Preventing a Bad Real Estate Purchase

Don't make the mistake in the first place

You know ​what to do after making a costly real estate mistake, but how do you prevent it from happening in the first place?

The first step toward becoming a successful real estate investor is—as with most things—educating yourself. I advocate the ​drink from the firehose​ approach to learning. Why? Because real estate is a competitive, ever-changing market. You need to know as much as you can, as fast as you can.

A learning burst won’t get everything down pat at first, but you'll develop a baseline familiarity with the tools of successful real estate investing. Building that foundational knowledge enables a structured, organized method of developing your own approach to investing, which means less odds of making mistakes.

But here’s the thing:

There are a million ways to play the real estate game, which means there are at least a million ways to make a mistake. While this article can’t cover each one of those million ways, if you follow the standards that follow, you’re guaranteed to make fewer mistakes in your future real estate career.

The Broad Look

Investment strategy is an ever-changing thing that depends on the market, your personality, and your network. A book or guru can’t teach you the best, safest strategy for ​you​, which means that a solid understanding of your own goals and processes is the most important step you can take today toward avoiding costly real estate mistakes.

Even though you have to find the right answers for yourself, research and networking will absolutely help. Find a financial advisor who's skilled in real estate investing, talk to others about what they’ve done, get a mentor, and dive into BiggerPockets books and forums.

Consider diversifying across various investments types (single family, land, multi-family, commercial, etc.). Get granular in your approach toward setting a time horizon and understanding appreciation, diversification, equity outlook, cash reserves, and cash flow.

Whatever you think today, your real estate investment strategy will change over time. But spend time mapping out your ideal strategy and be realistic about your risk tolerance. Not you ideal risk tolerance, your real one. If that tolerance is low, don’t forget about ​options like syndication​.

Due Diligence before Due Diligence

When it comes to contracts, avoid leading with your heart or a hunch—great understanding is the best way to great deals.

Investing equations like the 1% Rule are incredibly useful, but they’re still just rules of thumb. So, before you get a home under contract, do​ pre​-due diligence by considering the following:

  • Is there current/pending commercial property or construction that could interfere with the property’s value?
  • Are there any natural cause issues relevant to the area like flood zones, radon exposure, or high termite activity?
  • Why is the home for sale in the first place?
  • Get personal with the surroundings. Are there problematic dynamics that might not show up in census reports like education, government problems, gang activity, or high drug usage rates?
  • What are the overall and granular market trends and demographics? Atlanta is one of today’s hottest emerging real estate markets, but it’s not hot everywhere: in certain areas, values vary immensely between even a quarter mile radius.

Standard Due Diligence

If you proceed with an offer, don’t forget the essentials before going all-in:

  • Cosmetics: what’s new in the house and what must be replaced now or in the near future?
  • Hire a building inspector to assess safety, code, and permit issues
  • Ensure there are no title issues, debts, or code violations.
  • Check zoning and land surveys for any surprises
  • Solidify financing options
  • Get a professional appraisal

Build Your Network

I've said it before: networking is everything in real estate.​ This is a business that thrives on solid, honest connection. Befriend experts, take folks out for coffee, and go to every meeting you can.

Namely, your network should include real estate agents, other investors, a trustworthy inspector, appraiser, general contractor and/or handyman, and relevant attorneys (title, closing, etc.).

Don’t Overpay

Seems obvious, right? But you'd be surprised how many people overpay on real estate investments. Unless you are experienced, highly risk-tolerant, and very, very sure of yourself, avoid betting on guesses. Even if you’ve already put money or time into the property, remember the sunk cost trap: those resources are already gone—no need to throw more after them.

Follow ​basic ground rules for numbers in real estate investing​ and remember the factors we mentioned above. Try for equity gain a​ nd​ cash flow from the start!

Remember Expenses

Most investments—especially if you’re getting your hands dirty—will cost you more in time and money than predicted. Even with all the helpful rules out there, there’s still nothing that incorporates e​ verything​.

Some people make the mistake of forgetting that it’s not ​just​:

Purchase Price + Rehab Costs = All-In Price

(Nope!)

Ultimately, this one's on you. I'd suggest at least six months of cash reserves for your predicted expenses and other surprises. When you’re running the numbers, start off with these factors:

  • General maintenance
  • Lawn care
  • Furnishings and/or staging
  • Monthly bills (gas/electric, water, waste, internet, etc.)
  • Taxes
  • Insurance

Stay Grounded

At the end of the day, mistakes are a necessary evil in just about anything you do. They may sting, but their lessons can be priceless.

The best use of all this advice? Refer to it often to keep yourself grounded. Emotions should never be the leading force in a real estate investment decision. There will always be other opportunities and new ways to level up.

As with any worthwhile endeavor, the key to avoiding costly mistakes boils down to being patient, learning from those who’ve been successful, and continuously pursuing personal and professional growth.

Good luck!