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SHOW NOTES FOR EPISODE 462: MOST COMMON REAL ESTATE INVESTING MISTAKES
Real estate investing can be a profitable and worthwhile financial venture to build cash flow, obtain a great return-on-investment and to build a legacy for your children and your children’s children. However, you can achieve significant success sooner by avoiding common investor pitfalls. In today’s podcast, Bill shares some of the most common mistakes real estate investors make and how you can avoid these mistakes.
Tip of the Week
- Protect yourself. If you are thinking about investing in one or multiple properties, consider using an LLC to purchase them. An LLC, or limited liability company, can help you with risk management. The LLC has ownership over the properties; if anything should happen on those properties, you are not held personally responsible. Additionally, having an LLC can protect your retirement fund should something occur on the property. It can also give “checkbook control,” which can help if time is a factor when accessing your retirement funds for real estate-related purchases. After opening an LLC using your self-directed individual retirement account, your account is the business, and you are the assigned business manager. This process allows you access to your funds whenever you need them; however, that doesn’t mean you don’t need a custodian, or that you can take the funds for other uses. All funds removed must be used on the property, and any withdrawal needs to be reported to your custodian. However, instead of being charged for multiple account changes, you only need to report it once. This is especially useful for paying fewer fees.
Most Common Real Estate Investing Mistakes
Real estate investing can be a profitable and worthwhile financial venture to build cash flow, obtain a great return-on-investment and to build a legacy for your children and your children’s children. However, be wise and understand that you can achieve significant success sooner by avoiding common investor pitfalls.
Mistake #1 – Spending thousands of dollars buying books, tapes and attending seminars and then putting all of that information on a bookshelf and never looking at (or using) it
I am continually amazed at the number of “would be” investors who have spent a bundle of money attending seminars, getting an education and then never using it to start their investment program. Not only is it a waste of thousands of dollars but it could be the biggest financial mistake you can make.
Mistake #2 – Failure to learn the basics of real estate investing
The other extreme to Number 1 above are potential investors who realize real estate is the best way to accumulate wealth and venture into the purchase of properties without knowing the basics of real estate investing. Those investors are certain to get into financial trouble.
Mistake #3 – Fear of making a huge financial mistake
We all fear making mistakes, especially a large financial one. If you follow the advice in Number 2 above, you won’t have to worry about making a financial mistake.
Mistake #4 – Not looking at more properties
Don’t fall in love with the first property you look at. Lots of investors buy properties because they “look nice” or they are too lazy to see what else is currently on the market that may be better. Part of sound real estate investing is in giving yourself a choice so you can select the best one, financially.
Mistake #5 – “A better deal may be around the corner” syndrome
This is the opposite mistake of Number 4. This investor never starts his or her real estate investment program because they always hope a better deal may be out there somewhere if they wait…and wait…and wait.
Mistake #6 – Thinking that real estate investing is strictly a complicated game that only the wealthy can play
First of all, real estate investing isn’t complicated if you learn how to do it first. Did you know that even professional investors use a simple nine step process to analyze the financial feasibility of an investment property?
Here’s a brief idea of the nine simple steps to use in analyzing any type or size investment property.
A Basic Financial Property Analysis
- Scheduled Gross Income (Income if 100% leased)
- Less: Allowance for vacancies
- Operating Income before expense & Mtg. Pmts.
- Less Operating Expenses (Taxes, insurance, utilities, repairs and maintenance etc.)
- Equals: Operating Income (Income before Mtg. Pmts.)
- Minus: Mortgage Payments
- Equals Cash Flow
- Plus: Mortgage Principle Payment
- Equals Total Return
There is a lot more to it than that, but this is the basic nine step procedure most professional investors use when analyzing any income producing investment property.
Mistake # 7 – Falling in love with a property
Once you’ve got your feet wet and become a real estate investor, you’ll wonder why you waited so long to begin. Now you’ll face another problem – falling in love with your property. They’ve seen how well it is doing, cash flow has been going up each year, and they’ve fallen in love with their tenants (not literally). Two big mistakes are made here. First, never fool yourself into thinking your property is doing well enough to sell or trade up because your cash flow is considerably higher than when you purchased the property.
The second part of mistake number 7 is getting so friendly with your tenants that you fail to maintain rental standards based on what the market will bear. This greatly hinders your growth potential.
Mistake # 8 – Failure to effectively plan your financial goals
Before you purchase that first property, which, of course, you have financially analyzed, determine what you expect from your investments — your financial goals. It is known as “The ‘time vs. money’” concept. The more you have of one the less you need of the other in order to reach your financial goals.
Mistake # 9 – Trying to purchase properties that the seller isn’t motivated to sell
Buying off-market properties is a wise strategy that can can generate “built-in” profits. However, I have seen potential buyers continually try to purchase investment properties that owners are just not interested in selling. This includes property owners with the attitude that “Sure, it is for sale… for a price.” Unfortunately the ‘for a price’ part usually means it will make no financial sense for a buyer.
Mistake # 10 – Believing you can get rich overnight
Getting rich overnight won’t happen . . . (regardless of what a number of the so called “experts” tell you). It takes time, hard work and knowledge of real estate investing to do it with maximum return. The important thing to remember is that YOU can do it. You can join the millions of investors who generate sizable incomes by investing in real estate but be patient and prudent.
Mistake # 11 – Not financially analyzing a potential investment property
This is the most serious mistake an investor, or potential investor, can make. I have seen a few pros in the business rely on a “worthless and inaccurate” rule of thumb to make a huge financial purchase decision, with total disregard for how well the property will perform.
It’s all in the numbers! Make sure you have carefully collected the right data, that you are allowing for all contingencies and that the numbers work before you buy.
Oh, yes, there is one more major mistake lots of investor make:
Mistake # 12 – Thinking it is important to pay off your mortgage as soon as you can because mortgages are a ‘necessary evil’
First of all as a real estate investor, mortgages are an important part of financial success and not a necessary evil. You must learn why this is true. You must learn how, in the right situation, a second or third mortgage can be a nice thing. Secondly, mortgages are one of the keys to generating wealth in real estate. You must learn how to use financing as one of the keys to building a profitable real estate portfolio, without concern for it being “risky.” And finally, there’s the benefit of mortgage interest tax deduction.
In Conclusion
As an old dawg, I want to avoid as many mistakes as possible. As a young pup, you can afford to make a mistake or two because time is on your side to recover from it. But, later in life, you want less risk and more solid dependable returns!
So, hopefully, today’s podcast will help you to avoid the problems (of course we will always make mistakes) but at least we can make a few less mistakes so we can benefit from our great investments!
DISCLAIMER: Many of the above strategies take knowledge and have a higher degree of risk. You need to do your research and/or work with someone who is experienced to reduce your risk.
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