13 Real Estate Investment Tips That Can Actually Hurt Your Savings

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Real estate is often considered a surefire way to build your wealth, but it also comes with its own set of risks that will wipe you out if you aren’t careful. In truth, most people jump into real estate with the hope of fast profits, but mistakes can be expensive. Even the most well prepared of investors can be caught off guard by the complexities of the market and hidden costs, leading to setbacks, not gains.

In this post, we will learn about 13 commonly recommended real estate investment tips that seem helpful, when in reality they could end up costing you.

Following Trends Blindly

It feels like a good idea to put your money into ‘trendy’ real estate markets, but trends come and go. Today’s “hot” neighborhood can cool off in a few years, particularly if it was overhyped. Property values can die down too when the hype does. More likely, your savings are safer when you invest based on long term stability, rather than short term trends.

Ignoring the Property Management Fees

"22 Common Gripes Homeowners Have with HOAs" — Image Credit: Pikwizard

For many investors, they overlook the cost of property management assuming they can handle everything themselves. However, it is easy for the burden of tenant management, repairs, and maintenance to get out of control. Charging about 10 percent of rental income, professional property management can devour your profit margins. You might think skipping this cost up front is thrifty, but if you can’t keep up, it will strain your time and resources.

Underestimating Time Commitment

Costly Air Conditioning Mistakes That Are Draining Your Wallet — Photo Credit: LasVegasHVAC’/Flickr

Real estate is always touted as “passive income,” but anyone who has managed it knows better. Real estate can quickly become a second job between tenants, repairs and paperwork. If you don’t factor in the time commitment, you may have to offload properties in a hurry, at a loss, or worse, simply lose track of finances and have a budget leak.

Ignoring Research on Local Markets

The location of a property is what the value of a property largely depends on, but some investors fail to explore the local market. Job growth, neighborhood reputation, crime rates, and much more can make or break your investment. According to Investopedia, properties in good locations appreciate more. If you ignore this research, you may buy into a market that does not appreciate, or even depreciates, resulting in smaller returns, and smaller savings.

High – Leverage Loans Going All In

Using High-interest Loans — Image Credit: Raten-Kauf / Pixabay

Real estate can be sweet with other people’s money, but money borrowed at high leverage means high monthly payments and lots of risk. If the market shifts or your rental income fluctuates a bit, you can find yourself in a tight spot with over leveraging. Borrowing a little leverage is helpful, but not borrowing to the max can drain your cash flow to negative, and it can dig deep into your savings to cover expenses.

Skipping a Professional Inspection

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There are some investors happy to cut a few corners and not do a professional inspection before buying. You save a few hundred bucks upfront with this shortcut, but hidden issues with this rookie mistake can turn that into thousands of dollars in repair costs. Without an expert inspection, you may miss huge structural or plumbing problems that will haunt you financially for years to come.

High Appreciation Rates

It’s so easy to believe that property values are only going one way — up. In general, the housing market does rise, but it doesn’t always rise that much faster as some investors expect. High appreciation is not a safe bet when the market is down. If the market stalls or drops, you will likely end up left with a property for which you’re not getting the returns you were hoping for.

Underestimating Maintenance Costs

Outrageous Oops Moments That Ruined People's Homes — Image Credit: Pikwizard.com

Real estate investment doesn’t stop with the purchase. Maintenance never ends. From a leaky faucet to roof repairs, maintenance is a never ending cost for new investors. According to a HomeAdvisor report, homeowners spend an average of over $7,000 a year on unexpected repairs. If you ignore these maintenance expenses, you’re more likely to dip into your savings more often than you would like.

Ignoring Property Taxes and Insurance Rates

Property taxes and insurance can be just as important as the mortgage payment and many investors forget that. If property taxes suddenly go up in an area, your monthly expenses will also shoot up. If your property is in a flood zone, you’ll pay hundreds more a year in insurance premiums, shriveling your profit margin without you even realizing it.

Going It Alone

It can also backfire by trying saving on fees by not hiring professionals, such as real estate agents or lawyers. There’s lots of fine print in real estate transactions that could hurt you if you don’t understand what you’re signing. For instance, one clause overlooked in a contract could have unplanned expenses. Having a trusted advisor work with you can be more than worth the cost in keeping you from costly errors.

Over Renovating for the market

There’s nothing wrong with wanting to have the ‘best house on the block’, but if it ends up being over-renovated, you could end up spending way more than you’ll earn back. If your upgrades put your house well above the price of other homes in the neighborhood, you might not get your investment back when you sell. Improvements are very important, but it’s very important to also balance it with what the market will actually support.

Ignoring the Vacancy Factor

The best rental properties will never be occupied 100% of the time. However, continuous occupancy can be assumed which will result in financial strain if the inevitable vacancy period comes. You want to budget for these gaps so that you’re not taking money out of your savings to cover your mortgage payment when the tenants aren’t between leases.

Buying Property Based on Emotion

It’s easy to let emotions get involved when buying a home or investment property. Maybe that dreamy colonial-style house stole your heart, but your savings won’t thank you if the numbers don’t add up. Buying based on impulse is not a smart investment, it should be based on sound financial reasoning. If you buy something that feels right but isn’t a good investment, you could lose a lot of your savings.

Disclaimer: This list is solely the author’s opinion based on research and publicly available information.