Top Real Estate Investing Mistakes to Avoid

Achieving success in real estate investment goes beyond having ample resources and relying on chance. It requires essential elements such as knowledge and discipline. Whether you’re a novice in the field of real estate investment or seeking to enhance your existing portfolio, it’s crucial to steer clear of the common errors discussed in this article for a higher probability of success.

Onbridge Capital is a prominent syndication firm that specializes in real estate. We provide our investment partners with the chance to utilize fractional ownership of multifamily rental properties to generate a regular passive income.

1. Trying to Duplicate Investment Strategies

Real estate investing is not a one-size-fits-all solution, and approaching it in such a manner can lead to disastrous outcomes. Instead of trying to emulate the success of others, it’s essential to create a unique investment plan that aligns with your goals, needs, and limitations. To begin, conduct an honest evaluation of what you hope to achieve, your appetite for risk, and your available time.

Real estate investment can be a lifestyle that replaces a traditional 9-to-5 job or a side hustle that supplements an existing source of income. For some investors, it may be a means to spend more quality time with their family, rather than a full-time commitment. An individual with limited availability may eliminate options that require intensive interaction, such as managing a rental property. Conversely, they may discover the ability to expand their possibilities and devote time and energy to a complex undertaking.

It’s important to keep in mind that certain investment types may render funds completely unavailable for extended periods, and all investments carry some level of risk. Retirees on fixed incomes should have a different risk tolerance than younger individuals with adequate savings. Above all, when evaluating investment opportunities, it’s essential to keep your identified goals and limitations in mind to avoid becoming swept away by excitement.

2. Only Considering Direct Ownership

To overcome obstacles such as time constraints or limited cash reserves, it’s worth exploring investment alternatives that extend beyond direct real estate ownership. Three excellent options to consider are REITs, real estate syndications, and crowdfunding. These approaches offer the potential for income and appreciation while minimizing costs and time commitments.

REITs 

Real estate investment trusts (REITs) are companies that own and manage income-generating properties. These companies can be publicly or privately traded, and individuals can buy shares in them. The dividends paid by REITs represent at least 90 percent of their taxable income, and people can invest in them with relatively small amounts of money.

REITs often specialize in a particular property type, such as commercial buildings, hotels, or specific geographic areas. This approach enables investors to focus on the real estate market segments that they know well and that they expect to perform positively.

Real Estate Syndications

Real estate syndications are companies that acquire and manage a particular income-generating property for a specified period. Unlike buying shares, investors contribute funds to the syndication and receive returns based on its payment structure.

The majority of financing for syndications comes from a small group of passive investors, who earn returns proportional to their investment size. Generally, a minimum investment of $100,000 is required.

Before investing, the syndication sponsor provides information about the property and its operating plans, allowing potential investors to research the property, its market, and the sponsor.

Crowdfunding

Real estate crowdfunding involves online platforms such as Fundrise and Crowdstreet that connect investors with real estate projects. There are numerous crowdfunding sites available, and the types of investments and starting capital required vary between them and even among specific projects.

Some opportunities on crowdfunding platforms are similar to syndication, while others simply involve investors providing hard-money loans to individuals or entities seeking funds for a real estate project. However, most crowdfunding investments are passive, meaning that investors do not need to actively participate.

Regardless of the specific agreement, real estate crowdfunding provides investors with passive investment opportunities through various online platforms.

3. Skipping the Research

Investors can suffer financial loss by assuming that all real estate opportunities will result in at least breaking even. Various factors can contribute to project failure, such as the inability to sign and retain tenants or a lack of buyer interest at a specific price point.

The difference between successful and unsuccessful real estate investment lies in the investor’s decision-making. These decisions should be well-informed and consider factors such as the market, property type, and earning potential.

Know the Market

To achieve success in real estate investment, it is essential to understand the local market’s unique microcosms. National and statewide trends are irrelevant when a major employer shuts down or a significant company moves to town.

Investors must have a good understanding of the local market, including inventory trends, population demographics, real estate values, and the area’s economic health. By considering these factors, investors can avoid investments that are likely to fail and identify properties with significant potential.

Research Project Sponsors

Before investing in a real estate syndication or through a crowdfunding site, it is crucial to conduct research on the project sponsor or the entity seeking funding. It is essential to look for a track record of success in that particular market and with previous projects.

Sponsoring a syndication requires specific skills and knowledge, and the success of the project depends on whether the sponsor has these qualities. The sponsor is responsible for finding and selecting the property, securing financing, reviewing due diligence documents, and executing the property management plan.

Therefore, before investing, investors must ensure that the sponsor has the necessary qualifications and expertise to make the project a success. This can help investors minimize the risk of investing in a project that is likely to fail.

Rely on Due Diligence Findings

During the property acquisition process, due diligence involves revealing information about the property’s condition and finances. This includes property condition reports, environmental reports, appraisals, and other reports.

Investors who ignore the due diligence reports and pursue a property they like despite any issues revealed by the reports are putting themselves at risk. Even minor physical conditions can have a significant impact, as the recent Surfside condominium collapse in Florida showed.

Moreover, purchasing polluted land can result in liability for owners, which pre-sale environmental assessments can identify. As structures and fixtures degrade over time, accurate estimates of repairs and maintenance are essential for investment profitability. Investors should also consider renovation costs when comparing properties.

Financial information, including current tenant leases, is also available in due diligence reports. Investors can use this information to confirm that their underwriting projections are correct and determine if the property has the potential to generate the desired returns.

4. Doing It All Yourself

Just as most of us would not operate on ourselves, neither should we handle all parts of a real estate investment on our own. Building a team makes for a manageable and successful investment career because more hands on deck, especially expert ones, allow an investor to widen their net of properties and projects, and in turn, bring in more revenue.

The list of professionals that can help you become more efficient and profitable is lengthy.  Here are a few of the most commonly used ones to consider:

• A real estate agent knowledgeable about the property type and market helps find the most promising properties.

• Attorneys ensure compliance with all applicable laws, reducing future legal costs and monetary damage for which you may be responsible.

• A property management company coordinates all day-to-day issues regarding a property, freeing up the investor’s time for other pursuits. They may also prepare the lease audit in the due diligence phase of the purchase process.

• Tax professionals plan transactions to reduce tax liability and help you keep more of your money.

Finally, work to develop a network of real estate professionals, including other investors, to have access to future investment opportunities that may only spread by word-of-mouth. Creating a network is especially important for unaccredited investors who may only have access to syndications through their professional connections.

5. Delaying Investing

Procrastination is a common obstacle that prevents many real estate investors from achieving success. In the world of real estate investing, time is a crucial factor, and any delays can result in lost opportunities, missed rental income, and appreciation potential.

However, the complexities associated with real estate transactions, managing properties, and investing a significant amount of capital can be overwhelming and intimidating, making it challenging for investors to take the first steps.

To overcome these fears, investors need to take advantage of the current real estate market conditions, such as the low-interest rates, increasing population, and a lack of inventory, to find suitable investment opportunities. By taking action and avoiding the mistakes outlined in this article, investors can avoid missing out on the chances to grow their portfolios and build their wealth.

Final Thoughts

Real estate investment is highly adaptable, which makes it attractive and accessible to investors looking to customize their portfolios based on their goals and limitations. However, the vast array of options can cause even experienced investors to become overwhelmed. Thankfully, thorough research and careful evaluation of investment opportunities can help avoid many of the pitfalls associated with the industry.

Onbridge Capital is a prominent real estate syndication firm that provides investors with the chance to convert shares of multifamily rental properties into a passive monthly income.