Getting started in real estate: 10 fatal mistakes to avoid as an investor

Getting started in real estate and making your first investment in real estate is a learning process. Although you will inevitably make a few mistakes along the way, there are a few common pitfalls that can be avoided if you prepare thoroughly.

From financing errors to underestimating repair costs, beginners in real estate run the risk of losing serious money if they are not careful.

Nevertheless, practical experience is and remains invaluable (even if a first experience may have a bitter aftertaste).

Below, you will discover mainly what not to do from 10 fatal mistakes from novice property investors.

They will undoubtedly help you make better decisions for your very first investment in yield real estate…

For inspiration, we also take a look at some interesting passive real estate investments with carefree letting services.

Getting started in real estate? Standing still is going backwards, so get moving!

You may have heard or read that the first property investment is the most difficult. That is true.

Or that your first deal is difficult because you don’t know enough. That too is inevitable.

Nevertheless, you must continue to take steps and get to work.

If you wait until you are 100 per cent prepared, you will never make progress and will remain stagnant.

But while your first real estate investment will most likely not be perfect, you still don’t want it to get so bad that you are permanently knocked out.

This overview page will therefore help you to avoid the 10 most fatal mistakes when investing in real estate for the first time.

Use this as a checklist to ensure that you avoid worst-case scenarios at all costs.

When you avoid the worst, you gain the confidence needed to close your first deal.

And from there, you can continue to build up further practical experience.

Keep the 10 common mistakes below in mind when investing in rental properties.

This will facilitate getting started in real estate as an investor and also the rest of your investment career.

Ten fatal mistakes of novice property investors

Mistake 1: Poor funding when getting started in real estate

Poor financing of investment properties can be one of the most fatal mistakes.

More real estate investors lose money or go bankrupt because of bad financing than because of any other mistake.

What is bad financing when starting out in real estate as an investor?

In most cases, bad financing occurs when there is a combination of the following factors:

1. High interest rate
2. Variable interest rate
3. High monthly payments
4. Bullet loan requiring 100% capital repayment at maturity
5. Borrower who is a personal guarantor

Mortgage loans as standard financing

Most real estate mortgages save you from at least the first four mistakes:

• Interest rates are quite low (so you can usually enjoy competitive interest rates)
• Variable interest rates or hybrid loans (mix of fixed and variable) are in most cases less interesting than fixed interest rates
• The repayments can be quite good as often a financing with a rather long term is used, like 20/25/30 years
• In addition, this type of loan is usually provided as a mortgage loan, which means that periodic capital and interest payments have to be made by the borrower

The lender of a mortgage loan for a buy-to-let property has the property in question as collateral.

If you default as a borrower, the property is sold and the funds from the sale go back to the bank from which you borrowed.

Depending on the small print, you may also be personally liable if you borrow for a buy-to-let property.

This means that you personally guarantee the loan with your current assets and future earnings if your property does not yield enough in a sale.

You will have to make up the difference yourself.

Niche financing as an exception to the rule

There are also more flexible commercial and private lenders who do not meet the above criteria.

And that can be a problem, especially with your first property deal.

If you borrow, for example, at an exorbitant interest rate of 12%, with a high monthly repayment on a very short term, you are probably taking too much risk.

The same applies to a bullet loan whose capital you have to redeem after, say, ‘only’ 4 years.

Why do you take too much risk in the above two scenarios?

Because the property is likely to generate a negative cash flow, which then requires additional savings capacity from you.

This, combined with interest rates that are too high, will pull your returns down sharply.

And in the case of a bullet loan with a too-short maturity, you are under insane time pressure!

Because when it expires, you have to repay the capital, which means you have to refinance or sell the property in the short term.

Take into account worst case scenario (financial crisis)

As some learned during the 2008 credit crisis, it is not easy to refinance when the credit market dries up, even with a perfect credit score and a good income.

In addition, being a personal guarantor means that if something goes wrong and your lender loses money, they will make a claim on your assets to meet the loan and settle the account.

Try to keep in mind the above points of attention regarding financing errors.

Try to pursue a cash-flow positive property investment so as not to put too much pressure on yourself in terms of additional savings obligations.

Get help from an experienced financial planner to calculate this.

The beauty of private and niche financing is that everything is negotiable.

But regardless of the type of property finance you use, you need to negotiate hard and avoid serious mistakes.

Mistake 2: Choosing a bad location when getting started in real estate

Property valuation always starts with the location of the property in question.

The people and businesses that rent or buy from you start by evaluating the location.

Then other criteria are considered, such as the plot, the furnishing, the habitable area, the finish, and so on.

Because location and planting are so important, you should identify and study the best and worst locations in the area before you buy.

There are investors who make money with real estate in bad locations, but it is a challenging situation that beginners in real estate should avoid.

For example, getting started in real estate by buying a single-family house below the market value with excellent financing conditions.

But if the location is poor, you may not be able to attract good tenants, for example, because the neighbours are unfriendly or the neighbourhood is not safe.

On the other hand, you can start in real estate by buying property in good locations and making the mistake of paying a little too much.

In that case, the good location can help you to correct such a mistake in time.

In any case, try to buy (above) average property in the neighbourhood you have in mind! This is attractive for tenants in that particular property market.

Mistake 3: Misjudging resale or rental value

The most important task as a starting property investor is to understand how tenants and buyers make decisions and how this translates into a market value.

If you cannot assess and determine the full value potential, it will probably be difficult to confidently make a purchase offer that can bring you profit.

This task of valuation is important in the context of value investing in real estate but it is certainly not easy.

It is a skill that you must teach yourself and continue to refine throughout the rest of your real estate investment career.

In your first deal, it is likely that you are not yet an expert in valuation.

But there are, of course, a few things you can do to help yourself get started in real estate:

• Limit your target market to a relatively small, manageable area and specialise in that region. Compare prices and make a thorough analysis of current prices at which sales are easy in the region. Also analyse the condition of the smoothly sold properties.
• Examine all transactions in your market on a daily basis using online platforms and tools where you can very transparently follow the pricing of similar properties. Think of this as daily weight training that will keep you fit and competitive in the local real estate market where you want to be master.
• Hire professionals and specialists for specific help. For the estimation of the resale value, engage a highly competent real estate agent and/or licensed appraiser and/or notary public.
• Is there a lot of renovation work on the property? Then invite a few renovation companies that can give you an estimate of the cost of a total renovation.
• Are you looking for a market-based estimate of the rental value of the property in question? Then contact stewards or property managers with several houses or flats in portfolio in the same area.
• Take courses on property valuation at a reliable educational institution for getting started in real estate (see if it is possible via distance learning if you have a busy schedule).

Mistake 4: Underestimating repair and renovation costs

It is inevitable that at some point you will underestimate the cost of repairs.

Think of the costs of refurbishment, repairs and possibly even more extensive renovations.

Such budgetary surprises can lead to huge liquidity problems!

Huge unexpected expenses should be avoided to ensure that you do not burn up all your cash reserves. After all, getting started in real estate and already running out of money is a disaster…

In other words, you will need to develop a good estimation system for repairs, refurbishments and possibly renovations. This is to avoid major miscalculations.

Also make sure you get help from other property investors with a lot of experience or contractors with more knowledge.

Do not be afraid to pay these people for their time and knowledge.

You can meet these people and professionals by:

• Attending meetings of umbrella federations of the construction and renovation sector
• Attending trade fairs revolving around construction, renovation and interior design
• Attend meetings of the local real estate sector
• Attend meetings and seminars of local investor clubs that also actively invest in real estate
• Explore your region of choice (on foot, by bike or by car) in search of renovation projects (you will then find contact details for the contractors and employees of the project)
• Reading websites and online forums and asking questions in the relevant sections online

Mistake 5: Burning through financial reserves

Your investment properties are like a racing car and cash (money in a current account, free to spend) is like the fuel of this car.

When the fuel runs out, even the most powerful racing car in the world comes to a halt.

In other words, if you are through your financial cushion, even the best investment can start to hurt your assets.

So you want to avoid a situation where your cash reserve is too low or even burnt out completely.

Burning through a financial buffer is often the result of a number of reasons:

1. Underestimation of minor repair and/or refurbishment costs (see mistake 4 above)
2. Misjudgment of monthly cash flow:
   • Underestimate future capital and interest expenditure of a rental property if you have partly financed the property with a loan. For example, you had calculated a monthly positive cash flow but in practice it turns out to be a negative cash flow so you have to inject money every month. In such a case, this requires additional savings capacity from you as an investor, which can lead to major financial problems and stress and headaches.
   • Overestimation of the monthly rental income, which in practice is therefore lower. This can then lead to a monthly negative cash flow and additional financial pressure on you as an investor to continue to meet your monthly financial obligations (repayment of mortgage or bullet loan, payment of interest and other costs).
3. Underestimating certain exceptional costs (major interventions) such as replacing a roof or a heating system. If you do not properly anticipate such costs, it can become a major problem.

Conclusion: Adequate estimation of capital expenditure and budgeting in terms of cash flow for your revenue property(ies) is crucial. If you fail in this area, you will permanently feel a financial noose around your neck.

Mistake 6: Acting on emotion and getting started in real estate on impulse

This is a big mistake that is often made by investors getting started in real estate.

And it is understandable, because arranging and closing your first property deal is normally an exciting search and process.

But you need to temper your enthusiasm and find a healthy balance between emotions on the one hand and cold, hard and objective analysis of yield properties on the other.

Enthusiasm is wonderful. It is crucial for any enterprising property investor because it helps you overcome the many obstacles.

However, you should also learn never to make major financial decisions based solely on emotions.

Getting started in real estate based on your emotions is a recipe for complete failure…

You should use an analysis process to evaluate and filter all investment options. Evaluating an investment property must be done thoroughly and thoughtfully.

If necessary, have someone else look at each potential real estate investment.

This can be your business partner, but other mentors, advisors and experts by experience are also eligible.

Your objective evaluation process can start with basic criteria, including general locations, neighbourhoods, property types, investment type (do-it-yourself rental or turnkey rental), building quality, and so on.

This will help you in the first phase to narrow down the huge number of potential yield properties to offers that match your selection criteria.

You can then use a method to estimate and assess the figures for each revenue property.

This calculation method can then serve as a way of determining whether a potential investment property is a go or a no-go.

It is also always interesting to calculate some important statistics…

Think of the annual return on the purchase price and the annual return on your invested equity (if you partly finance with debt capital).

And make a clear distinction between return on paper versus real return!

Do not forget that you can increase the return on your invested equity by using financial leverage.

Mistake 7: Choosing the wrong property strategy

Do you know people who always jump on the latest fad?

Who allow themselves to be blinded by someone else’s success and forget to think for themselves? Unfortunately, you yourself may fall prey to such behaviour sooner than expected.

People are often blinded by quick money and success stories about getting rich (fast) with real estate.

What makes one decide to imitate someone else’s strategy or to abandon one’s own, current strategy…

And then to jump on the latest craze or hype of the moment.

In any case, be well aware that this type of behaviour can be detrimental to your financial future!

There is no perfect strategy for getting started in real estate

There are many strategies to choose from when investing in real estate.

And as great as that is, it is easy to get overwhelmed or to waste time following the wrong strategy.

Here’s a tip: you will not find a perfect strategy because the perfect strategy does not exist!

But you can find one that suits your unique strengths, your short-term needs and, last but not least, your long-term goals.

From this perspective, you should also be aware of the biggest mistake of new property investors: Giving up too soon due to an overwhelming feeling.

So instead of borrowing the perfect strategy from someone else, think carefully about what you really want and what real estate strategy will allow you to fulfil your desires and needs.

An important decision you need to make, for example, regarding private real estate investment is whether you want to investing in rental properties actively or passively.

In addition, you should think carefully about your investor profile when you are about to buy investment property .

Are you risk-averse? Then defensive investment in real estate, for example, is an absolute must.

Actively OR passively getting started in real estate

Passive or active investment in real estate? Think about the following before you tie the knot

Active real estate investing means fulfilling the role of landlord yourself while passive real estate investing means no stress and headaches (as another party takes over all responsibilities).

Depending on your character, your family situation, your job and hobbies, you will be more attracted to one of the two options in terms of starting out in real estate.

Becoming a passive property investor or an active property lessor…

It is a choice you have to make on the basis of your personal wishes, available time and character. Read more about it at passive income earning with real estate.

Since interest rates on savings accounts currently make you poorer rather than richer each year (because they are lower than the rate of inflation), there are now interesting offers of ready-made investment properties at home and abroad that offer the best of both worlds:

• An investment in full ownership of real estate
• A carefree and contractually guaranteed rental return
• No headaches and no stress (complete worry-free and hands-free investment because rental service, operation, management, maintenance, vacancy, etc. are all taken care of by the promoter via an all-in service package)

As an illustration, you can find some of these passive real estate investments below and take a closer look at them…

Passive real estate investments with carefree rental service: Offers

• Income property for sale in Brussels with 5-6% annual passive yield, in the fantastically located Woluwe-Saint-Lambert. Investing in Brussels real estate is possible here from as little as 100 000 euros of your own funds
• Newly built flat for sale in Brussels [AVAILABLE SOON] as an investment for rent – Optional all-inclusive rental service from A to Z available, with an annual net and passive return of +/- 5,5%. From 85 000 euros, you can invest in real estate in Brussels in a carefree manner through this residence
• Buy flat in Germany for passive rental – Unique hands-free investment with eastern neighbours, including rental guarantee by the promoter
• Real estate in Germany with a carefree rental guarantee and secure returns, low threshold in terms of minimum capital investment
• Luxury country house in France as an investment – Carefree investment in full ownership, with guaranteed return by the operator (up to 8% guaranteed return) and entitlement to 2 weeks of private use free of charge annually
• Buying a house in the USA through this yielding property with solid returns, including rental service (passive investment, hands free)
• Swedish property for rent [AVAILABLE SOON] – Complete support from A to Z, from purchase to rent. Nice annual return and direct return through the family homes.
• Finally, an investment property in co-ownership (and not in full ownership): French holiday property as an investment. This option is suitable for smaller budgets from EUR 17 230. You can count on a contractually guaranteed annual rental yield (up to 8% yield per year, increasing over the years)
• Property for sale in Montenegro in Tivat [AVAILABLE SOON], for personal use or for private + rental. In the latter case, you can count on 6 weeks of free personal use per year + good gross rental yield on an annual basis
• Buy a second home in Greece on the island of Samos – Includes free weeks of owner occupation and beautiful carefree guaranteed returns

Mistake 8 of getting started in real estate: Selecting bad contractors

It is more difficult to find contractors who do a good job, always finish on time and deliver flawlessly, clean up afterwards and charge reasonable prices, than it is to find a buried pirate treasure on a beach.

Perfection does not exist, not even among contractors and subcontractors.

This fact does not mean, of course, that you should be content with half-measures… You should make the most of it as a principal.

And don’t forget that the contractors who work on your property will also influence the ultimate success of your investment.

It is important to know the different types of contractors and when to use them.

You also need to know how to maintain a good relationship with contractors.

Such craftsmen are usually busy and so you should be early to book a particular craftsman for work to be carried out during a certain period.

Also avoid costly mistakes like appointing three different painters, two different heating and plumbing companies, several plumbers and two different flooring companies to make the property look neat.

It is much wiser not to act impulsively and first of all to compare various professionals.

After comparing prices and possibly viewing some references, you can then make your decision.

Then make an informed choice and stick to it, even if there are some delays or some problems.

Mistake 9: No or insufficient use of the due diligence period

Some experienced investors make an offer on a property in the condition it is in, with lightning speed decision making and no further due diligence period.

This can help them obtain a lower price and beat competing investors or building promoters.

But for your first real estate investment, such a scenario of striking at speed is probably not the best plan.

Instead, include a short but reasonable due diligence period in your offer, so that you can break the preliminary contract of sale if you come across a serious problem or defect during that period of investigation.

Here are a few of the most important things you should not forget during the due diligence period of the purchase procedure:

• Make sure you have a very good and professional inspection of third-party property (call in a professional if you don’t feel confident enough)
• Try to estimate repair estimates judiciously and realistically – Overestimating is better than underestimating (see mistake number 4 above)
• Evaluate zoning plans and local ordinances (e.g. the city or municipality where you invest may have a law prohibiting renting out in a certain residential area, or prohibiting renting to (more than two) students in a certain residential area)
• Ask for the professional opinion of third parties on the (rental) value of your potential future property in comparison to other similar properties on the market in the same region. Also ask their estimation of a resale value in the future.

In short, all the important assumptions that you used to make your bid need to be checked again and cross-checked with the opinion of professionals.

If you find that you have made a wrong assumption, you may have to renegotiate or look for another investment property that better suits your needs, desires and vision.

Some of your best deals/investments are the ones you don’t end up doing and miss out on.

Mistake 10: Not learning from your mistakes (getting started in real estate is a learning process)

You have just discovered nine mistakes you should avoid when getting started in real estate.

We could probably list and tell you about 20 more errors, but…

Whatever you learn, you will still make mistakes. That is a certainty and it is a guarantee throughout the career of every investor.

However, the biggest mistake you can make when it comes to real estate investing for beginners is not to learn from the mistakes you make.

Accept that you do not know everything at the beginning. So you know in advance that you will often not do the best job or will even ruin it completely.

Decide to call each mistake a lesson and actually write this lesson down in a (digital) notebook.

As such, you will learn hundreds of these lessons in the real world over the course of your career. Never be arrogant, you can always learn.

Be open to continuous learning, practice really is invaluable training.

Conclusion – Getting started in real estate

Investing money in real estate is a form of business.

As investors/entrepreneurs, we aim for the highest achievable, but in doing so we also take risks that could turn out badly.

And that can be a bitter pill to swallow with your very first property investment.

But risk does not have to be negative. You could see it as a barrier to entry.

It means that the less committed investors will drop out when things get too hot for them. They may be missing an opportunity here.

The successful real estate entrepreneurs are not perfect. They have (mental) scars that prove all their past mistakes.

But they gradually learn to avoid the crucial mistakes that can put them out of business.

And that is what distinguishes them from less successful property investors.

In addition, they learn to always keep moving forward. Forward motion because to stand still is to go backwards. That is what entrepreneurship is all about.

We hope that the lessons contained in the 10 fatal mistakes when getting started in real estate will help you grow as a real estate investor.

To conclude, here is an overview of many other interesting pages that can help you make the right choice when it comes to buying and letting property without worries (with or without a carefree rental guarantee).

Additional info for getting started in real estate more easily

• Investing in rental properties: Do-it-yourself or hands-free on autopilot?
• Investing in real estate for first-time investors: An overview of ten common start-up mistakes
• How to purchase a buy-to-let property: Tips + Nine common mistakes to avoid
• How to earn extra income with real estate: 9 ways to successfully earn extra money