Real-estate investors' 10 big mistakes

That's where a lot of newbies trip up, says Houston real-estate agent Laolu Davies-Yemitan. They don't do their due diligence about the deal, the costs or the market conditions, and they wind up draining their personal savings because the house needs extensive repairs or they can't sell it.

"Sometimes, new investors are buying property just based on the idea that the property is going to appreciate," he says. "Usually, they don't have any information to substantiate that."

7. Misjudging cash flow

If your strategy is to buy, hold and rent out properties, you need sufficient cash flow to cover maintenance.

"People think they can get a property manager," Tyson says. But many have never interviewed a property manager and have little idea about how they work. Most managers, for example, are reluctant to take on one single-family home or a duplex, he says, preferring larger complexes. And fees of 7% to 10% of the monthly rent are common.

"It's a huge expense," Tyson says. "I can put my money in a mutual fund and it costs a half-percent a year."

Davies-Yemitan agrees. It's not uncommon for a property to sit on the Houston market for 90 to 120 days before it's leased, he says. Meanwhile the owner has to pay the mortgage, the taxes, the insurance, the cost of advertising and any homeowner or condo association dues, he says. If the owner hasn't budgeted for that, an asset can quickly become a liability.

8. Lowering the volume

If you're working on one deal at a time, Crowe says, you're doing transactions, not running a business.

You need a steady pipeline of prospective deals; sufficient volume will weed out the marginal deals and let the good ones rise to the top.

9. Painting yourself into a corner

Many people buy a property and get stuck with it because they have only one exit strategy. They're going to sell it or rent it out. What if it doesn't sell? What if the rental market stalls?

Always have two, if not three, ways to get out of any deal. For example, if plan A is to rehab the house, put it on the market and resell it, then plan B could be to offer a lease-purchase to a buyer. Plan C might be to hold the house and rent it out. And as a plan D, there is the wholesale option, which would involve selling to another investor at a below-market price. Hopefully, you'll still make a profit, but at the very least, you'll cut the losses you're taking every month in carrying costs.

10. Miscalculating estimates

Crowe tells his new rehabbers that after they've done their homework, they should double the amount of time and money they think it will take. If they can still make money then and they might be able to rent it out, it's a good deal.

This article was reported and written by Pat Curry for Bankrate.com.

Published July 17, 2007

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