“I bought my first itty-bitty studio after scraping together a few bucks because I needed to live somewhere anyway,” says Barbara Cocoran, founder of The Corcoran Group and judge on Shark Tank. The studio eventually doubled in value. She bought a one-bedroom apartment, then worked her way up to buying her 10-room penthouse in New York City.
“Buying that tiny studio was the most important decision I made because it got me in the game,” Cocoran says.
If you were in Cocoran’s shoes, would you have bought that studio apartment? Would you have kept investing? For her, it turned out to be an excellent move. But in another individual’s specific situation, buying a studio apartment may have been a big investment mistake. It all depends. To help you make wise real estate investment decisions, here are our top four pitfalls to avoid: not making a plan B, forgetting the bigger picture, relying on the wrong people, and conducting insufficient research.
4. Not Making a Plan B
We want our real estate investments to be successful, but as with all investments, the risk is par for the course. Maybe your original plan isn’t benefiting your IRA, or the house you flipped didn’t turn out to be worth as much as you thought it would. Whatever your venture, accept the possibility of failure or slow progress.
Prepare an exit strategy and a plan B from the get-go. If you invest in a property, plan what you’ll do with the funds if it ends up appreciating more than you thought. And if your flipped property ends up being worth less than you’d hoped, maybe create a plan to rent it out. Ultimately, find the right balance between caution and optimism. When you have an exit strategy and a plan B, you can better avoid costly situations and put your money where it has the potential to do the most good.
3. Forgetting the Bigger Picture
Investors may get tunnel vision, focusing too much on the performance of a single investment and forgetting to look at it in the context of their entire portfolio.
“Many investors make mistakes when they don’t understand how real estate fits into their overall strategy that includes diversification, long-term appreciation, liquidity needs and cash flow,” says Brent Weiss, cofounder and chief evangelist of Facet Wealth.
The solution to this is to create a comprehensive, long-term strategy for achieving your financial goals. It doesn’t have to be set in stone, but it should help you understand how individual investments are (or are not) contributing to your ultimate goals. Finding a reputable financial advisor may be the right move to help you gain clarity and guidance for your overall plan.
2. Relying on the Wrong People or Advice
Becoming a confident real estate investor involves a lot of advice and support from others.
“Making an investment in real estate, especially for first-time investors, can be daunting and nerve-wracking,” says Rowena Dasgupta, an agent at Warburg Realty in New York. “Often, people ask friends and family for their opinion more for reassurance than for legitimate guidance.” But if investors take well-meaning but uninformed advice too seriously, the results can be disastrous. On top of that, unreliable contractors and flaky partners also have the power to make or break your real estate investment—but only if you let them.
Only put your trust in those you have vetted thoroughly and who have a lengthy, consistent track record in real estate. Search online reviews and meet potential partners in person, if possible. Relying on wise and experienced professionals may be instrumental in creating a successful investment portfolio.
1. Conducting Insufficient Research
It sounds like a no-brainer: Of course you wouldn’t purchase an investment property without conducting research! But too often, investors get excited early in the process and neglect to research as thoroughly as they should. Without thoroughly understanding everything from expected economic trends to costs of renovation or maintenance, you may end up with a money pit that is hard to sell.
It’s wise to think of real estate investment in terms of the long game. That doesn’t mean you can’t make quick decisions, but it does mean that you should keep your eye on trends and conduct research for a while so that when the time is right to make a decision, you can do so confidently.
“Before I buy anything, I have to look at the potential of the property, how much money and work needs to go into it, the market value and how quickly I expect to turn it around,” says Greg Herlean, founder of Horizon Trust. “You can’t do that by just looking at a house. It takes time.”
When you’re making investment decisions, make sure you make a plan B, keep the big picture in mind, rely on the right people, and conduct sufficient research. Whether investing in student housing is in the cards for you or you want to wait a few years and then purchase a studio apartment, it’s important to make decisions that make sense for you specifically.
Not an offer to buy, nor a solicitation to sell securities. Securities offered through Emerson Equity LLC, Member FINRA, SIPC. Emerson Equity LLC and NBPC are not affiliated. All investing involves risk. Past performance is not indicative of future results. Speak to your tax and/or financial professional prior to investing. Emerson Equity LLC is not affiliated with any other entity identified herein.