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How to Avoid Common Mistakes in Real Estate Investing

Updated on May 17, 2013

Investment property

Condos are a great investment property.
Condos are a great investment property. | Source

Net Operating Income

Apply this formula to avoid making a negative cash flow situation.

Add these monthly numbers:

Potential income - vacancy rate = Net Potential Income

Then:

Fixed expenses + variable expenses + reserves for replacements = Net operating expenses

Then calculate:

Net Potential Income - Net Operating Expenses = Net Operating Income

If this number is a negative, you don't have a negative cash flow, and don't make the purchase.

If this number is a positive and you have a loan on the property, then calculate:

Debt Service - NOI=

If this number is a positive, this is a positive cash flow and worth of consideration!

What not to do when putting your money in the game.

May 17, 2013 _ With mortgage rate so low and real estate prices down, investing now may be a great idea.

Real estate can be a very lucrative investment opportunity when simple bottom-line rules are followed. Skip the steps and you may loose your shirt.

Common mistakes in real estate investments:

  1. Buying high. Over improving. Selling low. Investors buy property, whether land or structures, at the lowest price they can get and compared to other like property on the market. Most property's value can be dramatically increased with inexpensive improvement. Fresh paint, pretty garden flowers, new carpet are upfront expenses that can raise the sale price of any building. And if the property is "flipped" quickly, then your profit margin can be even better. Reverse these steps and you will have a money pits that stays on the market for years, costing you thousands.
  2. Negative Cash Flow. Even in the case of raw land, investment real estate always has the potential of creating an income. The trick is to create a stream of income that out paces the stream of expenses associated with the property. If at the end of the month, the income is less than the expenses, you have negative cash flow that is draining your bank account.
  3. Bad location, location, location. The right location is gold. Buy property in the wrong location and you won't make money. Don't believe the seller who tells you that their house next to the railroad tracks is always rented, or the agent who tells you that commercial building is on a high traffic road. Do you homework and get the facts about where the property is located.
  4. No cash for improvements. Whether you are becoming a landlord or buying unimproved land, you will need to have cash in the bank after the purchase. You need enough to pay for repairs, property taxes, a mortgage payment when the property is vacant, and so on. If you don't have a cushion of cash, then you need to rethink investing this way.

Though real estate investments is considered passive income, making money takes hard work. Landlords are responsible to find paying tenants, keeping up with repairs and maintenance, answering Sunday calls when something doesn't work, paying the taxes, mortgages and so on. Those who are not prepared can easily loose their shirts.

Evaluate property carefully. Don't believe anyone's assessment that the potential purchase is a "great deal." Instead, gather the facts. How does the property fit in the location? Will it be easy to rent out? Does it need a lot of work? If so, can you do it?

Real estate has stood the test of time for decades as a great investment when the right variables come together.


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