Avoiding Failure Patterns
While real estate investing is the easiest way to financial independence, some people still fail. I believe the following are some of the more common reasons for failure.
Doing nothing is the most common cause of failure. Analysis paralysis is what stops most people from buying their first property. For many, it is the desire to find a "perfect" property. There are no perfect properties. One of the great things about real estate is that as long as you buy investment real estate in a good location, all but the worst mistakes will be corrected over time through appreciation, inflation and rent increases.
Not Doing Your Homework
Amazingly, people spend years of savings based solely on claims by infomercial gurus or touters of turnkey properties and such. If you do not take the time to understand the basics of real estate investing, the current and long-term viability of the location, you are going to lose a lot of money. As long as you buy property in a good area, all but the worst mistakes will be corrected over time through appreciation, inflation and rent increases. If you buy in a bad location, there is little you can ever do to turn things around,
Not Working with an Investment Team
The set of skills, knowledge, and experience needed to consistently buy profitable properties is too broad for any one person to master. And, there is no advantage and certainly every disadvantage for you to "Go it alone". Seminars, blogs, and books can only provide general knowledge. You are not buying a "general" property in a "general" location. You are buying a specific property in a specific location. The detailed local information you need can only be obtained from a local investment team. The most important member of any investment team is the property manager. They deal with rentals every day and know what works and what doesn't.
Buying in a Bad Location
Real estate is the easiest to learn and the most forgiving of all of all the investment options I know. As long as you buy property in a good area, all but the worst mistakes will be corrected over time through appreciation, inflation and rent increases. The corollary is also true, if you buy in a bad location there is little you can do to recover. Location is critical. There are at least three articles on this site that I recommend reading at a minimum:
- Investment Location Considerations
- Investing in Declining Markets
- Why Las Vegas - Use this as a comparison to other markets you are considering.
Your Personal Taste
You will not be living on the property. What you like or do not like is irrelevant. You have to trust the local property manager and others on what works best for that location. If you try to make the property the way you like it, you may be making the property undesirable to the target tenant pool. For example, a few years (and two property managers) ago, I had a client from LA who wanted do some of the rehab work on a property he purchased. He decided to paint the interior - "neutral green". Despite the property manager and me asking him not to, he told us that green was the "in color". When similar properties (that did not have a green interior) were renting in days, a month later the property was still vacant. He became quite upset and insisted the property manager explain to everyone that "green is THE color." At the end of the second month, he agreed to repaint the interior to a sand color and the property rented in about a week.
Buying for Future Gain
Buying for future gain is one reason so many people lost money during the 2008 real estate crash. They bought property in the hopes that values would continue to rise and they could sell the properties to someone else before "the music stopped." A few people were even successful in the short term with this approach. But when the music stopped (as it always does), tens of thousands of properties ended up in foreclosure. NEVER buy a property with a negative cash flow in hopes of future gain! If a property will not generate a positive cash flow today, don't buy it.
Family and Friends
Family and friends are wonderful but not in business. I regularly hear from people who bought an investment property from "aunt Edith" or their brother's best friend and are now in serious financial trouble. Don't even think about using family and friends. Real estate investing is a business, not a hobby. You have to be dispassionate and willing to replace any member of your investment team that does not perform. You need the best team members you can get and the odds of being related to a star performer are about on par with winning the lottery.
Managing Your Own Properties
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. Part of the problem is the misperception that the only role of the property manager is to collect rent after you buy a property. This is not true at all. A good property manager provides far more value than just collecting the rent. I will talk about this in detail in another article.
We are not talking about being cost-conscious; we are talking about cutting corners in places that matter. For example, one of our (former) clients refused to spend $350 to fix the front yard of a $200,000+ investment property he just acquired. To make a long story short, the property sat vacant for three months before it finally rented when similar (market ready) properties were renting in days. He lost 3 months rent ($1,200 x 3 = $3,600) to save $350.
This article covered some of the more common ways people fail. Usually, failure is easily avoidable if you think of investment real estate as a business and not a hobby.