“In the real-estate business, past success stories are generally not applicable to new situations. We must continually reinvent ourselves, responding to changing times with innovative new business models.”
~ Akira Mori, Tokyo real estate developer
If you’re not investing in real estate, you’re likely slowing your journey to financial independence. Over the last two centuries, around 90% of the world’s millionaires have real estate investments to thank for their fortunes, according to TheCollegeInvestor.com.
In fact, Bigger Pockets podcast host, David Greene, contends that real estate offers a more consistent path to wealth than any other asset class. After all, appreciation, depreciation, leverage, and inflation all work in the real estate investor’s favor.
Yet it’s the misinformation surrounding real estate investing that can sabotage your success—or even keep you from jumping in altogether. There’s often a steep learning curve to profits and numerous pitfalls to navigate.
So how do you maximize your profits without suffering the expensive “learning experiences”? Avoid these ten costly mistakes (and learn a thing or two about passive investing).
Mistake #1: Looking at Too Few Properties
When you’re starting out, it’s easy to jump too quickly on opportunities. This can be due to a lack of patience, limited time, or even searching in a too-small market. However limited options usually leads to mediocre deals. And in markets where the purchase price is high compared to rent means limited profitability.
In order to find better deals, you have to be willing to look at more deals. Broaden your scope and look at more properties, in more locations and markets. If you’ve got the time, or the team, to travel and analyze, you can do this yourself. We’ve seen investment providers who examine roughly 100 properties for every one property the purchase.
Mistake #2: Choosing Property for the Wrong Reasons
One bridge loan provider cautions investors against “falling in love with a property,” a common mistake with new investors. There are a number of reasons for people to get attached beyond the pure analytics—it’s on a street you grew up on, it’s your favorite color, etc. etc…
Yet regardless of these details, the property must provide cash flow. When you focus on emotion rather than data, you become a real estate speculator, not a real estate investor. We recommend a tool like Truth Concepts’ Real Estate Analysis calculator to evaluate deals.
Mistake #3: Paying Too Much for Publicly-Listed Properties
A publicly listed property sells for whatever the market will bear. If a property is a great deal in a hot market, buyers often bid each other up. Even in a slow market, underpriced properties will attract some attention—then all of a sudden there’s competition and they’re no longer underpriced.
To avoid overpaying, shop for properties that are not yet listed for sale publicly. Broaden your search by shopping advertisements and building relationships with lenders, brokers, and “bird dogs” who may know of properties that aren’t public.
Mistake #4: Unrealistic Expectations
HGTV may have some entertaining shows about flipping houses, yet don’t confuse “reality” TV for realistic portrayals of investing. The truth is, these shows don’t account for holding costs, commissions, or fees.
Many house flippers lose money despite their hard work, and even when they do make a profit, it’s a high risk investment for a one-time win. If you’re truly able to buy a house for rock-bottom prices and flip it on a dime, consider keeping it and enjoying the fruits of your labor. Whether you choose to live in it, or rent it out, you’ll be more fulfilled then washing your hands of the property.
Mistake #5: “Under-Doing” Your Due Diligence
When you’re investing in real estate, your process should be exhaustive. Whether it’s commercial real estate or rentals, leave no stone unturned. Surprises are rarely good for your wallet, and often they’re surprises that could have been avoided, prepared for, or negotiated.
Be thorough when you crunch numbers. Evaluate neighborhoods with care. Anticipate and estimate future repairs. Understand the future viability of a property by analyzing the job markets and local economies. Prioritize risk mitigation.
And the obvious one? Have your properties physically inspected!
Mistake #6: Using Traditional Mortgage Lenders
When you have personal, rock-solid financing, you don’t have to rely on the requirements, timeline, and veto-power of commercial mortgage lenders. This is a lesser-known key to real estate investing success.
And if you’re going to provide your own financing, you’ll either need a lot of cash (like high cash value life insurance), or strong relationships with a variety of investors who are willing to lend.
Pricey, “hard-money” lending can work well for short-term rehabs, however those often double-digit interest rates will kill ongoing profits, and can even force you into a premature sale. Either avoid these types of lending altogether, or refinance ASAP.
Mistake #7: Underestimating the Effort Involved
Active real estate investing is not like other investments—stocks, bonds, mutual funds, or otherwise. And active real estate investing is certainly not like REIT mutual funds (which we recommend against), nor is it like being a private lender on a cash-flowing bridge loan investment.
Real estate investing is work. Hard work. You’re challenged to solve endless problems that require knowledge, research, time, expertise, and often a lot of physical work. You’ll likely have to deal with everything from plumbing emergencies to pest infestations, tenant troubles to cash flow crunches.
If you’re interested in being an active investor, it’s important that you have both the time and the inclination to do the work. And yes, that also means you should enjoy it!
And if you don’t? Consider investing passively, so you can spend your time doing something that would bring you more enjoyment.
Mistake #8: Poor Management
Even the best deal can go sour with poor management. Whether you manage the property yourself, or hire a property manager, good management is in everyone’s best interest.
It only takes a quick Google search of “landlord horror stories” to understand all that could go wrong—even if you start small and follow all the best practices.
Most owners and/or landlords are not properly equipped to handle trouble tenants, evictions, and other tricky situations. Professional property management that vets tenants, manages cash flow, maintains properties, and troubleshoots problems can be well worth it in the long run.
Mistake #9: Selling at the Wrong Time
A rookie mistake is backing yourself into a corner with disadvantageous repayment terms. Maybe you have an agreement with a private lender to pay back the principle by a certain date. You may have entered into a partnership that requires the property be liquidated in a certain time frame. Or that partnership could require you to hold the property long-term. Many types of financing are temporary, and in any of these cases you may lose control of key decisions.
You don’t want to be forced to sell a property earning excellent cash flow, or find yourself obligated to hang onto a property in spite of a good market and a great offer. It’s important to have control.
Mistake #10: Not Treating Investors Right
How do you motivate quality investors and private lenders to line up to lend you money? It’s simple. Treat them well.
- Avoid the mistakes above
- Put their cash to use right away, so they don’t have to wait to make money
- Offer consistent, attractive profits
- Protect profits. “Never lose money” applies to real estate too
- Pay like clockwork. People love reliable monthly checks or deposits
- Offer equity in the property or fund bonuses. On top of offering a percentage of profits, consider offering a bonus after a certain length of time (say, 5 years?). In a new, innovative model, investors are given an equity position in addition to cash flow. They can then recoup or reinvest when the property is refinanced and continue to earn cash flow. Additionally, these owners can share in the profits when the property is liquidated.
Want to Know More?
Grab the book, Busting the Real Estate Investing Lies by Kim Butler and Jimmy Vreeland, today. Within it’s pages, you’ll learn the truth about real estate investments, “warts and all.” They name and obliterate the myths surrounding real estate so that anyone can be confident investing in real estate.
You can find a copy—be it eBook, audiobook, or paperback—here. We’re thrilled that this book has achieved Amazon Kindle Store’s “best seller” status in multiple categories, including Real Estate Investing and Wealth Management. If you’re interested in real estate investing, we know you’ll find this a highly worthwhile book.