Top 4 Mistakes Made by Real Estate Investors

Investing in real estate can be quite lucrative and rewarding, if it's done properly. Avoid these four mistakes often committed by real estate investors:

Mistake #1: Paying too much

The biggest mistake real estate investors make is paying too much for a property. Many real estate investors forget that their profits are not made when they buy, but when they sell. Getting property at a good price is how to make money in real estate. If you start at a high purchase point, your return on investment will suffer because the property will appreciate very little; you may even suffer a loss on the property.

If you don't get a good deal on the front end, you also will have a difficult time getting a reasonable return after all the carrying costs real estate requires. Owning real estate requires many ongoing costs (maintenance, property taxes, etc.) relative to other forms of investment (e.g., stocks); you must be especially sensitive to the purchase price, as even a significant appreciation from the purchase price to the sale price can lead to a subpar return.

Mistake #2: Not understanding the market

Another big mistake a real estate investor can make is not understanding their local real estate market. Understanding a market is more than just knowing a city or a neighborhood; it requires knowing and understanding the underlying demand for the kind of real estate you are investing in.

For example, if you like investing in suburban single family homes, you will not be successful unless you understand the market for suburban single family homes in your locality. Who are your buyers going to be? Who are your renters going to be? You also need to make sure you understand what your potential buyers and renters are looking for in a home.

Failure to understand your market can end up being a costly mistake if you get stuck with a property that doesn't appeal to anyone.

Mistake #3: Failure to do due diligence

More often than not, when a real estate investor is stuck with a property that is a money loser, the fault is the investor's own. You must go the extra mile when performing due diligence. A failure to do an adequate amount of homework on a property, a neighborhood, or a real estate market in general is an inexcusable error, yet it is one that many real estate investors make.

Check assumptions in your investment plan for properties against key market details. For example, if your plan requires selling a property at market price after holding the property for less than one year, but the median time on the market for that kind of property is 1.5 years, you are setting yourself up for a disappointment.

In addition, due diligence on individual properties themselves is a must. You should work with a good property inspector, and also understand how to look for common property damage problems. Not only are two sets of eyes better than one, but you will see properties before the property inspector, and understanding property damage problems can help you screen undesirable properties -- and save time and money.

Mistake #4: Not having an investing strategy

Another big real estate investing mistake comes from taking a "transaction-by-transaction" view of real estate. You need an overall investment plan -- and need to stick to it. A transactional view will result in you buying a property because it's a good deal without fully understanding the property's real estate market.

For example, if you usually buy college-area apartments that you rent to college students, you risk making a big mistake if you buy a rural farmhouse for appreciation. It is natural to develop a circle of competence; it is dangerous to move outside of your circle of competence.

Worse than ignoring circle of competence issues is having no plan at all. Merely getting a good deal on a property means nothing without an exit strategy.