It’s time for tough love. Contrary to what you may have learned on TV shows like ‘Flip This House,’ there’s a good chance you’ll never make quick and easy money buying houses and spending 30 minutes renovating the kitchen (minus 12 minutes for commercial breaks). While you can see Donald Trump on The Apprentice, you are not Donald Trump. And, in any case, Donald Trump does not make money buying houses.
This is your absolute best strategy for making money in home investing: Write a book called ‘How to Make Money In Home Investing’ and sell it to others.
The promise of quick and easy money has always been the traveling salesman’s most effective lure. Don’t fall prey to that siren’s song! If you’re considering going into real estate investing, make sure you’re aware of these common beginner investing mistakes…
shopping on a whim – “Wow, honey, that sounds like a good deal. Let’s go buy it!” Bad move. You need to do your homework first, as you are embarking on a journey that may last years. Better make sure you are really committed to all the work involved. You can’t just take your investment property to the store for a refund if you later decide it’s too much work.
Assuming all profits will come from growth in property value – TV shows and hucksters always dangle the capital gains carrot in front of dreamy beginners. In reality, the operating profit you make while owning a property is arguably more important than the capital gain you make when you sell. Why? Because if your property is profitable every month, you will never be forced to sell. What if the market crashes and you can’t get as much as you’d like for the property? No problem… you can keep it for a few more years, collecting profitable rents all the time.
Don’t pay attention to cash flow – This is an extension of the previous point. There is a temptation to focus on the potential capital gain when deciding whether or not to buy. But it’s really more important to focus on the cash flow of the property. They say “cash is king” for a reason. Perhaps, for strategic reasons, you decide to buy a property that has negative cash flow. It’s okay. But you must be sure that you will be able to handle that amount of cash (or more!) for as long as you own the property. It’s best to know about the commitment you’re making up front, before you commit to a situation you can’t stand. Just read the papers lately to see some examples of why that’s good advice.
Not prepared to manage tenants – If you are going to go into the business of managing tenants, it goes without saying that you must have the right temperament to manage tenants. Unfortunately, many homeowners find out too late that they just aren’t cut out for it. The shy and easily intimidated should think twice before applying for this job. Landlord bulletin boards are full of horror stories about collecting rent from tenants and dealing with damage. Read them before you go into business and ask yourself “Is this for me?”.
bad moment – Nothing like buying at the peak of the market to take the wind out of your sails. The media is awash with stories of investments gone miserably wrong underwater. Unfortunately, there’s not much you can do about time, regardless of what others tell you. That said, if you do your homework, you’re less likely to get hurt (or at least limit the damage) if the market turns against you.
No exit strategy – While we advise against planning for quick changes, we recommend that you spend some time thinking about the endgame before making the investment. Don’t count your chickens, but think about the scenario in which you would like to sell and then evaluate it to see if it is realistic or not. For example, there is a town in Pennsylvania called Centralia that is located directly above a coal mine. For decades, the coal mine has been on fire. Gradually the city has withered, as the government tried to get all the residents to move out so they could shut down the city. You may be able to get a good deal on an investment property in Centralia… but that doesn’t mean you should buy it, because who in their right mind would buy it from you?
Real estate is a ‘buy and hold’ game, not a ‘quick turn’ game. You should aim to buy low, make money while you own the property, and then, years later, sell high. In other words, get rich slowly. It may not have the same appeal as getting rich quick, but you have to admit, it still sounds good!