Four Real Estate Investment Mistakes to Avoid on Your First Property
Choosing where to invest your money has its risks and rewards. Take a look at these four real estate investment mistakes we recommend you avoid!
Mistake 1: Miscalculating the Rent Value
Our first common real estate investment mistake we are discussing involves calculating rent value. Many first time “do-it-yourself” landlords will either list their rental property using the Zillow Zestimate or a gut feeling. While the Zillow Zestimate can give some insight into a property’s worth by aggregating data from live and historical data on the site, it doesn’t accurately take in account for listings off the site, such as Craigslist, Facebook, etc. As far as using a gut feeling to calculate your rental value, this is never a good idea. In a world of data and analytics at our fingertips, researching market values have never been easier.
Here is what we recommend for first time landlords in need of a pricing strategy:
- Comparable Analysis Approach – Calculating the Rent Value
- Find listings near your property with similar square footage, bedrooms and bathrooms size, and amenities.
- Find the average price within these listings.
- Use an at-market, aggressive (below market average), or premium (above market average) pricing strategy.
- Cost of Ownership Approach – Calculating the Rent Value
- Calculate your monthly mortgage payments, property taxes, and utilities that is needed to maintain the property. These are your unavoidable costs.
- Calculate your monthly vacancy, maintenance, and eviction costs. These are your controllable costs and should appear as a range.
- Decide how much you want to mark up on your rental property.
- Add the unavoidable cost, your controllable costs, and your markup. This is your listing price.
Mistake 2: Thinking Emotionally Instead of Objectively
When it comes to purchasing your first investment home, getting caught in emotions can be easy. After all, a home is most often the largest item a person will purchase in their lifetime. If you are thinking your home is the best property on the block, then you are wrong. There is always another property that is more appealing depending on the buyer or renter. This is a completely normal behavior in the market that you shouldn’t worry about.
Take a look at the competition and see how your property compares within the market. The best real estate investors think objectively instead of emotionally. Failure to do so may result in excessive attachment to a property and making real estate investment mistakes.
Here is what we recommend to you to think objectively instead of emotionally with your property:
- Understand your market. Knowing the behavior of your market will give you realistic expectations into how your property should perform.
- Consult with a professional. There is nothing wrong with having a little assistance with your home. This will give you the chance to learn from their past real estate investment mistakes. The best DIYers never start out as experts. Chances are they were guided by professionals or online YouTube videos. Unfortunately, some professionals know the process better than others. If you’re a first-time landlord looking to gain more knowledge in real estate, we recommend scheduling a free consultation with our Onerent investment specialists. who can let you know your property’s worth.
- Seek more education. If you are not learning, you are not growing. The best real estate experts are always seeking more advice from financial managers, online guides, and e books. Take a look at our guide on how to accurately forecast cash flow for any rental property.
Mistake 3: Ignoring the Market Data and Statistics
Real estate is a large speculation market. This means there are many economists and thought leaders in the industry who predict the future market direction. Speculation markets are different from tangible and tactical markets, such as automobiles or food industries which are more influenced by products.
Due to the economic influence on the real estate industry, investors should be more skeptical aboutwhere they invest in. One way to eliminate skepticism in an investing decision is understanding the market data and statistics. If you solely rely on the CNBC and San Francisco Chronicle headlines, you might think it’s an amazing time to invest in a certain area while entering another would be a poor decision. This decision making strategy is flawed.
With the uprising of data visualization and analytics, data driven decisions have been easier to obtain, however, investors are still trusting their gut feeling instead of looking at the number. Data rich predictions and report can be found by independent research firms or by the county or state government. These reports can all help you make a more informed decision, and avoid real estate investment mistakes.
Don’t ignore the data. Stick to the facts.
Mistake 4: Ignoring the Taxes
Real estate taxes is often the area where investors have the least amount of experience in. This is because the tax code around real estate is generally different from each county to state. Investors also often lack knowing how much they can actually benefit from the tax laws. Here are a few examples of which:
- Setting up the wrong type of ownership entity: When investing large sums of money into a property which others will live in, there could always be the risk of risk and liability, therefore, investors often form LLCs. A limited liability company is a legal entity that merges the pass-through tax benefits of a partnership or sole proprietorship with the liability mitigation of a corporation. Essentially the investor will set up a new corporation for every property he or she owns.
- Pros:– LLCs, S-Corporations, and C-Corporations offer liability protection.
– These corporations are simple and inexpensive to setup.
– Pass through tax benefits are given with these corporations.
– This investment strategy can be difficult to maintain if you have multiple properties and corporations
– Fannie Mae, Freddie Mac, and most private lending institutions will not allow you to take the title in an LLC. If they do, you may pay higher rates and fees. If you are looking to set up your knowledge in Real Estate LLCs, consider reading our guide to LLCs which dives deep into the pros and cons of this strategy.
- Missing the deadline and requirements of 1031 exchange:Executing a 1031 exchange tax deferral allows real estate investors to defer all their capital gains taxes after selling an investment property. This essentially allows them to save thousands on capital gains taxes from each investment.
The IRS sets rules on how to complete a 1031 exchange properly. Here are the most significant rules you should be aware of:- Your new purchase needs to be an investment property. You cannot perform a 1031 exchange on your own home.
– You have 45 days after the sale of your property to state up to three potential properties you might exchange for.
– You have 180 days to close on one of the properties that you’ve identified.
– This list must be sent to a qualified intermediary. You must allow your intermediary to handle all the money throughout the transaction. Qualified intermediaries can be parents, children, or siblings. Anyone except for “agents”, such as your attorney, broker, CPA, or real estate agent is allowed.
– Personally handling any funds with this exchange is NOT ALLOWED.You can learn more about how to execute a 1031 Exchange through our free real estate guide.
- Maintenance cost deductions:Similar to a business, real estate investors can deduct their maintenance and upkeep costs from their taxes due on their investment or rental income. Be sure to keep proper invoicing, accounting, and receipts to simplify the deductions process during tax season!
- State local federal law changes:Since the ’08 recession, real estate has undergone significant legal changes at the county, state, and federal level. Rallies, hearings, and passed bills occur every month which can change your real estate investment strategy. Be sure to monitor these changes so you can adapt to the environment rapidly.