5 Traps to Avoid for New Real Estate Investors
5 Traps to Avoid for New Real Estate Investors
5 TRAPS NEW REAL ESTATE INVESTORS MAKE
The common trap/mistake that new investor's fall into when it comes to real estate is the notion that real estate goes up in value irrespective of what price is paid to acquire it, this may have been generally true in the recent past, where money was easily borrowed and governments were providing first home buyers with large non refundable grants to buy their first home. This created an artificial market where demand exceeded supply forcing property values up to unsustainable highs, everyone and any one seemed to be getting wealthy by investing in real estate.
So hot was the market, that new derivative real estate markets were created exploiting this phenomenon, such as wraps, flipping, Reno's, options (which were once only the domain of sophisticated investors, were now being taught to ordinary mums and dads by self acclaimed Gurus. Something eventually had to break, the majority of these derivatives were created during the boom of 2000 to 2007 and when you investigate the people and companies pushing these derivatives you will discover they all came to life around 2001 and 2002, and most will slowly go out of business and disappear within the next couple of years, unfortunately the average investor will be hurt and hurt badly.
This is already occurring with the global financial melt down and the massive collapses of sub prime lenders and highly regarded companies such as Lehman brothers, the fall in real estate prices especially in the residential sector and the high rise in foreclosure rates have put a much different frame on what once was a market where the nave and unsophisticated investors stood a good chance of increasing their wealth by investing in residential real estate, with little or no knowledge, and with out following any sound investment principles.
So what caused new real estate investors and experienced ones make mistakes?
The following 5 mistakes are made by new investors,
1. Lack of Knowledge,
New investors do not have the knowledge required to invest successfully in a sustained fashion in real estate, they tend to follow the crowd and jump in because everyone is doing it so it must be a good idea, or my friends are doing it and making money so it must be ok, or the news media hypes up the market by having a single mom with four young kids and no real income source suddenly telling the world how she has become a property millionaire.
2. Easily led and influenced,
New real estate investors are easily led and never tend to check the information they are given, often blindly trusting the sale person or their adviser to do it correctly.
3. Don't Get Emotionally involved,
Once an investor gets emotionally involved in an investment and when investing in real estate this is a major problem for new and some experienced investors, this mistake takes away rational thought replacing it with irrational thinking, which is never a good strategy when it comes to any form of investing.
4. Buying emotion rather than a business,
This mistake will cost the investor dearly when the market turns from an emotion driven irrational market to a market we are experiencing at the moment, where lenders are looking harder at the investment before advancing any funds, investors that look at there real estate investment as a business will survive any market condition, as the principles they have used to invest are sound.
5. Failing to seek independent qualified advice,
New investors fail to get advice as they think they know it all, after all how hard can investing in real estate be right? Property values keep going up and people will want some place to live. Wrong, this type of thinking will send you broke in the current climate, seek out good independent advice and be prepared to pay for good advice as it won't come for free, it will be well worth the expense.
I teach all new real estate investors and experienced ones as well to always have an independent valuation done of the property you are buying and make it a condition of the contract, this way should the value be less than what you have agreed to pay for it you can withdraw from the sale or renegotiate a lower price, this keeps you in control of the game.
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