Investing in real estate can be risky, and the uncertainty raises many questions: Is success based on “timing the market? Is it found in getting only great deals? Or are there more pieces to the puzzle?”
These are questions Forbes contributor David Greene, raises in a recent article. He may not have foolproof ways to hit it big, but after nearly a decade of investing in real estate and speaking with other investors, he clearly knows what can lead to “things going horribly wrong.”
Here are some sure-fire ways to fail:
Keep a negative cash flow: If you buy something that will lose money every month, thinking the property’s value will rise and you can sell it later, you’re headed for trouble. “[O]nly buy properties that generate more income each month than they cost to own,” warns Greene. This way, he adds, “you are protected from market dips or stalling home prices.”
Don’t have enough reserves: You never know when expenses will crop up: “a roof leak, or a water heater busting, there will always be something you need to repair or replace,” notes Greene. It’s essential to keep adequate cash on hand. Experts advise investors to have six months of expenses in reserve for each property.
Follow the herd: Basing your decisions on what others are doing, rather than “sound financial principles,” is a ticket to disaster. “The best deals I ever bought were purchased when no one else was buying,” writes Greene. Study the property in question, trust yourself, and make decisions independent of what others are doing.
Buy in bad neighborhoods: While the numbers might look good on paper, buying in a bad neighborhood jeopardizes your investment. “[Y]ou’ll be forced to rent to less than desirable tenants with lower credit scores, less reliable income streams, and worse rental histories,” writes Greene. Choose areas where dependable tenants want to live.
Underestimate costs of renovation: Savvy investors know that rehab costs always end up higher than estimated. It’s crucial to budget for unexpected cost overruns.
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