One of the most common real estate investing mistakes that people make when they begin considering dipping their toes in the investing pool is that they assume they have to become landlord or a fix and flipper in order to become a real estate investor. Of course, for some people that’s what they want to be doing – they like the hands-on action, and that’s great! Others, though, grudgingly take on the hands-on responsibilities in the hopes that down the line they’ll see a decent return on their investment when they sell, or if their tenants are reliable. But there is, of course, another way. Real estate investors can choose to passively invest in real estate, meaning that they put their money into the project by working with a private lending firm like Walnut Street Finance and don’t have to lift a finger as other people handle finding properties, making deals, renovating, and selling.
Once you’ve made the decision to become a passive investor, how do you make sure that you’re going about it the right way and investing your funds with the right company? Here’s a list of three real estate investing mistakes to avoid and what you should be looking for to make the best investing decisions.
Mistake #1: Choosing the Wrong Firm
The absolutely, number one, most important real estate investing mistake to avoid would be – obviously – choosing the wrong firm. But how can you know if you’re choosing the right firm or not before you’ve started working with them? One of the things to consider when looking for an investment firm is what happens on their end if the development goes poorly? If the investment firm’s borrower is unable to complete the project or something goes awry, do they simply sell it off at a loss, or is the firm capable of taking over the project and seeing it through to completion so that your investment is safe?
Mistake #2: Working with a Firm That Doesn’t Do Their Due Diligence
While you’re examining prospective firms to work with, you’ll want to make sure that they’re a firm that does their due diligence. How do they vet their borrowers and projects, and how involved are they? Do they check to ensure that proper permits are being pulled or do they just assume things are going according to plan? Do they ever make site visits to the projects, or meet with the developers once the project has been approved? All of these questions are incredibly important for you to know the answer to, as they will give you an idea of how diligent the private lending firm is.
Mistake #3: Working with a Firm That Doesn’t Know the Local Market
Finally, it’s important to work with a firm that knows the local market. Every day, investment firms see dozens of borrower applications from developers and fix and flippers looking to start new projects, and while it would be easy to assume that the developers themselves have done their research and know if their plan will be fruitful it’s ultimately the responsibility of the investment firm to decide whether or not that’s actually true. After all, they have to protect the interests of their capital investors.
A firm that isn’t incredibly familiar with the local market may think a developer’s plan to purchase a dilapidated colonial, tear it down, and build a modern, contemporary home with all of the latest and greatest updates is completely reasonable. However, a firm with working knowledge of the local market and specific neighborhoods may know that that particular neighborhood is full of historic old colonials, and contemporary would look completely out of place – actually bringing down the value. Or they’ll be aware that a plan to build a development of homes with three bedrooms and one and a half bathroom will never fly in that general neighborhood, as all properties that sell for asking price have three bedrooms and at least two full bathrooms.
If you’re interested in learning more about investing with Walnut Street Finance, and to download our Executive Summary, click here.