Selling or buying an investment property can be a very emotionally draining and time-consuming experience, especially for the novice real estate investor. As a result, the first-time real estate investor usually ends up making a lot of mistakes in the process. The problem is worse for those that are investing in real estate at a young age.
To make sure that you avoid all the rookie mistakes when first investing in real estate, check out our video below:
Here are some common real estate mistakes a young real estate investor needs to avoid:
1. Not Beginning Early Enough
Many young people wrongly believe that a successful real estate investor has to be ‘old’. As a result, they decide to put off the idea of investing in real estate young and don’t get started until a much later time. However, time is the most powerful financial asset that young people have. Investing in real estate as a college student is the best thing a young person could do. Beginning to save early for property ownership allows them to enjoy the benefit of compound interest. In addition, investing in real estate young means that the property owner can begin to build equity early and enjoy tax benefits. If you begin investing in real estate in your 20s, you are well on the way to building a solid financial foundation for the future.
2. Accumulating Bad Credit
In an attempt to keep up with their peers, young people are likely to find themselves spending money they don’t have to buy things they don’t really need. As a result, many end up with a lot of credit card debts to sustain a lifestyle they cannot afford. Failing to pay off debts will result in a poor credit score, thus making it difficult to secure a loan for investing in real estate young. Young people should, therefore, avoid unnecessary debt and live within their means.
Related: How to Buy Investment Property with a Bad Credit Score
3. Living with Parents for Too Long
The comfortable life at home with mom and dad makes many millennials complacent and unable to deal with the ‘real world’ out there. As early as possible, young people need to grow up, find a job, pay their bills and begin investing in their future. Once out of the nest, they are likely to start thinking about investing in real estate young. However, the only exception to this rule is if someone is living with their parents to get out of debt or save money.
4. Looking at the Short-Term Instead of the Long-Term
Many young investors have the notion that real estate is a get-rich-quick scheme. They expect to buy a property today and make a windfall by tomorrow. However, the reality is that investing in real estate young calls for a lot of patience and focus. It could take several months before a rental property begins generating a positive cash flow. If a real estate investor wants to sell, they might have to wait several years before their property appreciates enough. Therefore, young people should invest in real estate with a long-term view in mind.
5. Getting Too Emotionally Involved
When making buying decisions, many young real estate investors are influenced by their emotions. Some choose to purchase property based on price or the popularity of the location while ignoring other factors such as security and future growth potential. To avoid making such mistakes, young people should consult experienced realtors before investing in real estate young.
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6. Not Doing Enough Research
Many young people get into property buying or selling with a ‘know it all’ attitude and don’t look for real estate investment advice. As a result, they end up making costly mistakes in the process. While confidence is not necessarily a bad thing, it is very important to ask questions before investing in real estate young to avoid losing money.
Here are some of the key areas of research for real estate investors:
- Economic growth – Information about future growth prospects of a location can be found from government websites, tourism websites, and Chamber of Commerce websites.
- Demographic factors – Investing in real estate young requires consideration of factors such as the general population growth, the average age of residents, and migration factors.
- Real estate trends – Prospective buyers need to look at important market indicators such as sales to listing ratios, pricing trends, days on market, and sold prices compared to listing prices. Vacancy rates and rental rates should also be considered.
- State of the actual property – When considering a specific property, investors should inspect things such as the building foundation, water heaters, fire systems, electrical systems, and plumbing systems.
- Property costs – Buying real estate investments comes with a wide range of costs and expenses including property taxes, HOA fees, property management fees, legal fees, renovation expenses, rental income taxes, and mortgage broker costs. All these costs should be taken into consideration when investing in real estate young. A good investment property calculator can help figure out all these costs.
7. Not Hiring an Agent
Real estate agents usually ask for commissions that could be as much as 6% of the property sale price. To avoid this cost, some young investors choose to sell or buy an investment property on their own. This is a big mistake, especially for first-time real estate investors. A good agent can provide valuable real estate tips on the best properties in the market, risks of real estate investing, and local property laws. Since they have experience negotiating transactions, agents can also help investors get a competitive and fair selling or buying price. If any problems emerge during the transaction, experienced agents will be there to deal with it and ensure everything goes smoothly.
8. Failing to Review the Investment Portfolio
Many young investors assume that their work is done once they have bought real estate investments. As a result, they become apathetic and fail to pay attention to their assets. However, investing in real estate young requires continual monitoring of the performance of assets. Investors need to track metrics such as Internal Rate of Return (IRR), capitalization rates (cap rate), gross operating income, debt coverage ratio (DCR), cash on cash return (CoC), gross rent multiplier (GRM), and Loan-to-Value ratio (LTV). The more real estate investors understand the performance of their properties, the better portfolio decisions they will be able to make.
Related: Growing Your Real Estate Investment Portfolio the Easy Way
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