as a new real estate investor) can't just buy at the store. Here are some other ways to avoid experiencing serious timeline problems that could affect your status of business results:
1. Talk to other local investors
Local investors will know the market better than you. They will have a better idea of how long things take to close and process, which construction companies are delaying their work, and many other factors that may affect your projects. By considering experience, you can set more realistic timelines for your own projects.
2. Build "flexible" time into your schedule
If you know that the roofing job should only take a week, but could take up to two weeks due to weather conditions, you need to factor that flexibility into your overall timeline. If you do, you will finish your project sooner rather than later. Building flex time into your timeline is a great way to protect yourself from exceeding your projected timeline. Just make sure the timeline states which contractors can overlap their work and which must come in one after the other.
3. Hiring help
For certain parts of the process, hiring experienced helpers will keep you from falling behind. If you want to find a new tenant for a property you want to renovate within three weeks of completion, you can use an experience expert to ensure that you meet your deadlines. Just because you're an investor doesn't mean you have to handle everything yourself. Hire help to make sure things are done efficiently and correctly.
Start with experience
As a new real estate investor, the best way to succeed quickly is to pay attention to the experiences investors have had before and learn from them. Mistakes will occur throughout your career, but they don't have to be the same mistakes that hundreds of other investors have made before you. Learn from their experiences and you will be one step ahead!
