Real Estate Secret #3 – Hope for the Best, Plan for the Worst No one ever invests with the intent to lose money.
Unfortunately, it happens to even the best investors. The secret to putting the odds in your favor is learning how to minimize the potential risks that could derail your success. You do this through conducting due diligence before you purchase any property.
“Conducting due diligence” is a term that has been so overused that it has fallen into the MBA-speak lexicon along with “creating a win-win,” “right-sizing,” and “thinking outside the box.” All that aside, it does not change the impact and necessity of the process.
Thoroughly examining a potential investment will help minimize risks and determine whether an investment still makes sense for you. A beginning investor may naively think that as long as rents cover the debt services, then all is well.
However, if vacancy rates, repair costs, replacement values, and a number of other contingencies aren’t factored in to the final analysis, then an asset can quickly turn into a liability with the owner wondering,
“Why didn’t I think of that earlier?”
This goes beyond the financials too. For example, suppose an investor through an analysis of the property’s financials determines that an investment will cash flow. He closes on the deal, has tenants lined up, and then finds out that according to the CC&Rs (Covenants, Conditions, and Restrictions) of the property, the homeowner’s association will not allow the property to be rented.
What now? None of this is meant to scare anyone from investing in real estate, but to point out the need to be thorough in evaluating a potential investment. Now, for some, they will misinterpret this to thinking they need to know everything before they can invest. While a noble pursuit, it is completely unrealistic.
For those who understand the Rich Dad philosophy, they will build a team of advisors who they can count on to ask them the question, “Have you thought about this?”