Real Estate Success: Property Costs
November 20, 2013
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Finding Real Estate Success: Paying Too Much for a Property
This Rich Dad Education investing series focuses on the common traits of successful students in addition to the mistakes that unsuccessful students make. The goal of this series is to help provide a guide to emulate the traits of successful students while simultaneously helping new students avoid the pitfalls that can occur to those starting their real estate investing career. One of the pitfalls that you want to avoid is one of the biggest mistakes new real estate investors make — paying too much for a property.
It is easy to understand why even new investors who are properly trained pay too much for a property. After acquiring the proper training, there is a tremendous amount of excitement at the prospect of completing one’s first deal. After spending time becoming familiar with the local market, new investors who overcome whatever fear they have make their first offer on a property. Unfortunately, most offers are not successful and the new investor thus is forced to find another property and make another offer. This too is unlikely to be successful. Fueled with enthusiasm and a desire to get their new real estate career rolling, it is very tempting for a new real estate investor to start increasing the number of offers in order to get a deal done.
Perhaps the new real estate investor gets a counteroffer that is above their parameters for purchasing the property. It is very tempting for the inexperienced investor to adjust their numbers to find a way to make the deal work. This leaves them very little room for error, but they find a way to convince themselves that they can make it work. Their impatience, coupled with their enthusiasm to make their first deal, leaves them vulnerable to paying too much for the property.
Other Mistakes New Investors Make in Purchasing Their First Property
Aside from the pitfalls of unbridled enthusiasm and impatience, new investors can make mistakes depending on the exit strategy they are using. Many new investors choose rehabbing as their first real estate strategy to master. In analyzing a property, a new investor needs to determine what they can sell the property for and account for all expenses. These include acquisition costs, holding costs, repair costs, selling costs, a discounted sales price, and the profit they hope to make. Without the proper training, it is very easy for new investors to make mistakes in these calculations. Even with the right training, many impatient new investors get creative in their calculations to make the deal work.
New investors who are purchasing a property for rental in order to produce cash flow often make the mistake of calculating what the home might resell for instead of properly calculating the cash flow it will produce. New investors can also forget to factor in a realistic vacancy factor in their exuberance to get a new deal done.
Every new investor wants to get that first successful deal done. It is an exciting time that can create momentum that lasts an entire investing career. The key phrase here is successful deal. Completing an unsuccessful deal can have the opposite effect, leaving a new real estate investor frustrated and unmotivated to put in the work to complete that next deal. If you follow your training and demonstrate patience, then you will eventually complete that first deal and turn a nice profit in the process.