Top 10 Real Estate Investor Mistakes | Zillow Blog

Posted: 13 Jun 2014 11:59 AM PDT

Many people have learned that Investing in real estate is not as easy as it seems. At least that is true for investors trying to get a fair deal. For those of us who have been investing for years, and learned many hard and expensive lessons, here are issues you should think through, understand, and consider before jumping into the real estate investing arena. These are in no particular order, since an individual would be smart to read and think through each and every "lesson learned" in the list.

1. Not penciling out your real estate deal

Money down the drain This describes about 80 percent or more of real estate investors.

They don't take the time to put pencil to paper and make sure that the rental revenue from the property will be more than all the property expenses – and leave some monies left over to return to one's bank account.

A negative cash flow property will virtually guarantee a measly – at best – investment return on your money.

2. Not penciling out your deal with conservative numbers

For those few fortunate ones who do know how to pencil out a deal, many use unrealistic numbers. They overestimate rental income, underestimate the vacancy, then underestimate the expenses associated with operating a property. That turns into low or negative investment returns for the property owner.

3. Getting renovation costs wrong

Most buyers have little idea how much it costs to renovate a property. They listen to the home inspector, their real estate agent, and just throw out a number like $25,000 for everything. Then they start getting bids for the work and quickly see it will actually cost $80,000 for everything. Word to the wise: Always do a lot of homework and be very conservative in your renovation budget estimates.

4. Underestimating renovation time

Additionally, inexperienced investors believe a good renovation can be done in 30 days, or 60 days. Many times it takes much longer to finish these projects than originally estimated. As a real estate buyer, you should talk to others who are experienced to get a realistic expectation of the time involved in a property rehabilitation.

5. Thinking something can only cost 'that much'

It never does, it always costs more; many times much much more. So whatever the expense, renovation, service, contract, capital item, etc; chances are it will cost more than you think.

6. Thinking that stocks, bonds and real estate are all comparable investments

People often say they want to buy real estate to get better returns than their stock, bond or bank account can provide. Real estate is a unique asset that comes with clogged toilets, challenging tenants, nebbish neighbors, etc. It's not an asset where you can invest and just look at an account statement every few months like you could with a stock, mutual fund or bond. Owning rental properties is a business, it can be time consuming and stressful. Make sure that makes sense for you before you buy.

7. Thinking it's a "turn-key" real estate deal

Earning money with almost no work on the investor's part? Never! Not going to happen!

8. Believing that flipping properties is investing

Flipping is "speculating" for most real estate buyers. Unfortunately, most lose money. Sure, it looks easy on TV and those shows are fascinating! I personally enjoy watching them; but they are not realistic. Not everything you see on TV or the Internet is true you know…..

9. Thinking that real estate is low risk

There are all kinds of risk issues that come along with owning real estate. Many an investor can mitigate and/or remove some of those with prudent behavior and the proper due diligence. Most investors do not do any of that, leaving them exposed to a myriad of items and issues that can and sometimes do become financially painful.

10. Believing what others say about their "profitable" real estate investing acumen

There is also no way to verify what someone else is telling you about how they did on their real estate investments – unless they show you their tax returns and credit report. But since people love to boast, we often only hear about the winners, not the losers. Many times the statements from those supposed "winners" are embellished with questionable claims. Be careful, do your own homework, but verify your own conclusions.

Those are many mistakes that investors can make. Some are very challenging to mitigate. Experience will teach you a multitude of lessons over your real estate investing career. Just try to avoid the big expensive ones that could clobber you; and end your investing career before it even gets off the ground.

Related:

Leonard Baron, MBA, is America's Real Estate Professor®. His unbiased, neutral and inexpensive "Real Estate Ownership, Investment and Due Diligence 101" textbook teaches real estate owners how to make smart and safe purchase decisions. He is a past lecturer at San Diego State University and teaches continuing education to California real estate agents at The Career Compass.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

ETFs: The New Way to Invest in Real Estate - AOL Real Estate

Posted: 10 Jun 2014 10:31 PM PDT

ShutterstockWhen the housing bust hit, investors bought thousands of single-family homes -- the deals were too good to pass up. By Joanne Cleaver

Is investing in an exchange-traded fund a smart way to invest in real estate? Housing has been a surprisingly unpredictable sector since the great real estate crash of 2007. As a result, new ways to invest in real estate have emerged, with housing-related ETFs being a prime example.

Until the housing bust, most publicly traded real estate investment vehicles were real estate investment trusts, or REITs, explains Charles Sizemore, chief investment officer of Dallas-based Sizemore Capital Management. REITs were almost always comprised of large buildings such as shopping centers, apartment buildings and office buildings, or baskets of nearly identical holdings

"The game plan is to rent them until the market heals, then sell them."

such as public storage units. The REIT structure injected liquidity (the ability to easily buy and sell) into real estate, a notoriously illiquid category. In fact, REITs are easy to buy into, requiring only a few hundred dollars.

But as Sizemore explains, REITs also introduced market factors. Although the value of a REIT should track very closely with the value of the actual real estate it owns, the current value of REIT shares is actually set by market demand.

[Read: Don't Count Small Caps Out of Your Portfolio.]

When the housing bust hit, investors saw a chance to buy thousands of single-family homes. Until then, houses had been too small, too individual and too much work to manage for REITs to bother with, but the deals were too good pass up. Sizemore and other market analysts agree that without hedge funds and private investors creating portfolios of single-family homes (most of them foreclosures or nearly so), home values would have dropped even further.

In 2013, investors comprised 20 percent of single-family home sales tracked by the National Association of Realtors. "The game plan is to rent them until the market heals, then sell them," Sizemore says. One factor that is still evolving: how all those houses will be sold with minimal cost. Currently, institutional investors must continue to work with a patchwork of local agents and brokers, negotiating commissions as they go -- hardly a setup for smooth, cost-effective exits that maximize investor return.

Meanwhile, ETFs were gaining popularity due to their low-cost structure and tax advantages for some investors, and the inevitable mashup of ETFs and REITs occurred.

[Read: Everything You Need to Know About Exchange-Traded Funds.]

Just as the invention of REITs put one layer of distance between the value of the actual property and the market value of the investment, the ETF introduced yet another layer of market dynamics. The value of ETF shares are based first on the market value of that ETF, then on the market value of the individual REIT or housing-related shares, and only then on the actual property value. "It's very different from investing directly in real estate," says Gary Gastineau, founder of ETF Consultants Inc. of Bonita Springs, Florida.

"Other people's actions can affect your return," says Mark Cortazzo, senior partner with Macro Consulting Group in Parsippany, New Jersey. "If other property owners have to sell off to manage their portfolios, those market forces can drive down the value of property or property-based investments."
When you invest directly in real estate, "it's a long term and capital gain play -- a buy-and-hold conservative investment," Sizemore points out. It's best to think of a real estate ETF the same way, he advises, especially if you are aiming to get in on long-term demographic changes, such as the expectation that millennials will soon be buying their first homes.

If you are debating between investing in real estate directly or buying into a REIT or real estate ETF, don't overlook the tax advantages of direct ownership, Gastineau says. For many investors, tax deductions and capital gains taxes are integral to their expected return on real estate investments. Those factors are different from those you'd face investing in a real estate ETF.

[See: 6 Tips for Boomers Leaving Big Homes Behind.]

How does your own house fit into your portfolio? Isn't it an investment?

Not really, Sizemore says. "Your house represents a real estate risk but not an investment. Buying a house is a sensible thing to do if you intend to live in the house forever," he says. "Over 20 years, there might be some value if your mortgage remains the same while the economy grows and the property appreciates."

But houses are expensive, Sizemore points out. The actual return on your house is affected by unavoidable expenses such as property taxes, homeowner association fees, maintenance, insurance and other costs that, in effect, offset appreciation in property values.

A real estate investment produces income or appreciates in value after all costs are calculated. Not so with your house. "You have money tied up in it," Sizemore says. "You're not making income from it, so it's really not an investment."

Real Estate Investing

Sunday, 15 June 2014