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Thinking about investing in real estate? You're not alone.
Last year, about 40 percent of all homes sold were to buyers who were not planning to live in the property as a primary residence.
While scooping up properties at a low price sounds like the path to riches, there are a few mistakes you don't want to make.
Last week, I talked about how you shouldn't buy investment real estate on impulse, fail to do your due diligence on the property, or forget that numbers (i.e., profits) do matter. (Read the story here: Top three real estate investing mistakes.)
But there are at least two other mistakes that can sink your bid to be a successful real estate investor:
1. Exit strategy? What exit strategy?
Not knowing when, or how, to sell any investment is a big problem for most people. But there are some strategies that work when you're investing with equities that won't work for real estate investors.
For example, if you're investing in stocks or mutual funds, you can put a "stop loss" on the price of the investment to cap your downside losses. If the price on a particular stock falls below the stop loss price you set, the investment will be immediately sold, curtailing your loss.
But real estate investors can't put a stop loss on downward spiraling real estate prices. And, as millions of homeowners have noticed, you can't always sell real estate easily.
When people usually think of an exit strategy in real estate, they think about selling a property. But many people don't realize that an investment property may not sell if it is vacant. A shopping center that is vacant probably won't sell -- at least not for a price you were expecting. So knowing how to value investment property becomes important.
Some real estate investors will value investment properties based on what it would take to rebuild the property. Others will determine the value by how much cash the property makes. That is, if you have tenants, you need to determine the income those tenants generate, and then subtract the expenses of owning the property to know how much cash the property provides both yearly and monthly.
Others real estate investors will value an investment property by comparing it to other properties out there. Lastly, some people will use all of these methods to come up with a property's value.
Once you understand these valuation concepts, you can buy a small shopping center, and try to keep your costs down, rents high and perhaps make more money on the sale than another similar center that has higher costs and lower rents.
Who wouldn't want to own the center that's making more money? All of these issues are important in owning an investment property and ultimately being able to sell it.
As part of this strategy, you also have to understand that you might not be able to get rid of your investment property when you want to. You have to be prepared for that and understand how to handle owning an investment property for the long term, through good times and bad.
Developing an exit strategy will help you figure out how to manage your investment real estate better, especially if you're hoping to sell within a year or two of acquiring the property. And the best time to think about selling is before you even make an offer.
2. Not building a solid investing team.
Another crucial mistake real estate investors make is not putting together a solid team of professionals who can help them make a smarter investment.
Real estate investors need an investment team that includes a savvy agent, a mortgage lender, a professional home inspector, a real estate attorney, a tax professional (either an accountant or enrolled agent) who really understands the tax consequences of investing in real estate, a property management company (if appropriate for the level of real estate investing you're doing), and perhaps a contractor who can help make improvements to the property.
Not only do you need to find qualified professionals you can trust, but your investment team should get to know each other so they work in concert with your investment goals.
If you don't have a good team, you might find that your operating expenses are higher than they should be or that your leases are less favorable to you as an owner than other leases out there.
If you own an investment property and never contest the real estate taxes when you should have, you'll find that your costs are higher and the amount you might get if you tried to sell the property will be lower. You need a good person or company to work with, along with others, to keep your costs low.
How can you make that happen? Ricky Novak, president of Strategic 1031
He believes that the chatter over burgers and beer will result in all of your advisors doing a better job for you.