3 Huge Real Estate Deal Flaws that are Often Overlooked by Investors
No investor is perfect. No matter how long you’ve been in the real estate investment industry, there are still mistakes that you’re prone to make. However, one of the most effective ways to find success in the competitive world of real estate investing is to minimize those mistakes. When you know where mistakes generally stem from, you can put yourself in a position to avoid them.
While mistakes are universal, there are some that are simply more common than others. Learning from your own mistakes is important. However, it’s equally important that you learn from the mistakes of other investors. Even the most successful real estate investors have made mistakes. The key is to learn from them, make the necessary changes, and turn those mistakes into learning experiences.
Mistake #1: Making Assumptions About Business Plans
Depending on the type of real estate investment opportunity that you choose, you may be given the chance to review a business plan. For instance, if you opt to invest in real estate syndications, you should always request a copy of the business plan, as this ensures that you’re working with an investment firm whose strategies, goals, and principles align with your own.
Within these business plans, you’ll often see beautiful photos of properties that the syndication owns and operates. However, some syndications aren’t as forthcoming about the time and money that was required to add value to these investment properties.
Don’t just assume that you’re working with a syndicate that quickly produces properties that look like the ones in the glossy photos that you’re presented with early on. Actively ask questions about how many units the firm can improve within a given period. If you assume that things are going to quickly look like they do in the finished product, you may find yourself disappointed with how quickly you recover your initial investment and start turning a personal profit.
Mistake #2: Being Too Aggressive with Exit CAP Rates
If you’re not familiar with the world of multifamily investing, you may not be familiar with the term “CAP rate.” A property’s CAP rate simply refers to the expected rate of return on a multifamily housing unit. For instance, if you’re considering an investment in a large apartment complex, you should review the property’s existing CAP rate while also learning more about what the property’s projected CAP rates are. Is there a plan in place to make the property more profitable? Have the CAP rates of the subject property been trending downward? All of those questions are a crucial part of doing your due diligence on a property.
An exit CAP rate is the expected income that will be generated for the year that the property is liquidated. Most investment firms and individual investors purchase multifamily properties with the intent of holding onto them for a considerable amount of time. However, liquidation is usually the end goal for any multifamily property.
Most investors are risk-averse, which means you want to take a conservative approach to exit CAP rates. When you take a conservative approach, it helps ensure that you’re getting out of the investment when it’s value is trending downward instead of upward.
Mistake #3: Making Aggressive Assumptions About Income and Expenses
Finally, a large part of success as a real estate investor is about having realistic expectations about the income and the expenses associated with any property investment. If you review the past performance of a property and it has consistently generated $250,000 a year, you shouldn’t assume that the property is going to quadruple in value the year that you invest. Those are unrealistic income expectations.
Similarly, you should have realistic expectations about expenses. If a property has required $150,000 per year in operating expenses, don’t assume that the operating expense is going to drop by 50% because of your investment.
Making faulty assumptions about a property sets you up to be disappointed with the results. When you’re developing your strategy and setting your personal goals, it’s important to be realistic.
You will never achieve perfection as a real estate investor. However, you can take the steps to protect yourself from these mistakes and put yourself in a better position to find lasting success.