WEALTH magazine Editor’s Note: In Part One of “How to Avoid the 3 Biggest Pitfalls in Real Estate,” best-selling author and expert Dean Graziosi introduced the first two pitfalls new investors can fall into as Buying in the Wrong Location and Buying at the Wrong Time. In this installment, he examines Buying Without Examining the Facts.

Though real estate is local, major national and international events and trends can help the worst of markets or damage the very best.

It’s crucial for real estate investors to keep up with the home price indices. (U.S. home prices fell a record 6 percent between the third quarter of 2007 and third quarter of 2008.) A home that was appraised for $200,000 a year ago and is on the market for $190,000 may STILL not be a good deal.

If an area has a sudden increase of jobs, more people will flood into that area, driving up real estate prices and apartment rentals. If an area suddenly loses jobs, though, then more people will leave that area, depressing real estate prices and lowering rental demand.

Each situation creates different but profitable opportunities. Analyze a real estate investment by filtering it through both national and local factors. One positive local factor may outweigh multiple national factors.

REAL ESTATE PITFALL NO. 3: Buying without examining the facts

Are you sensing a pattern here? Timing is related to location. Now we move to the investigation and analysis necessary to make a wise purchase. Of course, it’s related to the other two as well.

We’ve all heard that a successful investment starts with a good buy. Making a good buy requires a great deal of valuation analysis in real estate.

Knowledge + Action = Results

The following story of two of my friends shows the dangers of relying too heavily on your emotions, or gut instinct, and not enough on objective information that could be staring you in the face.

My friends, I’ll call them John and Joan, purchased a beautiful Victorian home they fell in love with the first moment they stepped inside. Although the house was run down, it still had beautiful leaded glass windows, natural woodwork, built-in hutches with glass doors and hardwood floors.

They bought it, cleaned it up, and made it sparkle.

“We loved the house, even though it was in a questionable neighborhood,” Joan said. “As a result, we violated the number-one principle of real estate: Location, location, location. To make a long story short, the beautiful house we loved could be rented only to less-than-desirable tenants, because the type of tenants we hoped to attract didn’t want to live in that neighborhood.”

Although they later sold the house for a small profit, they would have been better off if they had examined the facts about the location and the property. They would have then made a decision to buy a different home in a much better neighborhood.

First, research location and market timing. Then, research it again.

Get the picture for the area in which you want to purchase before you narrow your search to specific properties. Once you’ve decided that timing and location are right, focus on individual homes.

Crunch the numbers

It is now number-crunching time. There simply is no substitute for a very thorough property evaluation using all of the mathematical valuation tools available.

What are the rents you can count on? (Also known as Gross Potential Income.)

Are the listed lease amounts really being paid regularly and on time?

What is your break-even ratio calculation (fixed costs / gross profits) for that magic turn to positive cash flow?

What are ALL your potential expenses and risks?

Have you calculated the capitalization rate to compare property investment potential? (Use the cap rate calculator on my website.)

Your lender may keep you focused, as they will likely want to see all the relevant numbers to assure them of a performing loan asset. But, in the end, it’s your responsibility, and you’ll prosper by doing the math well.

Sure, it takes work to find the right properties. But you don’t need any special education or skills. It’s all about gathering information and making decisions based on hard factual data, proven calculations, and very little luck.

Hey, if a naïve kid like me, who came from no money, had no mentors and never went to college, can do it, you can too! Just get the right knowledge to take the right action. Your first deal could be just weeks away!

How to Avoid the 3 Biggest Pitfalls in Real Estate, Part One

Dean Graziosi is a real estate investing expert, teacher, and author who began investing at age 18. His book, Be a Real Estate Millionaire, is a New York Times, Wall Street Journal, Amazon.com, and USA Today best-seller. Visit www.DeanGraziosi.com

Tags: investing pitfalls, REAL ESTATE, timing

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