How to Maximize Real Estate Profit

Making money in real estate requires more than just deep pockets and luck; knowledge and discipline are the fundamental foundations of a successful investment. Regardless of whether you are new to the world of real estate investment or already have a portfolio that needs improvement, avoid the most common mistakes addressed in this article for the best chances of success.

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1. Trying to Duplicate Investment Strategies

Real estate investing is not one-size-fits-all, and treating it as such is a recipe for disaster. Rather than trying to emulate the success of an envied relative, friend, or colleague, focus on creating an investment plan that meets your goals, needs, and limitations. The best place to start is an honest assessment of: what you hope to gain, your appetite for risk, and your available time.

Real estate investment can be a way of life that replaces the traditional 9-to-5 job or a side hustle that complements a pre-existing source of income. For some investors, it may be a way to spend more time with family rather than a full-time commitment.

An individual with limited availability can filter out options that will require intensive interaction, like self-managing a rental property. But, conversely, one may discover that they can expand their possibilities and devote time and energy to a complex undertaking.

Keep in mind that some investment types render the funds completely unavailable, sometimes for years, and all investments carry risk. A retiree on a fixed income should have a tolerance for risk that is very different from a younger person with adequate savings.

Most importantly, keep your identified goals and limitations in mind when vetting any investment opportunity to avoid being swept away with excitement.

2. Only Considering Direct Ownership

To combat many factors that delay investment, like lack of time or less cash in reserve, consider investment alternatives beyond direct real estate ownership. REITs, real estate syndications, and crowdfunding are three fantastic ways to realize income and appreciation while limiting cost and time commitment.

REITs

REITs (real estate investment trusts) are publicly or privately traded companies that own and operate income-producing properties. Investors can purchase shares of these companies, which pay at least 90 percent of their taxable income as dividends. Initial investment amounts are as low as the cost of a single share.

REITs often focus on a specific property type, like hotels, commercial buildings, or a particular geographic area. As such, investors still have the opportunity to put their funds in segments of the real estate market of which they have knowledge and reason to expect positive performance.

Real Estate Syndications

Real estate syndications are companies that purchase and then operate a specific income-producing property for a limited period of time. Rather than buying shares, investors provide capital to the company and receive returns based on the syndication’s payment structure.

Syndications obtain the bulk of their financing from a small pool of passive investors, and the investors earn returns based on the size of their capital contribution. Most syndications require a minimum investment of $100,000.

The syndication sponsor makes information about the property, and the syndication’s plans to operate it, available before committing any more. As a result, potential investors can research the specific property, its market, and the project sponsor.

Crowdfunding

Real estate crowdfunding connects investors to projects via online platforms like Fundrise and Crowdstreet. Many crowdfunding sites exist, and the types of investments and the cash required to get started vary among the sites and even between projects.

Some of the opportunities on crowdfunding sites look like syndication, while others are simply transacting hard-money loans from the investor to the person or entity seeking funds for a real estate project.

Regardless of the final agreement, crowdfunding investments tend to be passive investments that do not require active participation from the investor.

3. Skipping the Research

Investors fail when they assume all real estate opportunities will at least break even. Some projects end in financial loss due to the inability to sign and retain tenants or lack of buyer interest at a specific price. The difference between growing and losing wealth through real estate lies in investors’ decisions, and those decisions should be informed by the market, property type, earning potential, and more.

Know the Market

Real estate exists in microcosms unique to each area, so knowing the local market is critical to success. National and even state-wide trends mean nothing when the largest employer in a county shuts down, or a major company comes to town.

Investors must know inventory trends, population demographics, real estate values, and an area’s economic health. These factors help investors pass over investments most likely to fail and catch properties with significant potential.

Research Project Sponsors

When investing in a syndication or through a crowdfunding site, research the project sponsor or the entity trying to obtain funding. Look for demonstrated experience in that particular market and with past projects.

Sponsoring a syndication requires skill and knowledge, and the success of the project relies on whether a sponsor possesses those traits. The sponsor finds and selects the subject party, secures financing, reviews due diligence documents, and enacts the property management plan.

Before investing in any project, know the qualifications of the person most responsible for the success or failure of the endeavor.

Rely on Due Diligence Findings

Due diligence refers to the disclosure of property conditions and finances that takes place during the purchase process. Reports include appraisals, property condition reports, environmental reports, and more. Investors who fall in love with a property and pursue it at costs, regardless of the due diligence findings, put themselves on a dangerous path.

Of course, some physical conditions are trivial, but the recent Surfside condominium collapse in Florida serves as a reminder of the worst-case scenario. Owners also incur liability when purchasing polluted land, and pre-sale environmental assessments will identify that risk.

Even if a property lacks major issues, structures and fixtures do degrade over time. Therefore, investment profitability relies on accurately gauging the required amount of repairs and maintenance needed. Similarly, be sure to accurately factor in any renovation costs when comparing properties.

The due diligence reports also shed light on the property’s finances, including any current tenant leases. Take advantage of this information to determine that your underwriting projections are accurate and to weigh whether the property has the potential to earn the desired returns.

4. Doing It All Yourself

Just as most of us would not operate on ourselves, neither should we handle all parts of a real estate investment on our own. Building a team makes for a manageable and successful investment career because more hands on deck, especially expert ones, allow an investor to widen their net of properties and projects, and in turn, bring in more revenue.

The list of professionals that can help you become more efficient and profitable is lengthy. Here are a few of the most commonly used ones to consider:

A real estate agent knowledgeable about the property type and market helps find the most promising properties.
Attorneys ensure compliance with all applicable laws, reducing future legal costs and monetary damage for which you may be responsible.
A property management company coordinates all day-to-day issues regarding a property, freeing up the investor’s time for other pursuits. They may also prepare the lease audit in the due diligence phase of the purchase process.
Tax professionals plan transactions to reduce tax liability and help you keep more of your money.

Finally, work to develop a network of real estate professionals, including other investors, to have access to future investment opportunities that may only spread by word-of-mouth. Creating a network is especially important for unaccredited investors who may only have access to syndications through their professional connections.

5. Delaying Investing

Procrastination thwarts many would-be success stories, and because time is money in real estate investment, it is a villain to be avoided.

Investment delays mean missing out on rental income and property appreciation, and worst of all, missed opportunities as others take advantage of available properties. Between the complexity of executing a real estate transaction, assuming the burden of property management, and surrendering a large sum of capital, the first steps can be daunting.

There really is no time like the present to get started. Record-low interest rates, an ever-growing population, and inadequate inventory combined with the convenience of the internet create more investment opportunities than ever before.

Stop watching from the sidelines and losing chances to create and build your own portfolio. Instead, mitigate the concerns preventing you from taking action by avoiding the additional mistakes detailed in this article.

Final Thoughts

The versatility of real estate investment makes it widely appealing and accessible because it allows us to tailor investments to our individual goals and limitations. Still, the nearly endless options for adding it to our portfolios can lead new and seasoned investors alike to get in over their heads. Fortunately, research and frank evaluation of investment opportunities can steer investors away from many of the pitfalls in the industry.