I've worked in the real estate industry for over 10 years both as a real estate agent and a real estate investor. I first began real estate investing when I was in University. I remember looking at all the student rental housing and thinking why should I give my money to someone else? Why not use my own money to make money. I then cashed in my RRSP, approached my mom to be my partner and bought my first rental. After renting property and flipping houses in additional to attending real estate investing education programs, there are some key lessons I learned along the way. In this article I will touch on myths about real estate investing that can save you tens of hundreds of thousands of dollars. So if you are a budding investor, sit back and take a few minutes to read this article it just might save you the shirt on your back.
Myth 1: I Will Make As Much If Not More Money Flipping Houses Than If I Had A Job
When we think about real estate investing, we often think of flipping homes. And let's be honest HGTV has made flipping houses look sexy, easy and profitable. The reality is flipping homes can be one of the most lucrative options when it comes to making cash when done correctly. However there are a number people who have tried to flip and lost thousands. So let's consider some of biggest mistakes novice flippers make and why they may want to keep their day job options open.
Mistake 1: You Paid Too Much For The House
The most important thing to do when purchasing a house to flip is to buy right! This is hands down the MOST important thing to get right. If you pay too much for the house all efforts you put in for the next 2 - 6 months will be for nothing and not only will you not make any money but you could potentially lose a lot of money. Therefore before you purchase a house to flip you want to work backwards and consider what you will get for the house and be conservative. Remember when calculating your potential profit you want to add all your costs. Not just your costs to renovate, but you have to remember you will be closing twice and you need to factor the costs to carry the house.
Mistake 2: Novice real estate investors Underestimated the costs
One costly mistake novice real estate investors make when flipping a house is underestimating the costs. Often novice real estate investors diligently calculate the material costs that go into the renovation and forget the costs go beyond the renovation .
You will have to pay to closing costs twice on the property. Your first closing on the property will include provincial sales tax (and municipal if you're in Toronto) plus legal fees, and any closing costs associated. Then when you sell, your second closing cost will involve real estate commissions, legal fees again, and any adjustment costs.
Depending on how you borrowed your money and how you arranged your financing you may need to pay points or you may have a penalty if you close the mortgage before a certain time period.
Mistake 3: function before form
Very often when someone buys their first flip they start planning out the design and everything else comes second: I'm going to remove this wall... I'm going to change these cabinets... I'm going to... Well there's a saying: Function Before Form for a reason.
If you need a new roof, an electrical upgrade, a new furnace, a flooding basement you need to get your priorities straight. If your roof is leaking, the windows are old, you can't get approved for insurance and therefore cannot get a mortgage because you have knob and tube or the furnace is 50 years old and at the end of its shelf life. The fact is you need to factor and address the structural and functional musts before you EVER start thinking about your design.
Did you bring in a home inspector for your first flip or a contractor? If you didn't perhaps you should have. Having an extra set of eyes can bring renovation costs to your attention that you may have missed the first time.
Mistake 4: You Overestimated Your Skills and Knowledge In Renovation
So you've bought your first flip and you are going to save money by doing the work yourself. After all I saw this 20-something couple do it on TV and they made $100,000 and this was their first flip. Well what TV might not have shown you is perhaps one of the young couple's parents or uncle or cousin or best friend was a contractor and helped them with the renovation. The scenario you saw on television may have been far from the truth.
If the television show's goal was to glamorize flipping and attract viewers, the camera work was not going to focus on the rough workmanship. Right? However, if you look very closely you might be able to see the rough workmanship. If on the other hand, you weren't looking for it you might think 'their design ideas are really nice' and you think to yourself.. wow that house will sell no problem ..and the house doesn't sell so the couple decides to live in it.
The reality is if your buyer has to rip out what you've done because it is done so badly and re-do it themselves, they are going to pay as much as anyone will... for a rundown property a.k.a "a flip". As a result the selling price is significantly reduced and you only get what you originally paid for it.
Mistake 5: You Didn't let Key Market Indicators guide your real estate investing strategy
If real estate investing was that easy everyone would be doing it. Part of being successful is paying attention to more than just the micro market and how homes are selling in one neighbourhood. You need to pay attention to what is happening around you. The macro-market can play a huge role in the health of the real estate market and this should be your guide when you decide if you are going to flip a house or buy, hold and rent or find a new neighbourhood to invest.
For example, companies are moving out of your area and people are losing their jobs with no new jobs in sight. If there are no jobs who will buy your house? The reality is if the surrounding economic indicators point to a recession or worse a depression it is unlikely house prices are going to be rising any time soon and thus it is better to buy when the dust settles and housing prices have STOPPED dropping.
Another scenario, your regional or federal governments have added a new tax or have made it tougher for buyers to get approved for a mortgage. The result is: you may be in for a housing price reduction due to fewer buyers competing for your house. The fewer number of buyers who can afford your newly renovated house, a cooler market or a recession translates into a price reduction.
The announcement has left home buyers, home sellers, real estate agents and homeowners wondering how they will be impacted. So, what does this mean for Canadians?
Well, ultimately, the seller's market -- mainly in big cities such as Toronto and Vancouver -- is going to become a buyer's market, but with a lot of restrictions.
A smart investor who is looking to flip houses does not buy in areas where market indicators suggest a market is going to decline. On the other hand, if you are looking to rent and hold you may not make money on your investment initially but as long as market rents can cover your costs this may be a better investing option.
Mistake 6: You Let Your emotions Get In The Way
We have all heard the horror stories, "(someone hopefully not you) ..overbids on a house". Well when you're fired up you've decided I'm gonna do it you get so caught up in the momentum and not hell or high water is gonna stop you and you are gonna buy that house. Sound familiar?
Well I hope it doesn't sound familiar because when you get in that frame of mind, bidding on a rehab can become less about making money and more about winning the bidding war.
You need to get your emotions out of the process and focus on the facts. Educate yourself and know what your maximum amount is that you can pay and still make a profit is critical to being successful.
Worry less about the future design you're going to do or that you want a house because you've decided you're going to buy a house no matter what.
Myth 2: I'm Going To Get A Better Deal If I Buy My Reno Property From A Wholesaler
Wholesalers generally will acquire properties that need rehabbing, stressed sellers that are in foreclosure, inherited properties the family doesn't want or even rental properties gone wrong. Wholesalers are not necessarily real estate agents. They purchase homes from privately and will sell the property to you. The idea of purchasing from a wholesaler is you can buy the property at a discounted price often less than you would pay on the MLS because the home or the property is dilapidated and you are not factor buying and seller real estate commissions. This can be a huge mistake if you don't know your market numbers going into any deal in addition to not knowing the wholesaler you're dealing with.
Wholesalers will typically a profit on the property before they sell it to you but just because you purchased the house from a wholesaler does not mean it is a good deal. How many times has this property been "wholesaled"?
Always consult a professional and find out what other houses are selling for in the market before you enter any deal including a deal with a wholesaler.
Myth 3: I Can't Get Money.. The Bank Said "No" Therefore I Can't Invest In Real Estate
There are many different ways to acquire money, with that said there are a number of different lenders including private lenders available if you are looking to get into real estate investing. The biggest misconception is that banks are the only source of money in order to get into real estate investing.
Most lenders will want to see your business proposal what you will be spending what your costs will be and what is your return on investment when you are finished so you will need to do your homework. At the end of the day, a lender will not want to be stuck with a house that is worth less than you paid for it. You will need to prove to the lender that the money they are investing they will get it back should something happen should something happen and you are not able to finish the house.
If you are interested in getting into a real estate investing, contact me.
Rachel Craggy has a license in real estate and has been working in the real estate industry for the last 10 years. Successfully flipping houses since 2015, Rachel has education in interior design and real estate staging, was the owner of a success home staging company in Toronto and has worked with many home owners to help them achieve their real estate dreams