How to avoid common pitfalls in real estate investing

Real Estate Weekly, Nov 14, 2007 by Josh Slaybaugh

There are great real estate deals to be had for the strategic investor, but it's crucial to examine your goals and financial reality when considering an investment. Here are some tips to help you get off on the right foot, as well as mistakes to avoid.

1. Have a plan

It is astonishing the number of investors who jump into a long-term commitment without taking the time to determine what they want from a property. There's never a good reason to purchase real estate without having a clear understanding of how it can be used to your financial benefit.

This advice is particularly important when considering a 1031 exchange. Investors only have 45 days to identify a new investment property. Those who wait until the last minute often don't find their next purchase, leaving them with a large tax liability--typically 21 to 24 percent. That's a big hit to take, no matter the dollar amount.

2. Build a team

There are a number of professionals an investor should consult before completing a real estate transaction. If you're serious about investing, you need an advisor to navigate all the different properties and investment options out there. At the very least, you need a team to cover the basics, to look at the physical condition of the property and to determine if it matches your investment strategy.

3. Do Your Homework

Fully evaluate not just the building, but the neighborhood it's in. Look at the demographic data for the area and physically inspect the property. Get an appraisal.

Shop around for the best deal if you're considering carrying debt. Don't jump in.

4. Create Multiple Exit Strategies

It's important to prepare for market changes, especially if you're hoping to turn around a property in a matter of weeks or months. Set realistic expectations. Know what type of improvements will increase the property's worth and understand who the buyers are in your area. Consider hiring a good advisor who can offer solutions to common problems.

Just as there are basic requirements to real estate investing, there are mistakes to avoid at all costs. Taking a realistic approach, and in some cases preparing for the worst-case scenario, can help you avoid disappointment or financial disaster.

Here are the don'ts:

1. Don't Expect to Get Rich Quick

There will always be a risk and reward balance in any investment. If you want to see your money grow rapidly, be prepared to take a few hits along the way.

Real estate has proven to be a powerful income generator and wealth builder, but typically only in the long term. Give your investment time to grow. Becoming impatient can mean less stability in your financial portfolio and a potential loss on your investment.

2. Don't Assume You've Found the Best Deal

You'll make the most on your investment by purchasing the right property at the right time for the right price.

Advisors have access to properties that are offmarket and will never be listed in traditional press. A property that isn't advertised to a large audience is going to be your best bet for investing. You'll get a better deal by not competing with a large number of bidders, and a lower buying price will give you a greater return on the investment.

3. Don't Duck Due Diligence

You can't see a property once and know what you're in for. There are many things to consider before purchasing a property. Making a profit is just the tip of the iceberg.

Due diligence can't be done overnight. Many investors fail before they ever get a chance to succeed because they lack the patience and knowledge to really investigate a potential investment. If you fast track the sale and skimp on research, you're looking at losing not just profit, but any money you put into the purchase.

4. Don't Expect Perfection

Investing demands caution. Understand the worstcase scenario and be prepared to deal with it.

To succeed, understand what can go wrong and prepare for it. You might not be able to lease a property as quickly as you'd like, or for the price you had in mind. Create sufficient reserves. Caution and risk management will give you the certainty of riding out ill market conditions and weathering any crisis.

The real estate market has historically operated in peak and valley cycles.

However, the truly successful investor can navigate through any ups and downs. Know your do's and don'ts and you too could be one of the investors who prospers in all investment climates.

By JOSH SLAYBAUGH, PRESIDENT, TRADE UP 1031