Mistakes of Beginner Investors: How to Invest in Real Estate Correctly

How to invest in real estate abroad correctly? We are often asked this question during investment consultations. We decided to post the TOP 7 most typical mistakes of novice investors in our article. Last week (as of November 2021), a major event took place in the American real estate market. One of the top players in the market, Zillow, announced the end of its work due to serious losses at the end of the year. The amount of losses amounted to almost 400 million dollars. We will not go into a detailed analysis, but to make a short conclusion – the algorithm for assessing the purchase price of real estate in this company did not work correctly. Errors were also made in the market forecasting system. All these factors together led to the loss of large sums of money, a drop in the value of the company's shares on the stock market and huge losses for all shareholders. If professionals make such mistakes, what can we say about private investors. Our article contains typical mistakes of novice investors when investing in real estate. We suggest you familiarize yourself with them. Contents:

• #1. A frivolous and naive approach
• #2. Investing in the cheapest real estate
• #3. Mixing Goals: Resale and Profitable Rental
• №4. Saving on specialist services
• #5. Insufficient study of the location features
• #6. Improvidence
• №7. Re-evaluation of performers and intermediaries

No. 1. A frivolous and naive approach.

In most cases, investors are deceived by “status”. People are too quick to classify themselves as part of the investor community, and as a result, they approach the issue of investing superficially and too frivolously. This approach combines several typical practical errors:

• • Selecting an apartment or house option “for yourself” and not “for making a profit”.
  • Even when choosing real estate “for profit”, they are guided by their own taste.

• Missing or insufficient analysis of the foreign market into which the investment is directed.
• Lack of clear calculations, a clear step-by-step investment plan, underestimation of planning.

Let's look at each mistake in more detail to understand how to invest in foreign real estate correctly.

Selecting real estate “for yourself” and not “for investment”

Beginning investors very often confuse the picture of “the ideal housing that they would choose for themselves” with the reality that will give the opportunity to receive maximum profit. The apartment or house that you would choose for yourself for long-term housing will be very different from the one that will give you maximum liquidity or rental income. Here you need to clearly understand the goals for which this or that property is acquired and rely on numbers and calculations more than on feelings and emotions.

Orientation to your own taste

Even when choosing an apartment or house for profit, investors often look at real estate like tourists. Even spending a couple of weeks in a country, you will not be able to get rid of this view. What seems very attractive in the first few days may not be suitable at all for a long stay. For example, an apartment by the sea is not so good when you plan to live in it all year round. There are very few countries where an apartment by the sea in winter will be as good as in summer.

Spain is one of these countries; we will be happy to help you choose real estate in Spain for both your own residence and for investment!

From January to March, apartments close to the sea usually have higher heating costs, piercing winds blow there and apartments can cool down significantly. The apartment will have a terrace, but it will be impossible to use it because of the cold. The sea view itself is also not always a good choice: in summer, the sun can reflect off the water all day long, blinding your eyes and additionally heating the house, so you have to keep the curtains and blinds closed all day. And at night, the sea turns into a dark spot and there is no beautiful view again. At the same time, apartments and houses by the sea are much more expensive than the same ones, but 400-500 meters from the coast. Therefore, housing directly by the sea is well suited for short-term rent (and not for all tourists, Europeans, for example, prefer just another option), and if you are planning a long-term rent, it is better to take more spacious and cheaper housing, but a little further. In addition, an apartment directly by the sea can be seriously damaged by moisture. In such an apartment, it is necessary to constantly ventilate the premises, which means that under-occupancy of the apartment by tenants is a threat of mold, damage to furniture, etc. Also, the facades of houses built using modern technologies become outdated faster. Therefore, an apartment directly by the sea has a lot of nuances that must be taken into account. Another important point is the noise on the first line. There are always beaches, restaurants, bars and the whole season it is an area of increased noise. Cars are constantly parked here, traffic jams occur and this is often a hindrance for those who want a quieter environment or for families with children.

Missing or insufficient analysis of the overseas property market

A typical situation is when an investor understands market analysis as a few Googled articles or posts on social networks. To invest in foreign real estate correctly, follow these recommendations:

• Firstly, only specialists with extensive experience in a particular real estate market can make a good analysis. DenizEstate will kindly provide its services in the Turkish and Spanish markets.
• Secondly, even if you decide to do it yourself, it would not be superfluous to remind yourself of the proverb “measure seven times, cut once”. Check all the figures and facts MANY times. Preferably from different sources. Even serious statistical centers and portals often give average data that differs greatly from the real situation even in different regions or provinces of the same country. Not to mention different countries.
• Third, look for official sources. Articles on a real estate website are good, but they can only serve as a guide to the topic. Market analysis should always be done using official figures and statistics. And the best way to do this is to hire professionals who will add their own real-life experience to the statistics.

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Lack of clear calculations and investment plan

Investments are projects. They are not bets, not attempts to “try it out”, and certainly not entertainment. And like any project, investments require clear planning and a mathematical basis in their foundation. Beginning investors too often do not understand this. As a result, it is too easy to spend money “in the wrong place”. Usually, this is followed by an appeal to experts with requests to “sell this unprofitable apartment or house”. But selling it by this time is either very difficult or impossible, because it was bought either at inflated prices or without taking into account many factors affecting the liquidity of real estate. It is also necessary to clearly understand the time of entry into the project and the time of exit from it. Often, investors believe that it is most profitable to buy properties at the earliest stage of construction, since by the time of delivery it will have risen in price significantly and will bring in the maximum income. And this really works in some countries (for example, in Turkey), but in some places it is not so. The right moment for purchase is often determined by a whole set of criteria. Consult with professionals.

#2. Investing in the cheapest real estate

Often, an investor enters the investment stage with a small budget. As a rule, there is not enough money for good real estate and in this situation there is a temptation to buy something as cheap as possible and “earn from the business” to reinvest. Another situation is when an investor has a budget, but he wants to “run the procedure” on cheap real estate and only then how to invest… Most often, such investors are in for a severe disappointment. Real estate purchased on this principle will have extremely low liquidity (that is, it will sell poorly and will not be rented out well). An object purchased on such principles will most likely belong to the secondary market, will be without repairs, with old furniture or without it at all. Expecting to earn something in such conditions is an empty hope. For example, there are often cases when a buyer wants to buy a home for rent, but only has a limited amount on hand. For this money, you can only buy an apartment in the old housing stock, and the quality of this housing will be, frankly speaking, poor. But the buyer thinks that this is a good investment. As a result, after the purchase, he cannot rent it out, because tourists want to relax in a new, modern, clean and tidy house. And they are ready to pay more for such apartments. It even happens that a similar apartment in the same house, but after renovation, is rented out and brings profit, but without renovation – it does not. Another way to fall into the trap of "cheap real estate" is to focus on the cost per square meter. The buyer seems to have a logical logic: the cheaper the square meter, the better. But in fact, everything is different. The investor should operate with the concept of LIQUIDITY, and not the concept of the cost per square meter. And liquidity is an analysis of a set of factors that will allow an apartment or house to bring maximum profit and pay off faster. In resort areas, they never calculate the effectiveness of investments by the cost per square meter. For example, a house next to the one in which you are taking real estate may cost 3 times cheaper or more expensive. An apartment in the same house, only 2 floors higher, will already cost 30% more due to a better view. An apartment with a mountain view will be 20-30% cheaper than a similar apartment on the same floor with a sea view.

#3. Mixing Goals: Resale and Profitable Rental

These two options almost never coincide. Therefore, the purchase of real estate for different purposes will be oriented towards a different set of criteria. What will be well rented out may not sell so well in the future. This is not always the case, but it is still better to separate these goals, which will help to clearly define the investment strategy.

№4. Saving on specialist services

Often, investors with a limited budget try to save on the services of specialists: a real estate agent, an accountant, an architect or a lawyer. But ignorance of local specifics can play a cruel joke on you. Cases can be different, we will list some from experience:

• Every country has its own swindlers and fraudsters. You can run into unscrupulous developers or a dummy management company that can easily outwit a foreigner who doesn't know anything. When this is discovered, it is already too late, because either the property was bought at inflated prices, or the money was paid to someone who simply disappears.
• Some sellers of secondary real estate may remain silent about many important details: necessary repairs, furnishing the apartment with new furniture, encumbrances on the property, etc.
• In some countries, it is common to carry out repairs of entire residential complexes at the expense of the owners. And if the cooperative meeting decides to do such repairs, they will simply take a loan from the bank, divide it among all the owners of all the apartments and oblige everyone to pay their own amount. Without knowing this feature, you can get a lot of additional expenses.
• Saving on translators often results in poor study of documentation, missing important points of the contract, and, as a result, additional financial costs.

We would like to draw your attention to the fact that Deniz-Estate agency provides turnkey transaction support services. This means that if you choose us as partners in supporting your transaction, we provide the best specialists in each field, for which you do not need to pay extra and do not need to worry about independently searching for these specialists.

#5. Insufficient study of the location features

This mistake is closely related to saving on specialists, because here too they can give advice and work out all the nuances. But we will put it in a separate point.

• It happens that the calculated ratio of the property price to the rental price seems highly profitable. However, in practice it turns out that the property is located in an unfortunate place and the real rental price is significantly lower (or the property cannot be rented out at all).
• It is also important what time of year you buy an apartment: if it is summer and the peak season, then even in the most remote regions there will be life, everything will be rented out. But if it is November, then the picture will be different. To understand the specifics of the region, you need to live there yourself for a year or trust the professionals who have lived there for years, 10-15 years and know every corner of the house and every piece of land.
• Even having a cast-iron tenant shouldn't overshadow a thorough check of other criteria. What will you do with the illiquid property in a year when your tenant moves out?
• It's not just the location that matters, but also the surroundings of the property. If you buy a great new apartment with great rent figures, but in a huge complex with hundreds of other great apartments nearby, renting it out can be a challenge.
• It is also important to consider the future development plans of the area. It may happen that after buying a great house on the seashore, high-rise apartment complexes will appear nearby in a year. And your house will end up in a very unattractive place.

#6. Improvidence

It is always necessary to assess the risks of force majeure. For example, the COVID-19 pandemic has upset all the cards in many markets. Including the real estate market. But in the case of commercial real estate, it can be useful to provide for different uses of the property depending on the conditions:

• For example, converting a café into a retail space for a store may well resolve the issue of continuing regular payments even under changed conditions.
• A hotel that is not generating income can be sold off as individual apartments.

№7. Re-evaluation of performers and intermediaries

Any business requires serious involvement. Often, beginning investors are deceived by the phrase “passive income”, believing that from the moment of purchase, there is no need to do business. Hired intermediaries will do everything.

• The developer's manager does NOT work on your side. His task is to sell the property, so the profitability figures and liquidity criteria may be overstated. The same story can happen in real estate agencies that are also developers. Since it is more profitable for them to sell their own real estate.
• The bank manager is interested in issuing a mortgage. You should not expect him to delve into your relationship with the seller and give you exhaustive advice.
• The notary checks the situation only for the day or period of the transaction. He will not examine the entire history of the object.
• A management company without proper oversight may not take your property very seriously.

The article discusses typical mistakes made by novice investors who underestimate the advice of professionals. Of course, these are far from all the mistakes, but we have listed the most common ones. If you want to learn more about investing in foreign real estate and how not to fail, contact our company by phone at the site header or through other communication channels. We will be happy to help! [special_block]