While real estate investing is an amazing way to build wealth and passive income, it is also a perfect way for inexperienced investors to lose money quickly. In this podcast episode, Bill will point out some real estate investor common mistakes so that you can avoid or fix them right away.
The purpose of this post is to point out common mistakes so that you can avoid or fix them right away.
Mistakes are an important part of investing. Everyone makes mistakes. Even Warren Buffett or Donald Bren made them. You just have to learn from your mistakes.
There are two ways to learn from mistakes, 1) you’ll either learn from the ones that you make or, 2) you’ll learn from the mistakes of others. I don’t know about you but I prefer to learn from other people’s mistakes. The important thing is to keep the mistakes to a minimum. You don’t want to make too many of them and then lose heart and end up quitting real estate investing altogether. You need to recognize mistakes for what they are – necessary learning and maturing experiences.
This is perhaps the biggest loss. Being so afraid to fail or mess up that you never ever take the first step. And you end up regretting, 10 years down the road, not taking that first critical step.
Lack of a plan is one of the biggest mistake new investors make. They buy a house because they think they got a good deal and then try to figure out what to do with it. That’s working backward. First, you find the plan. Then you find the house to fit the plan. Pick your investment model, and then go find the property to match that. Don’t find the strategy after you find the home.”
That kind of wrong-headed thinking is fueled, unfortunately, by self-appointed gurus who have infomercials and make it sound so easy to get rich in real estate. It’s not easy. It takes hard work and unwavering determination. Sure, I believe it can be the fastest way to wealth it comes at a cost. You have to be smart. You have to be willing to work hard. And you have to understand your risk tolerance.
A key to real estate investing success is building the right team of professionals. At the very least, you need good relationships with at least one real estate agent or broker, an appraiser, a home inspector, a good attorney, CPA and a lender, both for your own deals and to assist with financing for prospective buyers. In the remodeling and maintenance segment of the business, the team includes a plumber, an electrician, a roofer, a painter, a heating and air conditioning, or HVAC, contractor, a flooring installer, a lawn maintenance service, a cleaning service and an all-around handyman. You can’t build a business as an investor if you’re spending all your time fixing leaky faucets and putting up ceiling fans.
The biggest reason investors don’t make money is simple: They pay too much for their properties. The profit is locked in immediately once the investor buys the property. Due to mistakes in the analysis, the investor pays too much and then is surprised later when he doesn’t make any money.
You wouldn’t think you’re qualified to perform open-heart surgery without years of education and training. Yet many wannabe real estate investors don’t think twice about taking their financial lives in their hands without even cracking a book. Educate yourself before you put your family’s financial security on the line. Read articles, listen to podcasts, look on YouTube, read blogs, check out books from the library (hey there’s an ancient term!) and look for a local chapter of the National Real Estate Investors Association or other real estate meet-ups. Speakers at monthly meetings cover everything from buying foreclosures to screening tenants. Also, you’ll make contacts at those meeting who may become future partners, sellers, or investors.
Investors often like to move very quickly on their deals. That doesn’t mean they sign a contract and write a check without plenty of research, though. That’s where a lot of newbies trip up. They don’t do their due diligence, research costs or the market conditions, check local permits and they wind up draining their personal savings because the house needs extensive repairs or they can’t sell it. Sometimes, new investors are buying property just based on the idea that the property is going to appreciate and miss the fact that it can also be a cash cow for years to come – if they do their due diligence and aren’t hit later with unanticipated expenses that will destroy your bottom line.
If your strategy is to buy, hold and rent out properties, you need sufficient cash flow to cover all expenses and maintenance. People think they can get a property manager who will take care of those things – but not without a cost. Many newbies have never interviewed a property manager and have little idea about how they work and what “additional costs” can occur. It’s not uncommon for a property to sit on the market for 90 to 120 days before it’s leased, he says. Meanwhile, the owner has to pay the mortgage, the taxes, the insurance, the cost of advertising and maintenance. If the owner hasn’t budgeted for that, an asset can quickly become a liability.
If you’re working on one deal at a time, you’re doing transactions, not running a business. You need a steady pipeline of prospective deals; sufficient volume will weed out the marginal deals and let the good ones rise to the top.
Many people buy a property and get stuck with it because they only have one exit strategy. They’re going to sell it or they’re going to rent it out. What if it doesn’t sell? What if the rental market stalls? Always have two, if not three, ways to get out of any deal. For example, if plan A is to rehab the house, put it on the market and resell it, then plan B could be to offer a lease-purchase to a buyer. Plan C might be to hold the house and rent it out. And as a plan D, there is the wholesale option, which would involve selling to another investor at a below-market price. Hopefully, you’ll still make a profit, but at the very least, you’ll cut the losses you’re taking every month in carrying costs.
After you do your homework, you should double the amount of time and money you think it will take. If you can still make money then and be able to rent it out, it’s a good deal.
The problem is that most people look at real estate as a transaction instead of as an investment strategy. People fall in love with a property. I say, “Who cares about the property? I fall in love with a motivated seller.” The number is the number, and you don’t go above that. The best way to solve the problem is to have lots of activity and make offers on multiple properties. Then you don’t care which one you get — as long as the numbers work out in your favor.
Some people don’t want to spend the “extra money” to have an inspection but I say an inspection is not “extra money” – it’s mandatory money that has to be factored into every deal. An inspection can reveal things like foundation issues, black mold, asbestos and other critical issues that can rob you of making any profit on a property. Don’t be a tightwad here! Spend the money for a good, qualities inspection.
This is a biggie for many investors. They don’t have enough for the rehabs, necessary CAP-X expenses, allowance for vacancies and 3-6 months of reserves for serious down-turns for natural disasters. Make sure you build in plenty of cash
Too often, investors buy the agent or seller’s rhetoric about how the area is turning around or it’s in the path of progress or… fill in the blank. Do your homework. Talk with city planning officials, chamber of commerce, the mayor’s office, local cops, people living in the area, inspectors and appraisers, and he list goes on… Once you buy in a bad location, there’s not a lot you do. You either have to sell at a loss, be content with high-maintenance tenants, high turn-over, maybe high crime,
After you get your repair estimates, always add on 30-40%. Unless you have a relative doing the construction and rehab, you need to assume costs will run higher and take longer than projected.
I always say your real education starts AFTER your first property purchase. You will make mistakes. It’s a given. But you can mitigate most of the big ones by heading the list I just presented. And, when you do slip up, don’t be discouraged. It’s part of the learning process. Embrace the mistake and learn from it. Ask yourself these questions:
Well, that’s my list. Yes, I know there are plenty of other items that I could have included here but I tried to hit the most common and most costly.
Again, don’t be afraid of the mistakes. We all make them in this crazy real estate investing business. It’s part of the cost of admission to “the club” so to speak. Watch, after a while, you’ll find yourself sitting around sharing real estate “war stories” with some of your buddies at the local REI meeting or meet-up before you know it.
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