Things to watch out for in investing in Real Estate

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Investing in real estate has helped thousands of people improve their financial status, but for all its glory it is possible to lose money by being frivolous. There are a few things that newbie investors need to watch out for, especially when working on their first few deals. The quickest ways to lose big money in real estate are:

1. Paying Too Much - Paying way too much for the property is a big mistake that puts investors at a disadvantage right from the start. This often results from failure to research the area, finding truly motivated sellers, and knowing your true costs. Even if the property was bought below market value, investors can still pay too much for repairs, underestimate holding costs, and by not performing the necessary due diligence resulting in extra expenses.

2. Lack of Due Diligence- Experienced investors know the importance of performing due diligence on the property. The purpose of due diligence is to help you realize if the property is a good deal and mitigate risk before you make the purchase. A licensed inspector should inspect the property and it is even better to use an inspector that you trust. The biggest key in the due diligence phase is asking the right questions about the structure, the neighborhood, and the process (permitting, inspections, etc).

3. Lack of an Exit Strategy- Before taking on a new investment property, you must plan out an exit strategy. Seasoned investors know the importance of having more than one exit strategy, and often have a few options open to accommodate for unforeseen events.

To illustrate, imagine yourself in a pitch-black room with one door that illuminates the far side of the room. If that door closes, you will be fumbling around in the dark. Wouldn't it be much easier if there were two or three doors illuminating the room? Investors that fail to plan exit strategies often become motivated sellers themselves.

When mapping out your plan for the investment, make sure that you have more than one option. If your main goal is to rehab and then flip the property, you should still create a backup plan if you can't sell it within a reasonable period of time. This second exit strategy will ensure that you do not become a motivated seller or have the property foreclosed on by the lender.

4. Lack of Contingency for Unforeseen Problems - In order to be sure that you are covered, it is important to allow for unforeseen costs in rehabbing real estate properties. Even with proper due diligence and a full inspection, additional problems and costs are bound to come into play. When investing in a property, always budget for unforeseen problems and unexpected costs. This is the best way to ensure that your seemingly good deal doesn't become a bad deal overnight.

5. Not Knowing What the Market is Doing - It is important to have a grasp on the real estate market in your area. Being too pessimistic or optimistic can hurt you in the long run. Before making an investment, get a handle on where the market is going to be 6 months down the line. You must pay attention to a number of factors and do your research. Across the country, many real estate investors are losing their shirts because they failed to anticipate the decline in the real estate market.

Real estate investing should be approached with a business mindset. It is important to begin each deal with a complete plan of action, a plan that should accommodate for unforeseen costs and also for unexpected turns in the market.