4 Common Pitfalls for Real Estate Investors
Real estate investment is business management
As real estate investment is considered middle-risk middle-return, the risk of failure is considered relatively low. Nevertheless, there is no end to the number of people who end up failing. Each Singapore investor has their own set of circumstances, but those who fail seem to have a few things in common. In order not to be in that number, you should know the common pitfalls.
1. They don’t study hard enough
The first common mistake is that many people who fail don’t study hard enough.
Real estate investment targets units worth between S$12,000 for cheap studio apartments, up to S$1,200,000 (in Japan). It is natural that with such a high investment if you start without studying thoroughly, you are more likely to fail.
This is especially true when there are successful investors around you, and it is a step toward failure to have unfounded confidence that you will succeed.
If you think you can easily make unearned income, you’re wrong. If you don’t study hard, trust others and use reputable contractors, you won’t succeed. If you don’t have basic knowledge, you will be at the mercy of others and will end up buying a property without checking or verifying the necessary details.
As a salesperson, you want to be showing profitable properties to good customers. What if you have a problem property that is difficult to sell to a knowledgeable or experienced customer? A diligent investor will see the downside of the property. It is for this reason that a salesperson is recommended to beginner real estate investors.
Many of those who invest without studying are relatively young and have high salaries. Regardless of their main profession, they tend to be ignorant of the world despite their wealth of professional knowledge, and they tend to leave investment to others rather than study because they are busy with their day job.
Those who do not study are likely to be targets of malicious traders. It will be impossible for a beginner to make a profit if he or she leaves it to a substandard contractor and gets a bad property.
2. They don’t understand that real estate investment is business management
One of the major differences between investment in stocks and FX and real estate is that real estate investment has an element of business management. Despite the tax benefits, it is not uncommon to form a corporation to invest in real estate.
The most important aspect of real estate investment today is income gain-style management, in which people earn income from rent. If you don’t understand this well, you will face failure.
To secure a stable income from housing rents, it is essential to make efforts to create a comfortable living environment for residents. Daily work must be entrusted to a specialised management company, but it is the responsibility of the management to verify the quality of work from the residents’ point of view and make improvements as necessary. A company where everything is left to the employees will not do well.
Furthermore, while it is important to be creative from the perspective of the tenant, it is also necessary to consider cost performance. This requires a sense of management that balances revenues and expenditures. The common denominator among failures is that they don’t work or study hard to develop their business sense.
3. They don’t try to expand their network
One of the factors for success in real estate investment is having extensive personal connections. The network of real estate agents is important, but more so, is the network of real estate investors, or peers. This is the key to success because the opinions of those who have experience have more weight and value than any book or seminar.
Solo investors tend to be lonely. Although there are similarities with business management, in real estate, all investment activities are conducted by one person. While it can be said that various things can be decided by one person and carried out responsibly, there are times when it is difficult to maintain objectivity and motivation. If you have a broad network, you can get the right advice when you’re in doubt.
Some point out that those who do not have personal connections tend to make decisions without consulting others while leaving the purchase to the contractor. If you’re experienced and have your own investment style, you’re fine, but if you’re a beginner, you’re more likely to make the wrong choice.
Needless to say, it is not enough to know real estate investors. Some salaried workers participate in cross-industry exchange events to collect business cards, but it is important to have friends who can improve themselves through friendly competition and reliable acquaintances. To do so, you need to be a person who can provide inspiration, good information and knowledge to others.
4. They do not plan their spending
This isn’t limited to real estate investment, but many failed investors seem to spend money in an unplanned way.
People who splurge on real estate seeking unearned income and do not accumulate it in preparation for unexpected situations will surely fail. But the other way in which this trips people up is when it comes to management of the building. For example, some investors avoid regular maintenance of their property or decide to use a contractor without obtaining a competitive estimate for repairs. It may not be a huge cost increase on a case-by-case basis, but it can add up to a lot of money, and that lack of consideration and planning can lead to big losses and mistakes.
A common example of failure is the purchase of high-yield items without checking the maintenance status, which later requires unexpected repair costs. What was supposed to be a cheap purchase, turned out to be a money pit. There are always good reasons for cheap deals. Of course, sometimes it is judged fair because of the seller’s situation, but investors need to be careful.
In other cases, renovation work is carried out in order to avoid the risk of vacancies and to increase the occupancy rate. In such cases, the renovation tends to be self-satisfying, ignoring cost performance and investment effectiveness.
Renovation without taking into account the needs of tenants will not generate enough rental income to recover the money spent. If that is the case, the investment will not be cost-effective. The result is negative cash flow, squeezing revenue.
In addition, the easy use of loans tends to lead to a negative spiral as the repayment ratio rises. The repayment rate is the ratio of the repayment amount to the rental income. When this figure is high, the amount of cash flow minus running costs, such as administrative costs, decreases accordingly.
When taking out a loan, it is necessary to know numerically the minimum level of cash flow that can be maintained.
It depends on the property, but running costs, such as administrative costs, are estimated to be about 20% of rental income, and it is said that you should repay the remaining 80%. However, this calculation assumes an occupancy rate of 100%, so it is necessary to take vacancy rates into account based on past experience with neighbouring properties.
If the repayment rate exceeds 60%, the cash flow will fall below 20%, and if there is a vacancy or unexpected repair costs, there is a possibility that it will enter the danger zone. The ideal repayment rate is about 40%, but the most important thing is planning for unexpected situations.
We’ve looked at some of the obvious and common mistakes of failing investors. In order to invest in real estate, constant information gathering, management consciousness, cost consciousness, and planning are required.