More millionaires have made their fortune through real estate investing than through any other form. Despite this, the path to riches in real estate investing is strewn with investors who have failed, been forced into bankruptcy or lost everything. In order to improve your chance of success as a real estate investor, you must understand these potential pitfalls so you can avoid them.

Declining Neighborhood
In ever town there are areas of the city that increase in value while there are areas that decline in value. Successful real estate investors understand their market and avoid the declining areas of the city. It may be tempting to purchase a property that is 20-50% below market value but avoid the temptation.

Areas decline because owners stop caring for their property, increased crime rates, or a declining school system. If current property owners do not take pride in the place they live then the value of that property will most likely decline over time. Avoid these areas.

Property Taxes
When real estate investors crunch the numbers to decide whether or not to purchase a property, they will usually the principal and interest payment of their mortgage. They fail to account for the annual property tax bill. Investors that fail to account for property taxes will be in for a rude awakening when they receive their tax bill at the end of the year. Most investors will panic because they do not have the necessary funds to pay for the bill.

Even if they do calculate for taxes, they may be basing their calculation on last year’s tax value. That value was probably based on an owner occupied tax rate but investors are charged much more for taxes since they do not have the exemption that owner-occupied properties realize. Your tax bill could easily be 50% to 100% more than the bill the seller paid.

Over-renovating
New investors will try to “trick out” their rental property as they do the rehab. If comparable properties have composite countertops, you will not receive much more in rent by installing granite countertops. Spending more for these extra touches will be cost that you may never be able to recoup as you probably will not be able to charge more for rent when measured with comparable properties.

Successful landlords are able to manage their expenses. They do this by not over-renovating their properties. The primary desire of any investor is to quickly renovate a property and get it ready to be rented.

Avoiding these pitfalls will put you on the path to riches as a real estate investor.

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Filed under: Real Estate Investing

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