Investing in real estate has long been considered a sound strategy for building wealth – a strategy that can provide some tax advantages and a stable cash flow to the investor and that should be at least a part of a well-diversified portfolio. Owning well-managed rental properties, for example, can be a good source of passive income.

But there are risks in venturing in without a clear financial roadmap, especially for beginners. Seasoned real estate investors point out some of the most common mistakes new investors often make:

• Underestimating costs – Setting up and maintaining a realistic budget is essential. In estimating the true cost of an investment property, consider:
  • Cost of acquisition – Including closing costs, title fees, and loan fees, if financing
  • Renovation costs – The cost of materials, labor, and permits
  • Holding costs - Factor in ongoing expenses, such as property taxes, insurance, utilities, and any loan payments before you can rent or flip
  • Contingency fund – Include a buffer of 10-15% on your total project cost to account for unforeseen circumstances 
• Overleveraging – That is, using borrowed money, or going into excessive debt to fund your investment carries inherent risk. It is vital to:
  • Have a solid financial plan – One that builds in a buffer zone against the unexpected
  • Maintain a healthy debt-to-equity-ratio that does not put a drag on your credit scores
• Ignoring due diligence – Reasonable investors rely on property inspections and take care to confirm contract facts and details before investing in a property. Failure to do so runs the risk of:
  • Finding hidden structural problems that add to the total cost
  • Discovering legal complications that add time and/or additional funds to your investment
• Emotional decision making – Emotions can cloud judgment and lead to poor investment decisions. Rather than relying on your ‘gut feelings:
  • Put your trust in the data and objective analysis of the property
  • If any red flags pop up, take a breath and get a second opinion