“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
Investment real estate is a proven path to wealth. However, there is often a steep learning curve to real estate investing profits. Investing in real estate also has many possible pitfalls that can lead to frustration and loss!
How do you maximize your profits without suffering expensive “learning experiences”? Avoid these ten costly mistakes! (And if you aren’t sure that “active” real estate investing is for you, read on… we can help you avoid these mistakes AND earn passive cash flow from real estate investments… without plumbing or tenant problems.)
Mistake #1: Look at Too Few Properties
Too often investors are impatient, limited on time, or searching in too small of a market. They evaluate 8 or 10 properties, pick the one that seems the best, and make an offer. Yet choosing from limited options and locations usually mean settling for mediocre deals. And in markets where purchase prices are high compared to rents, properties have limited profitability.
To find better deals, look for MORE deals. Examining properties in various locations and markets is one way to do that if you’ve got the time (or a team) to travel as well as analyze properties. One of our providers of real estate investments examines about 100 properties (all around the country) for every ONE they purchase.
Mistake #2: Choose a Property for the Wrong Reasons
One of our bridge loan providers cautions investors against “falling in love with a property,” a common mistake with new investors. Don’t get attached because it was built the year you were born, it’s your favorite color, you used to live on the same street, or because of how much you think it’s going to appreciate.
You may or may not “love” the property, but if you’re buying or lending on it as an investment, the property must provide cash flow! Otherwise, you’re a real estate speculator, not an investor. We recommend using a tool such as Truth Concepts’ Real Estate Analysis calculator to evaluate deals.
Mistake #3: Pay Too Much for a Publicly-Listed Property
A publicly listed property sells for whatever the market will bear. If it’s a great deal in a hot market, buyers often bid each other up. Even in a slow market, underpriced investments tend to attract attention, then voila – they’re not so underpriced once there is competition!
Ideally, you should find and consider properties not yet publicly for sale. This can happen through advertisements and through relationships with lenders, brokers, “bird dogs” and other people who may know about deals not publicly listed.
Mistake #4: Have Unrealistic Expectations
While shows like “Flip or Flop” may be entertaining, don’t confuse these “reality” TV shows – which never account for costs such as holding costs, commissions, fees – with realistic examples of investing.
Many house flippers lose money in spite of all their hard work, and even when they do clear a profit, it can feel like a lot of risk and hard work for a one-time reward. If you truly can buy a house at a rock bottom price and renovate it on a dime, consider keeping it to enjoy continuing cash flow.
Mistake #5: Under-Do Your Due Diligence
You should have an exhaustive process for evaluating a commercial or rental real estate purchase. Surprises are rarely good for the wallet, and often they could have been avoided, prepared for, or negotiated.
Crunch the numbers thoroughly. Evaluate the neighborhoods carefully. Anticipate and estimate future improvements and repairs. Examine job markets and local economies to understand future viability and potential. Prioritize risk mitigation. And last but not least, have the property physically inspected!
Mistake #6: Rely on Traditional Mortgage Lenders to Finance Deals
One of the keys to successful real estate investing is having your own rock-solid financing, so that you don’t have to rely on commercial mortgage lender requirements, timelines, and ability to kill a deal.
To provide your own financing, you’ll either need a lot of cash (life insurance cash value is perfect for liquidity), or excellent relationships with multiple investors willing to lend you their money.
Many real estate investors turn to pricey “hard money” lending, which can work well for short-term rehabs. However, you’ll want to refinance ASAP as double-digit interest rates will kill ongoing profits and may even force a premature sale.
Mistake #7: Underestimate the Work Involved
Active real estate investing is not like investing in stocks, bonds, mutual funds, or private equity funds. It’s not like investing in a REIT mutual fund (which we don’t recommend), nor is it like being a private lender on a cash-flowing bridge loan investment.
Real estate investing is work. It challenges you to solve endless problems, from plumbing emergencies and pest infestations to tenant troubles and cash flow crunches. It is active investing that requires knowledge, research, time, expertise, and often a lot of physical work.
It is important to have the time and inclination for active investing, and to also enjoy it sufficiently that it is worth your while! Sweat equity isn’t always necessary, but it can increase profits. Or perhaps you would rather invest passively, earn cash flow, and spend your time doing something else!
Mistake #8: Ruin a Good Deal with Poor Management
You’ve bought an excellent property with solid numbers and upside potential to boot. Now what? You can manage it yourself or hire a property manager, but either way, management is critical.
Many newbie investors start with single family homes in their own city or county. These can be successfully self-managed with assistance to screen tenants, make contracts airtight, and follow best practices. But it only takes a quick google search to find “landlord horror stories” to realize all that can go wrong!
Most owner/landlords are not properly equipped to handle trouble tenants, evictions, and other tricky situations. Professional property management that selects tenants, manages costs and cash flow, maintains properties and troubleshoots problems can be well worth it.
Mistake #9: Sell The Property at the Wrong Time
You may have an agreement with private lenders that they will receive their principle back by a certain date. Or you may have entered into a partnership that requires the property to be liquidated within a specific time frame, or held long-term. Many types of financing are temporary, such as bridge loans or mortgages with a balloon payment, and your plan may be to sell before a refinance is necessary.
In any of these cases, you could back yourself into a corner and lose control of key decisions. You don’t want to be forced to sell a fantastic property earning excellent cash flow or find yourself obligated to hang onto a property in spite of a good market and a great offer.
Mistake #10: Don’t Treat Your Investors Right
How do you motivate quality investors and private lenders to line up to lend you money? Simple – treat them well:
Avoid the mistakes above.
Don’t make your investors/private lenders wait to make money. Put their cash to use so that they start earning cash flow right away.
Offer consistent, attractive profits. (We help our clients earn 7-14% ROI, depending on a few factors.)
Protect principle. “Never lose money” applies to real estate, too.
Pay like clockwork. People love reliable monthly checks or bank deposits!
Offer equity in the property or fund bonuses. Most real estate deals offer private investors cash flow, which could be a guaranteed rate or a percentage of profits. As extra incentive, you could offer an additional bonus paid after a certain length of time, such as 5 years. In one innovative new model, investors are given an equity position in addition to steady cash flow. Investors can recoup or reinvest their original position when the property is refinanced (often within 3 years) and continue to earn cash flow. Additionally, these fractional owners share in the profits when the property is liquidated. If you are an accredited investor, contact Partners for Prosperity to find out how you can participate in this new business model for passive real estate investing.
Looking for Passive Cash Flow from Real Estate Investing?
Whether you are an accredited investor looking for double digit returns or a newbie investor looking to turn as little as $25k or $50k into some reliable cash flow, we can connect you with appropriate providers of bridge loan and real estate investments. Options include private equity funds, first-position liens and more.
Clients are currently receiving returns ranging from 7% to 14%. Most (but not all) options require investors to be accredited, with either a net worth of $1 million (excluding home equity) or income of $200k for individuals, $300k couples. Contact us today for details.