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Real estate is the most popular area American millionaires will invest in this year. These dollar-savvy investors clearly know how to make money, so it’s worth following their lead. However, don’t make the mistake of thinking that real estate is a sure thing. Make these errors and you could easily lose money in the market.
Over-Leveraging Your Investment
Most investors use some kind of leverage to get into the real estate market. They “leverage” the bank’s capital and a relatively small amount of their own money to buy their first property, then “leverage” more money to get bigger and better homes with a greater potential return.
However, as leverage increases, so does the amount of risk involved in any investment. While leverage can maximize an investment’s growth, too much can be disastrous. If you have over-leveraged on a fixer-upper and don’t have the money to see the repairs through, you’ll be left with a property that can’t be sold for its potential value. If the local market takes a dive, you won’t be able to pay back your debt if you sell it.
Carefully consider the repayments you can reasonably afford before deciding how much you should leverage.
Image via Flickr by Images Money
Underestimating Times and Prices
Real estate investors look not just at what a property is now, but what its potential could be. You might have grand plans about the patio you’d add or the bathroom you’d revamp, but novice investors often underestimate what’s involved in these measures.
Experts suggest doubling expected costs and timelines to get a conservative picture of what’s involved. If the project still seems like a good deal, then it’s safe to proceed.
Not Doing Your Research
It’s easy to be blinded by the potential to make a lot of money in real estate, but you’ll only do that if you do your homework and ask the right people the right questions. An attorney or accountant with real estate experience can guide you through the process. These impartial professionals will help you assess the situation with a clear head.
Getting Into a Bad Partnership
Partnerships can increase your investment capital and potential profits, but they can also cost you if they go south. It’s not uncommon for partnerships to sour if one partner becomes saddled with the majority of the work.
You might think pairing up with family members or friends will safeguard you against this, but experts suggest you should be even more wary of such partnerships. If things fall apart you don’t stand to just lose your money, but your relationship as well.
Not Using Common Sense
Dr. Phil famously said that “Common sense needs to be more common.” This relationship expert is no real estate guru, but his advice could save many investors from losing money. Any deal that seems too good to be true probably is. If a property seems like a steal, you must ask questions to determine why it’s a bargain. If something doesn’t feel right, trust your gut instinct and don’t part with your cash.
Being aware of the mistakes others have made is the best way to ensure your real estate investment turns a profit.