Gus Dahleh has been successfully investing in real estate since the early 2000’s. According to Gus, these are the 3 common mistakes investors make when investing in real estate.
Gus Dahleh – “There’s been an increase in demand for multifamily homes. Because of this, a large number of investors are interested in the investment potential of these types of properties. Unfortunately, there are a number of mistakes that real estate investors make when they choose to invest in real estate. Anyone considering investing in multifamily homes or other types of real estate should be aware of these mistakes so that they can avoid them.”
From our interview with the experienced Chicago real estate investor and commercial developer, we have noted these 3 mistakes to avoid when making passive real estate investments:
1. Making Emotional Financial Decisions
Balance sheets and potential profits should be considered when you’re trying to decide whether or not you should make a multifamily real estate investment. However, a lot of investors make the mistake of thinking with their heart rather than their brain. It’s easy to form an attachment to a lovely property or a building that’s located in a wonderful area.
However, in these situations, it’s important to be sensible. When you make decisions based on your emotions, it can get in the way of common sense. According to Dahleh, you shouldn’t overspend on a property simply because you’re attached to it. If you allow yourself to make emotionally-charged decisions, you could wind up making an investment that you’ll regret.
Instead, you should look at the numbers when you’re deciding whether or not you should purchase a property. You’ll want to look at the property’s potential as well as the costs of managing a property. Don’t focus your attention on how nice the building looks or how appealing a specific market is.
2. Assuming That A Property Will Appreciate
There are two primary sources of profits for multifamily property investments. Properties like this are able to generate income via rent or other fees charged. Appreciation is the other source of profit. However, when you’re deciding whether or not to invest in a multifamily property, you’ll want to focus on the amount of income it will generate. After all, even if a property does appreciate in value, you won’t see any profits from that until after the property is sold.
There are investments that aren’t able to generate much income but could potentially show a great deal of appreciation. For example, Gus Dahleh believes in markets like New York City, Los Angeles, or San Francisco, profits usually don’t generate much cash flow but could appreciate in value significantly. Properties in this area typically have a capitalization rate between 1 and 3%. The capitalization rate is the ratio between a property’s purchase price and its net operating income. If the cap rate is low, you can expect to pay more. This is why sellers typically try to sell at the lowest cap rate possible. The opposite holds true in the Midwest. Cash flow is high, but properties usually don’t significantly appreciate in value.
A lot of investors depend on a high appreciation. Even if a property doesn’t bring in much cash flow, investors assume that they’ll be able to earn a great deal when the property sells. Assuming that a property will appreciate is a big risk that may not pay off for you. As an example, you may not see any appreciation if the market goes into a recession.
Thankfully, there are plenty of ways to increase the potential income for a multifamily property. For example, you could renovate the property and make upgrades before raising the rent. You could also work to lower your operational expenses. No matter which method you choose, you’ll want to look at ways to increase cash flow.
Ideally, investors should make balanced investments in properties that will provide consistent cash flow and appreciate in value. Investing in this way will give you multiple streams of revenue. It’s best to purchase properties in areas where properties are likely to appreciate, but can also provide a positive cash flow of 7% or more. Dallas, Atlanta, and Jacksonville, Florida are all great places to invest.
3. Choosing A Bad Market
It’s common for investors to select a market they’re familiar with when they’re trying to decide where to invest. As an example, an investor may choose to buy property in the city that they live in because they know the area well. Unfortunately, choosing a market just because you’re familiar with it could cost you a great deal.
You’re also likely to run into issues if you invest in a smaller market. There are some advantages to small markets. Since purchase prices are lower and cap rates are higher, these markets can provide high cash flow. However, in the case of a recession, these prices won’t be sustainable. There are markets that are sustainable, such as Atlanta or Orlando, Florida. Investing in these markets is a smart idea.
Smaller markets may be able to offer a 10% CoC to investors, but markets with a CoC around 7 or 8% are actually a better option. CoC stands for “cash-on-cash return.” It’s a term that helps to evaluate a real estate investment’s performance. It looks at the annual net cash flow the property will bring in and divides that by the down payment that was used to purchase the property.
It’s essential to investigate a market before making an investment. Check to see if vacancy rates are decreasing. Look at job growth in the area. These factors can indicate that a market is a good area to invest in. After you purchased a property, you can hire a property manager in the area that can manage the property on your behalf.
Conclusion
It’s important to avoid the most common mistakes that people make when investing in real estate. Sidestepping these mistakes will allow you to put money into properties with a high potential for passive income. Don’t rely on your feelings when you’re deciding where you should invest. Take the time to crunch the numbers and confirm that an investment will be profitable. Don’t rely on potential appreciation when you’re deciding whether or not to purchase a property. There’s no guarantee that a property will see appreciation. Instead, you should look for a property that will bring in steady cash flow and also has the potential to appreciate. Lastly, you’ll want to choose your market with care. Buy property in an area where vacancy rates are going down. You should also look for markets that are seeing a lot of job growth. If you’re able to avoid the mistakes that new real estate investors frequently make, you’ll be able to create a solid source of passive income for yourself.
About Gus Dahleh:
Gus Dahleh is a real estate entrepreneur who specializes in commercial real estate development with a primary focus on distressed assets. Since 2010, Dahleh has acquired over $50 million of commercial real estate assets and entered into long term leases with JP MORGAN CHASE BANK, AT&T, WALMART, SAMS CLUB, AND CUBESMART. Gus Dahleh has also developed a niche in the cell antenna industry by selling lease revenue to publicly traded REITS which include American Tower and SBA Communications Corp. In 1995, Dahleh began his financial markets career as an equity options trader at the Chicago Board of Options Exchange. Gus Dahleh has developed proven option strategies for the U.S. 30 Year Treasury Bond and Gold Futures based on seasonal and technical patterns. Gus Dahleh has a proven track record for providing direction on how to maximize the value of commercial real estate and financial market investments. For more information, follow Gus Dahleh on Social Media or visit GusDahlehBlog.com for more information.
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