Avoid the 5 Biggest Real Estate Investing Mistakes

By Emily Southey | 10 minute read

Investing in real estate can be tricky, especially if you’ve never done it before. Certain mistakes can have serious consequences, which is why it’s important to learn what the most common mistakes are and how to avoid them.

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The Risks of Real Estate Investing

Before we dive into some of the most common mistakes real estate investors make, we are going to outline the main risks that come with real estate investing. Every type of investment comes with risk. The key is being aware of these risks, as awareness can help you make smart investment decisions. Some of the biggest risks of real estate investing are as follows:

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• Unpredictability: The real estate market is unpredictable, just as the stock market is unpredictable. Therefore, any time you purchase a piece of real estate, you are not guaranteed to make a profit. The market could take a turn and you could end up selling your property for less than you originally paid. That said, the real estate market is generally less volatile than the stock market, and if you adopt a “buy and hold” strategy, most of the time you will turn a profit.
• Bad location: Another big risk of real estate investing is choosing a bad location. Location is everything when it comes to choosing which property to invest in. Unfortunately, it’s not always possible to know what a good location is. For example, a neighbourhood that’s been deemed “up and coming” might seem like the ideal choice, but if a major development project falls through, it could end up as an undesirable area, making it hard for you to find a tenant or resell the property.
• No liquidity: One final risk of real estate investments is that they lack liquidity. Selling a piece of real estate is not necessarily a quick or easy process. Therefore, if an emergency happened, it could take months to gain access to the cash, and if you were forced to sell under unexpected circumstances, you may end up selling the property at a loss. Therefore, the lack of liquidity in real estate is a major risk, especially if you stretched yourself thin to purchase the investment property in the first place.

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The Five Biggest Mistakes in Real Estate Investing and How to Avoid Them

Now that you know about the risks, let’s move on to the biggest mistakes a real estate investor can make. Below, we break down five real estate investing mistakes and how to avoid them.

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Mistake #1: Overpaying for a property

The first mistake real estate investors make is overpaying for a property. In fact, generally speaking, spending more than you make on a rental property is a no-no. After all, the goal of real estate investing is to buy low and sell high. If you buy high, your odds of turning a profit when you sell are dramatically reduced. The result? You could end up earning little to nothing on your investment. Overpaying for a property isn’t just about the purchase price, though it certainly can relate to that if you end up in a bidding war you refuse to back out of. It also relates to the money spent on the home. For example, in the case of a rental property, negative cash flows can occur when you spend more on the expenses associated with the property (for example, taxes, insurance, maintenance) than you earn from the rent collected from tenants. This can happen if you charge a rent price that’s too low, have particularly high financing costs on a loan, or are dealing with high vacancy rates. Overall, overpaying and overspending on an investment property are two traps that are best avoided.

How to Avoid

To avoid overpaying for a property, make sure you spend time researching the neighbourhood to understand what properties are worth before investing. Work with a REALTOR® to draft a comprehensive comparative market analysis that includes everything from average sale prices to average rent prices and vacancy rates.

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Mistake #2: Not doing enough research

The next mistake real estate investors often make is failing to do the proper research. Before buying a property, whether it’s a primary residence or an investment property, ample research is required. Research is the only way to understand the current market conditions, which is crucial to helping you determine the best property to buy and what price point to pay for it. If you plan on renting your investment property out, the right research can also help you understand the rental potential of the property and how to prepare for tenants. If you don’t do enough research before buying, you could end up making rookie mistakes like buying in the wrong neighbourhood or overpaying for a property, all of which could translate to losing money on your investment.

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How to Avoid

Avoid not doing enough research by dedicating as much time as possible to research before you start hunting for properties. Make sure you have a firm grasp of market conditions (that is, is it a buyer’s market or a seller’s market?) before diving in. Some of the key signs of a buyer’s market are homes taking longer to sell, sellers lowering their listing prices, and more properties for sale than there are buyers. Meanwhile, some of the most common signs of a seller’s market are homes selling quickly, homes selling over asking, and sellers being picky about who buys their homes. If you don’t have time to allocate to this, contact an experienced REALTOR® for help.

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Mistake #3: Making decisions based on emotions

Emotions often run high when making a major purchase like real estate. But as an investor, it’s critical that you don’t let emotion dictate your decisions. Emotional decision-making might cause you to ignore major red flags, which can lead to overpaying for a property and ultimately hurt your bottom line. Try to avoid getting emotionally attached to any one property and forget about that “fear of missing out” (FOMO) feeling, as rushing into a property sale because of FOMO almost always leaves investors with more regret than if they took their time.

How to Avoid

To avoid making decisions based on emotion, consult with a real estate professional, such as a veteran investor, who has experience in the industry. Getting an expert perspective on the property can help you see the facts more clearly. We also recommend asking yourself some basic questions, such as:

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• Is my decision based on fear or greed?
• Is this investment over the budget I’ve established?
• Am I considering this property from all perspectives?
• What are the experts or people I trust saying about my possible investment?
• Do I feel emotionally attached to the property? 

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Mistake #4: Underestimating the cost of repairs

The next common mistake among real estate investors is underestimating the cost of repairs. Many investors fail to realize the extent of the repairs needed and how much they will cost until it’s too late. The result? They end up losing money on their investment because repairs and renovations cost way more than they budgeted for.  

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How to Avoid

Before buying a property, hire a house inspector to examine it (pay for the most comprehensive inspection they offer). From there, carefully review the inspection report and understand what repairs or renovations that house needs in order for you to rent it out or flip it and sell it. Make a list of the work that needs to be done and consult with multiple contractors in the area. Ask them to visit the property and give you a quote. This will give you a realistic estimate of the repair costs (and we always suggest budgeting a minimum of 10% more than what the contractor tells you). 

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Mistake #5: Going it alone

The last trap real estate investors may fall into is trying to go it alone. Real estate investing is not a solo endeavour. Even if you are the only one funding your investment property, you should be asking for help along the way, especially if you’re a beginner. This means consulting with everyone from REALTORS®, property managers, accountants, stagers, and other investors to mortgage brokers, contractors, property inspectors, real estate lawyers, and more. Ultimately, it takes a village to buy an investment property — and trying to go it alone will only lead to trouble. Your odds of making a mistake shoot right up if you try to do everything alone. 

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How to Avoid

Successful real estate investors understand that real estate investing is a team sport. Rather than trying to do everything yourself, network and build a team of professionals who can help you with the various aspects of real estate investing. Having a winning team around you can make or break an investment. We recommend assembling a network that consists of lawyers, REALTORS®, contractors, accountants, appraisers/inspectors, and more. Such a team can help you avoid all kinds of real estate investing mistakes, including those listed above.