Real estate investing can be a profitable exercise.
For people keen to diversify away from an inflated stock market or who simply like the asset class, owning real estate either directly or through a REIT can be exciting. With that said, it’s necessary to avoid making key mistakes that set you back or incur losses as a result. To help you avoid them, here are four mistakes to watch out for.
- Not Deciding to Be a Passive Investor Early On
Not all real estate investments are passive. If you’re a small operator, then you may be doing more of the legwork. This can get tiresome in a hurry, especially if you have a full-time job and family responsibilities too. You may realize all too late that you’ve taken on more than you can chew, but hiring a property manager will reduce your profit margin to zero.
If you’re wanting a passive investment in real estate, consider buying a REIT index fund. This provides a leveraged return on public REITs across multiple sectors without any of the hassle. It will more closely correlate to small-cap equities in the market, but it’s the best you can do.
- Diversifying Too Soon
While the concept of diversification is a useful one, it’s not always the best move. Broadening your horizons can increase the difficulty level and the risk of failing to make a profit.
Diversifying into Multiple Markets
Moving into multiple markets across different towns, cities or states creates an unnecessary level of complication. When purchasing real estate directly, it will need maintenance and attending the property occasionally to resolve disputes. If you’re not large enough yet to employ a property manager, then it increases the problems. Also, knowing the real estate market in each city or state is too much to learn and keep track of. There’s a good reason why realtors typically stick to one city and don’t branch out much beyond that.
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