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SHOW NOTES FOR EPISODE 216: ASK BILL! MOST COMMON REAL ESTATE MISTAKES AND BEST STATES TO INVEST
This is our monthly Fun Fact Friday “Ask Bill!” episode, where I answer specific real estate investing questions received during the month from e-mails, in-person conversations, phone calls or through online portals such as BiggerPockets.com and Quora.
We learn from our mistakes and we can also learn from the mistakes of others. In today’s monthly “Ask Bill!” episode, Bill shares some of the most common real estate investing mistakes as well as a list of some of the best US states for real restate investing.
Question #1 – What is the most common mistake when people first get into real estate investing?
If you’ve listened long enough, you know, we always ask our guests about their Biggest Mistakes.
Recent:
- Bad partnerships
- Didn’t analyzing properties more carefully
- Due diligence
You know we can really learn from other people’s mistakes. Hearing how other people blew it and turned things around can be a great way to learn and avoid mistakes.
One of my favorite podcasts is done by Paul Moore, an Old Dawg guest, and it’s called the “How to Lose Money!” podcast Where people share big mistakes they made, what they learned from it and how they fixed-it or turned it around.
Let’s talk mistakes
Two biggest mistakes according to Old Dawg/Long-Time Investors:
- Not buying more
- Selling
Not buying more real estate! I have a podcast where all I do is interview the top real estate investors in the nation and the number one complaint is that they didn’t buy more real estate sooner. Here is an interview with Samuel K. Freshman, a Stanford Law grad who wrote the book on real estate syndication and who has been investing in real estate for 60 plus years. Listen to his answer about his biggest mistake: 091: Real Estate Syndication for Dummies
Also, from a personal prospective as a real estate investor, I did a podcast on my 5 biggest mistakes that also might be helpful. You can check it out here: 064: My 5 Biggest Real Estate Investing Mistakes… So Far
And finally, I wrote a few articles on common REI mistakes that might be helpful as well. One is entitled
6 Common Mistakes to Avoid When Investing in Real Estate.
1. Be Pre-Qualified
Always visit a with a mortgage broker or with your bank to get pre-qualified before you start looking for properties. And determine how much of a loan you can get. This will help you determine just how much you have to spend and where to buy. Nothing is worse than losing a great deal and possibly losing your earnest money deposit because you did not secure the proper financing in advance of signing a contract.
2. Run Your Numbers
Also, look for properties or areas that are sure to generate a positive cash flow; this means the rent from tenants should be enough to not only pay for your mortgage, property tax, insurance, utility bills, repairs and maintenance, property management fees and other regular expenses, but also include an allowance for vacancies and future capital expenses (roofs, new A/C, etc.). After all of those, you also want to make sure you have built in your positive cash flow income. Afterall, you are an investor and investors seek good returns and profits!
3. Know Your Market
Never go into the real estate market by yourself, always have an experienced local team and solid “boots on the ground” who thoroughly understand your market, and, especially, the neighborhoods in which you are investing. This point cannot be emphasized enough. A strong local team can advise you on where and where not to invest. If you have members on your local team who are also investors this gives you an additional advantage as they have had first-hand experience investing in the area and you definitely want the advantage of their experience.
4. Have a Professional Inspection
Have any property you are going to settle on be inspected by a professional home inspector, as it is often said, not everything that glitters is gold. Never just look at a property from the exterior and the face value and jump on it. The pipes may be damaged, wiring might not be properly done, the foundation may have issues and many more problems, so the inspector should be a crucial step before settling on any property. Also, find a contractor whom you can trust to give you the right advice on repairs and renovations to be carried out on the property.
5. Carefully Track Your Income and Expenses
Always keep proper records of your income and expenses, even before you purchase, for every investment on the property. Do not get these records mixed up with your personal bank accounts as it would become even more tedious to separate when you file a tax return at the end of every year. It does not matter if the investment is owned in your name or a company name, always try to separate these records.
6. Properly Document Partnerships
If you are buying any property with a partner, always make sure you have a proper joint venture or partnership agreement to protect the interest of both parties should things not work out as predicted. Most importantly, provisions should be made in case a partner wants to sell and the other partner does not, one partner is not paying their share of expenses or what should happen if a partner was to die. Do not be naive and believe because you and your partner are best friends nothing bad can happen. Always drawing up a proper partnership agreement, you could never know what exactly would happen and to assume is a dangerous step.
Twelve Common Mistakes Real Estate Investors Make and How You Can and Should Avoid Them
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
- 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.”
Other Podcasts and Articles on Common Real Estate Investing Mistakes
202: How to Avoid Real Estate Investing Mistakes – May 4, 2018
Top 10 Costliest Landlord Mistakes – December 14, 2016
Question #2 – What are the best states to invest in real estate right now?
Great question! However, to really answer the question well, you need to define a little more in detail as to what are you investing for? Cash flow? Equity? Both? Are you investing for retirement or immediate cash income now? These are just some of the questions you need to ask yourself.
Also, when you look at good markets to invest in, you must realize that real estate investing is very regional. It’s better to look at MSAs (Municipal Statistical Areas)/cities and smaller regions within a state. And even when you look at cities, there can be a good part of the city and a not-so-good part of the city to invest.
I currently invest in Atlanta, Memphis and Indianapolis. But, even within each city, for example, Memphis, a good investment area vs. poor area can be the difference of one street to the next.
Some people choose to invest in “emerging markets” – markets that provide both good cash flow and strong equity growth. To identify an emerging market you need to examine a number of key metrics. You generally will start with statistics on such things as population growth over a 5–10 year period, unemployment numbers, rental demand, building starts, info on local economic growth, as well scour news articles about the region you are interested in regarding companies planning to move in the area, local city tax incentives for businesses, city planning /growth and more. You’re trying to find those areas that have all the right stuff to explode over the next 5–10 years.
I had a guest on my podcast who has been very successful investing in emerging markets. Because I have limited space here, you might want to have a listen to that interview. Here is a link: 095: How to Find Hot Emerging Markets for the Best Deals
I also recently did a podcast on the The Top Emerging Real Estate Markets for 2018 that might be helpful. In that show, we looked at the best states for equity and appreciation. Here are the top states we identified:
TOP EMERGING STATES
- Washington
- Utah
- Idaho
- Tennessee
- Rhode Island
- Oregon
- Colorado
- Texas
- Nebraska
- Michigan
- Florida
Here is a link to that show if you’d like to learn more about how this list was determined: 178: Top US Emerging Real Estate Markets for 2018
I hope this information helps answer your question! Best, bill
Well, that’s our “Ask Bill” questions for today!
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