Five Mistakes Made by Novice Investors

 

Green investors get a crash course on what not to do.

 

HONOLULU ADVERTISER   October 28, 2007

 

BY LISA SCONTRAS

 

Custom Publishing Group

 

Housing market woes — even the possibility of lower prices — have aspiring real estate investors sniffing out opportunities from Waianae to Waimanalo.

Ian Farrell, Realtor Associate with Prudential Locations, says that while there are a lot of people who would like to invest in real estate, many of them simply don’t know where to start.

 

“They’re asking the questions,” says Farrell, who has helped dozens of people make their first investment purchase. “But they may not have much of a plan.”

 

The plan, he says, should include coming up with specific criteria for a good investment first and then looking for that property instead of looking at random properties and hoping that one of them will end up making a good investment.

 

Successful first-timers realize there is a mindset that seasoned investors adhere to — one that is strictly business. Here are some of the common mistakes the novice investor should avoid:

 

Mistake #1:

 

Farrell says the biggest mistake green investors tend to make is over-analyzing the process.

 

“Some spend thousands of dollars to attend a real estate seminar and then never buy a piece of real estate,” he says. “Or they focus a lot of effort on finding something that will make an instant positive cash flow — not looking at what will happen five years down the road, or 10.”

 

Veteran investors may find that running at a small loss in the beginning may be a benefit — providing a tax write off. When rents go up in five to 10 years, the property will provide a tremendous cash flow.

 

Mistake #2:

 

According to Farrell, the next most common mistake made by beginners is getting emotional about the decisions. Typically, they’ll look for a property they would want to live in or stay.

 

“I would never stay in any of the rental properties I own,” he says.

 

It really needs to be all about the numbers. And on this Island, he says when you compare property by its square footage, the dollar-for-dollar best deal may be a studio condo in Waikiki, providing the highest rent for the lowest price and with the lowest maintenance fee, says Farrell.

 

Condos in general are what he prefers over single family homes for several reasons. “Condos have money in reserves for deferred maintenance,” he says. “If you need a new roof, there are cash reserves for that. In a single-family home, that cost falls on the owner. People forget that. Also, homeowners associations get group rates on things like insurance.”

 

Mistake #3:

 

Not treating investing as a business is the third most common mistake.

 

You need to be realistic about what the income will be and what the expenses will be. Crunch all the numbers.

 

Farrell suggests that it is your job, as the “president” of the business, to secure the property at the best rate. But don’t try to run the entire business yourself. Your Realtor can help you secure the best property, you’ll need an accountant to help you with the taxes, and a property manager to help you to manage the day-to-day business. You should not try and do all these on your own. Get professionals to work for you.

 

“My goal for my investors is that it doesn’t affect their day job,” he says. “Property management is a day job, being a Realtor is a day job. Let the people who do that for a living worry about those things.”

 

Mistake #4:

 

Investors just starting out tend to sweat the small stuff.

 

“There are going to be expenses, such as vacancies and air conditioners that break,” warns Farrell. “But in time, your assets will grow.”

 

Mistake #5:

 

Inexperienced investors tend to be under insured.

 

Insure your assets.

 

“Liability and flood insurance — even more than your home because you want this to be worry free,” he emphasizes.

 

Farrell, who helps first-timer investors develop their own personal strategy, says step one to being successful is figuring out how to come up with your down payment. Funds can come from personal savings, diversifying other assets such as stocks, or using equity from another home.

 

“That’s my personal favorite,” he says. “Use equity to make equity and watch it grow twice as fast.”

 

 

 

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