10 Aug Big Real Estate Mistakes: Part 2
On Monday, I shared the first four big real estate mistakes. Whether you’re just getting started in the real estate business or have been in the game for awhile, these big mistakes are important to avoid!
Today, I’m going to share four more real estate mistakes. As you read, you might get nervous about making mistakes or jumping in quickly without all of the information and knowledge needed. If you start feeling like that, remember that the first big real estate mistake I shared on Monday is this: starting later rather than sooner. In other words, in order to be successful you have to get started.
With that in mind, here are four more big real estate mistakes.
More Big Real Estate Mistakes to Avoid:
1. Overanalyzing deals and not pulling the trigger.
Basically, you have to ask, “Does the property work as an investment?” Always remember that if you know a house sells for $100,000, that house should rent for $1200-$1500 a month. If it will do that, then you know you’re looking at a property that works as an investment.
Maybe you’re considering a home that needs some rehab work. Let’s say the house is worth $100,000, but you negotiated down for a purchase price of $85,000. Rehab will cost about $15,000, which means you’re still at $100,000 investment. If you’re making $1200-$1500 per month in rent, then you know the numbers work.
The purchase price and rehab cost added together equals your investment, and your goal is to make 1.2%-1.5% per month in gross rent. These monthly rental return percentages tell you immediately that you’re going to have some positive cash flow. This helps you not overanalyze whether or not something’s a good deal.
So, the secret sauce is this: always start with the numbers. Does the property have positive cash flow? Don’t overanalyze. Don’t be guilty of paralysis by analysis. Make sure you pull the trigger and you’ll have a successful career in real estate investing.
2. Not having contingency clauses.
Contingency clauses are typically things that the seller has to perform or allow with the property. You need these clauses so that you have an out – the ability to not have to follow through with the contract. You must have protections like this. In fact, in any business deal you ever do, you want to know what your outs are. This allows you to protect yourself.
Here are three types of contingency clauses you need:
1. Financing Contingency: A financing contingency is common. You, as the buyer, need to provide a pre-qualified letter. You’ll need to go to your lender – either a mortgage company, bank, or private lender – to get this letter. (This is especially common and necessary when purchasing a personal home and vacation home.)
2. Inspection Contingency: As you move through the contract process, you will want to have a contingency on inspection. The inspection phase is a really good time to be able to renegotiate the price downward if you’re the buyer, especially if you discover something that needs to be improved/fixed.
3. Approval of the Partner Contingency: Another contingency to consider is this, a partner contingency. You say something like, “I’m going to write this contract, but I’m going to do it with the approval of my partner.” Frankly, your partner could be your spouse. Now let’s say you wrote a contract saying you’ll purchase a house for a certain amount of money, but then you discover something not quite right. With this contingency, you can always say, “My partner hasn’t approved that.” You have an out.
3. Paying contractors before they have finished with the rehab.
It’s a good idea to require proof from your contractor that all of his workers have been paid. It sounds simple, but you will avoid future headaches if you require this documentation up front.
Another tip for working with contractors is that the final payment – the last 10 or 20% that you owe on the contract – should not be released until all of the proper government inspections have happened.
I’ve seen it happen many times where a project has not been finished properly, the investor pays ahead of time, but the inspector comes back and wants more work done. Just be sure that anytime you write a contract, you always tie it to approval from whatever municipality matters for the area you’re in.
4. Failing to prequalify tenants.
New landlords often don’t understand some of the processes that tenants must go through. There are a couple of things that must be done to prequalify your tenants.
First, run a credit check. Run a normal credit check which means you look at their credit score and what their history has been. If their credit score has been 600+, that’s a good place to be for low-to-medium income properties. If you get into more higher-end, luxury properties, you want to be in the 680+ range.
Second, get a criminal check. With this you’re looking primarily for any kind of drug use or drug manufacturing. Be aware, one of the greatest problems with rental properties is people who rent them for meth labs.
Third, go see where they live now. If a tenant comes to you and you’re not sure about them, the best thing to do is go see where they live. Visit them unexpectedly at their current place of residence. Knock on the door, and look around at their house and their yard. Look to see how nicely they keep things. If they didn’t know you were coming and they keep a tidy home, then they are going to care for your property. Now, obviously you’re not looking for perfection. But this step will save you many headaches in the future!
Well, this wraps up our two-day series on BIG real estate mistakes. Do you have questions about real estate investing? Ask in the comments section. I’ll do my best to respond to your questions.
And, if you’re a newbie investor or if you’ve been in the business for years, consider attending my upcoming Real Estate Mastery Workshop! You’ll leave with actionable information to become a successful real estate investor. Plus, this event is a great place for networking with other investors. I’ve seen some amazing things happen at these workshops and I’d love for you to be a part of the next one in October!