Avoiding Failure Patterns
In this article we cover some of the more common reasons why new real estate investors fail.
This is the most common cause of failure. Analysis paralysis is what stops most people from buying that first property. For others, it is the goal to find that “perfect” property. There are no perfect properties.
Not Doing Your Homework
You would not choose to invest your hard earned money in a stock just because it has a nice name or glossy brochures. You would look at the financial performance as part of your due-diligence. Investing in real estate is no different. Yet too frequently people invest with “turnkey” types of promoters and lose money. Failure to perform due-diligence is a common failure factor.
Not Working with an Investment Team
No matter how many seminars you attend or books you read you need specific local knowledge if you want to succeed in real estate investment. Such local knowledge can only be obtained through local subject experts. A minimum team should contain the following skills:
- Property manager
- Property inspector
- Loan broker
Equally important to having a team is listening to them. If you do not trust your team members enough to follow their advice you need to replace them with the ones you do trust. The corollary is that if your team is not making you money, you need to replace the team.
Buying for Future Gain
This is why so many people lost money during the real estate crash. They bought property in the hopes that values would continue to rise and they could sell it to someone else before "the music stopped." A few people were even successful once or twice. But when the music stopped, tens of thousands ended up in foreclosure. NEVER buy a property with a negative cash flow! We see no difference between gambling at a casino and buying for "long term gain." If you don't have a positive cash flow today, don't buy it unless you really know what you are doing.
Family and Friends
Family and friends are wonderful but not in business. We regularly hear from people that they bought their last property (and lost a bundle) from aunt Edith or that uncle Ed always wanted to be in the property management business and now they are in the process of trying to evict a tenant who will not pay the rent and is destroying their property. Don't even think about using family and friends. You have to be dispassionate and willing to replace any member of your investment team that does not perform. You need the best and the odds of being related to a star performer are about on par with winning the lottery.
Managing Your Own Property
One of the surest ways to fail is to manage the property yourself. We occasionally hear statements like, "I will manage the property myself to save the management fee." Don't do it, you will fail. For example, unless you have access to the right databases (you need several and they are not cheap) you can't even qualify a potential tenant (credit history is not the most important factor). If the property manager does not save you far more than their fee, you are working with the wrong property manager.
We are not talking about being cost conscious; we are taking about cutting corners in places that matter. For example, one of our clients refused to spend $350 to fix the front yard of his property. He ended up with 3 months of vacancy before he finally rent it out through a subsidized program. He lost 3 months rent ($1,200x3 = $3,600).
Good tenants will not rent bad or substandard properties. And, a tenant who does not care about the condition of the property when they are moving in is not going to take care of the property. You can't afford to have that kind of tenant no matter how much you "saved." Do not skimp on making (and maintaining) your property to market standards.
In this article we covered some of the more common ways people fail in real estate investments.