by Scott Pastel
In real estate, like many facets of life, it can often times be more useful to know what NOT to do than to know what to do. Being in real estate for many years, I have seen a pattern of mistakes that most people tend to make as beginners. Since 1979, we have helped over 50,000 people investment in real estate. Needless to say, we have seen it all. The following 10 mistakes make up over 95% of all the major mistakes we have seen over time since they seem to be pretty common. If you are able to stay clear of even some of these mistakes before you invest in your first or next property, than you are way ahead of most investors out there.
1. Thinking you have to invest in your own backyard: Buying a house to live in is an emotional decision. You want to live near friends, family, in safe neighborhoods, close to entertainment and your job location. Investing in real estate is a financial decision and must be treated as such. If you live in a tenant-friendly state like California, I highly encourage you to look elsewhere. Similarly, if you live in areas like Los Angeles, San Francisco, New York City, or Seattle, consider branching out because it’s still cheaper to rent there than it is to buy. Live where you want, but invest where the numbers make sense. One must choose a geographic location to invest based off of logic, research, and the numbers.
2. Not setting specific investment criteria: I can’t stress the importance of this one enough. Everyone needs a plan, because “Failing to plan is planning to fail”. Real estate needs to be an unemotional event where you stick to your criteria and stay focused. In real estate, being picky is good but being a perfectionist is unrealistic. Allow your investment criteria to tell you when to say yes and when to say no. If you don’t have clearly defined criteria, it could result in major headache and costly mistakes. Real estate investing is not “one size fits all,” meaning what is a good investment for you might not be for the next person. Don’t fall in love with an investment property, fall in love with your criteria and you’ll quickly realize that there’s no such thing as a “Once in a lifetime opportunity.”
3. Investing in a particular market because you have family nearby. This is one I hear often and sadly it gives people a false sense of security. Family and money, more often than not, complicate things rather than simplify things. Does it make sense that your brother who is a math teacher goes and looks at a broken garbage disposal? Better yet, if you plan on owning this property for 10 years, how many family favors do you have stored up? Work with a professional property manager to manage your property rather than a family member that has their own life and really doesn’t know a whole lot about real estate investing anyways.
4. Doing things simply because “That’s the way I have always done them.” Life moves very quickly these days, and technology is only increasing this rapid rate of change. Thankfully, these changes are for the better. Eight years ago, you never would have been able to type in the address of a property you are buying on a computer and check rental comps, recent sales comps, look at aerial photos, and virtually stand in the street facing your property. My point is this: Working with an outdated CPA, or not upgrading your computer or software, or not continuing to educating yourself on the changes in financing and the real estate market will hinder you from setting yourself up for financial success. Never stop learning!!!
5. Working with the wrong people: You absolutely need to surround yourself with a trusted network of experienced professionals that have an extensive track record of solid performance. I understand people occasionally make mistakes, however, life is too short to have your retirement be the guinea pig for some “new kid on the block” company. Real estate investing demands well-educated and ethical individuals that are not just “in the business,” but are actually investors themselves who do more than just talk the talk.
6. Negative cash flow: I’ve never met a single real estate investor in my life that said “I wish I did not have so much positive cash flow coming in from my real estate investments.” However, I have met countless investors that purchased property with negative cash flows in hopes that the appreciation would counterbalance this negative, only to end up walking away from the property because they simply couldn’t afford it any more. That’s not to say that people haven’t made money investing in properties with negative cash flow, however it’s just a lot riskier and I’m not of the belief that risking your life savings and retirement is a good idea. It’s okay to target properties for appreciation, just make sure you also have positive cash flow each month to hold you over while you wait for the property to go up value over time. If it doesn’t cash flow with 20% down, then put 25% down.
7. Being unorganized: Being unorganized is a very costly mistake. Many people do not take the time to track the performance of their property. This leads to poor documentation, missing numerous tax write offs, overpaying for maintenance, and ultimately having difficultly determining how good or bad their Return on Investment (ROI) really is. Not to mention that being organized will save you countless hours of time when doing things like preparing for taxes and refinancing properties. Every successful real estate investor I have met that’s built a fortune over time has a very organized system for managing and tracking the performance of their real estate portfolio.
8. Not factoring in maintenance and vacancy: When it comes to maintenance and vacancy in rental property ownership, it’s not “IF” but “WHEN.” This should not be a surprise to you or cause for concern. It’s just a part of real estate investing that you need to factor in when calculating your potential ROI upfront. I recommend factoring in at least 5% to 10% of your monthly rent for maintenance and the same for vacancy, depending on the property location, age and condition. This is one of the biggest mistakes people overlook, but also one of the easiest mistakes to avoid.
9. Thinking you need to buy a primary residence before owning investment property: The majority of the time, your primary residence is not an investment. It is a roof over your head, the home you will raise your children in, and the place you and your wife entertain friends and family. I personally live in Newport Beach, CA. It is not the cheapest place to live, and you can rent a place for 25% to 50% less than what you can own it for. Sadly, many of my friends are buying condos or houses that they are not happy with simply because that’s all they can afford, but mainly all they know. They moved into this home knowing they can’t wait for the day they get to move into a home they love. That just doesn’t make any sense to me. Why not invest that money in real estate, make significant cash flow on the side, and rent a nicer place for cheaper until you have enough money to buy a home that makes you happy? Moving and selling real estate has tons of costs associated with it and should not happen often (10-15 years minimum per primary residence). Also keep in mind that buying a primary residence first and incurring tremendous debt could prevent you from qualifying for investment property thereafter. Conversely, buying income producing properties first can actually lower your debt-to-income ratio and allow you to qualify for a larger loan on a future primary residence.
10. Not conducting proper due diligence: So many people do not read the contracts they sign, or
glance through them and either don’t understand them or overlook certain things. Know what you are signing, know the fair market value of the property, and know the rent prior to buying a rental property. If you can’t find the answers yourself, then ask a professional Real Estate Advisor.
Real estate investing isn’t rocket science, and you don’t need to know everything there is to know before getting started. However, if you can use these 10 pieces of Marshall Reddick Real Estate Network wisdom as the foundation of your investing journey, you should be able to join the ranks of the thousands of people who have been successful investing though our network since 1979.