Real estate has long been one of the most reliable investments around. When other investments fail, real estate still tends to perform quite well. Nonetheless, not every investment is a wise investment. Real estate investors have to be just as careful about how, when, and where they invest.
Making money in real estate is all about knowing and understanding the market. It is about placing your money in those properties most likely to generate the kind of return you’re looking for. Do it right and a strong portfolio can generate significant returns. Make just a few mistakes here and there and real estate holdings can end up being less-than-profitable.
As far as those mistakes are concerned, here are the top three commonly made by real estate investors:
1. Investing with Tunnel Vision
The primary reason for investing in real estate is to further diversify. Every successful investor knows that diversification is what prevents widespread losses. The more diversified one’s portfolio, the safer one’s long-term position. The tried-and-true principles of diversification don’t go out the window with real estate.
It is too easy for real estate investors to focus only on one type of property. One investor may put all his money into house flipping while another sinks every penny into becoming a residential landlord. Still another only invests in commercial office space.
The wisest real estate investors do not zero-in on one type of property at the expense of all others. They look at each and every opportunity based on its own merits. They also don’t practice tunnel vision in regard to where they purchase properties. Their portfolios are diversified by multiple property types in numerous locations.
2. Limiting Funding Options
Another common mistake real estate investors make is limiting their funding options. For example, a first-time investor might pay cash for a rental property, then leverage that property to take out a bank loan on a second property. This all works just fine, except for the fact that banks do have their limits.
Banks are not the only means of funding real estate acquisition. There are hard money lenders, like Salt Lake City’s Actium Partners. Hard money lenders tend to appreciate opportunities to invest in real estate projects.
Funding can also be obtained from peer-to-peer sources, high net-worth individuals, large real estate brokerages, and even investment funds operated by experienced fund managers who specialize in property acquisition. Here’s the point: having access to as many funding options as possible makes things a lot easier for real estate investors.
3. Investing Without an Exit Strategy
Real estate investing is generally a long-term thing. Unless you are in the house flipping business, you invest in real estate with the understanding that you will hold it for some time. Still, that doesn’t mean you don’t need an exit plan. The smartest real estate investors establish an exit plan early on. That plan can change according to circumstances, but it serves as a foundation from the start.
Why is an exit plan necessary? Because circumstances change. Right now, both commercial and residential property are hot. But there is going to be a correction at some point. Without an exit plan, the next market correction could induce panic. Will you sell along with all the other panicked investors? If you have an exit plan and stick to it, you are not as influenced by market ups and downs.
Real estate has consistently been a reliable investment. It still is. If you understand the market, invest wisely, and avoid common mistakes, you can do very well with commercial and residential property.