Avoid These 5 Common Investing Mistakes
There are some common investing mistakes that I see people make over and over again. Today we are going to take a look and see what they are (and how to fix them!) If I recall correctly it was Henry Ford who stated, “I do not need to know everything; I just need to know people who know all the different things.” I always liked this quote and it is so prevalent in real estate investing, especially today.
Then there is the famous author John Maxwell who wrote the book Failing Forward. The premise of the book if you have not read it, is that the best way to learn anything is to fail at it. Then you have truly learned how not to do something and the lessons will propel you forward.
So when you mesh these two astute observations together, what you get is the understanding that you can indeed learn from other people’s mistakes (failures) and simply avoid what these many people before you have already identified as a way to NOT do real estate investing.
Let’s look at 5 common mistakes so you can avoid them.
1. Not having an identified investing plan.
As the old saying goes, "people do not plan to fail, they simply fail to plan." Having a clear plan that you can share with as many people as possible will assist you to accelerate your investments. Share this with your attorney, your Realtor, your handyman, your property managers. Anyone in the world of real estate can assist you to avoid mistakes and to help you find the properties and strategies required to run a great streamlined business.
2. Not setting up a proper business entity.
Another great saying (wow, looks like I am in to quotes today) is "begin as you plan to proceed." Going hand in hand with having a plan is to incorporate into the plan an entity structure set up. Most common is the LLC, but there are different types of trusts and LLP’s,etc. These of course are used for both asset protection and liability protection. an attorney and or accountant can best assist you to set up the best entity structure for you.
3. Not investing in sustainable investments markets.
Many years ago we used to invest in our backyards. The mindset was you should be able to drive to your property within 20 minutes. Today this really only applies to fix and flip type of investing. Buy and hold investing in today’s modern global economy will best serve you by investing in emerging real estate markets. Those markets that have strong economic fundamentals, such as job growth, job diversity, population growth and markets that are considered to be undervalued. These markets will sustain longer appreciation growth and more easily allow for rent increases.
4. Not investing in sustainable investment properties.
I am often told by new investors they want to buy a number of rental properties so they can build long term residual income. Then they say they are looking for cheap property like 40 to 50K. Of course any seasoned investor will tell you this is not congruent. The cheap $40 to $50 k properties tend to be located in higher populated areas of rental property which prohibits appreciation, they tend to have more repair issues which prohibits sustainable cash flow and they tend to have higher rate of tenant turnover which also prohibits sustainable cash flow. You are always better served by buying a decent property that will attract a tenant that wants to stay for a longer period of time. Then when you sell it you can sell to the retail buyer who wishes to move their family into the property. This will provide for much more sustainability.
5. Not knowing how to read or identify a good pro-forma.
This one can trip you up. A pro-forma of course is designed to give you a good look into the financial benefit of owning a property. Never rely on the pro-forma the seller gives you as they are, of course, trying to make the numbers look as good as possible. Find an investment calculator you like that encompasses all monthly expenses including a line item for both VACANCY RATE and REPAIRS. These numbers of course may vary depending on location and age and condition of the property but having the line item will remind you to incorporate these expenses into your pro-forma evaluation. As an example, you may want to put a repair expense equal to 5% to 7% of the monthly income. Perhaps more on an older property or one that has not been recently updated. As for vacancy factor, ask your property manager what their annual vacancy rate is. This too may be 5% to 7%. As you can see, not calculating these occasional expenses into the cost of operations will indeed make for un sustainable cash flow as these expenses do come up.
I trust that these helpful points on mistakes investors before you have made will allow you to avoid these same mistakes, propelling you into quicker profits and more sustainable investments.