TOP 3 THINGS THAT CAN GO WRONG WITH REAL ESTATE INVESTING
I have narrowed this down to 3 basic things that tend to repeat themselves the most. Usually these things can also be easily avoided. This is why savvy people like Donald Trump want to hear of the things that went wrong. Once you are aware of what does not work you can redirect, find a solution and then move forward with a solution based approach. And avoid the pitfalls.
Buying NON -Sustainable investments:
Bar none, I see this as the largest challenge investors complain about. I hear things like “according to the pro-forma report I should be making this”, or “I was cash flowing big time until a series of repairs were needed and now I am bleeding on the property”. Indeed buying properties that are sustainable for long term cash flow and long term sustained equity growth is paramount.
I see that people are too into analyzing the numbers and the property to take precautions to insure what they are buying has staying power. Many like to buy small, older buildings because the price is cheap compared to rental returns. But older cheaper properties tend to break down more often and have far more tenant turnover which negates the large cash flows, rendering them non sustainable. Additionally, these older properties tend to not appreciate in desirability and value like newer fresher properties do.
Spending a little more up front may look on paper like smaller returns, but often they are much
more sustainable. So over the long term hold, the newer properties in a more desirable
neighborhood tend to perform far better over time and, of course, with a lot fewer headaches.
Here is another challenge that can have dire consequences. Unrealistic expectations can take you from making a little less than you wanted to making nothing at all.
I work with thousands of investors from all over the world and the trend is astonishing. Those with higher than realistic expectations often never make any purchases at all, meaning their high expectations were not only reduced, they were totally eliminated. While they will spend two and three years looking for something that does not exist, the prices continue to climb and the profits continue to diminish. The more time that passes makes it harder and harder and eventually impossible to find any investments at all.
Here is a true story of a gentlemen I was working with who lost over $80,000 by waiting for the right deal. This is a classic example of less is more, It also goes to validate that sustainable investments will always win over time.
Poor diligence process:
It is often said that people spend more time planning their vacations than they do planning their investments. Over the years I have definitely learned that due diligence starts at the conceptual intention of investing into property. Many fail to plan out their investment portfolio. They simply want to hop into buying a property.
Approximately 80% of the people I work with are more interested in the house they want to buy than understanding why they want that particular house or what the long term outcome of owning the investment will be. To be satisfied with the performance of an investment, you must have a measuring guide (your investment plan) to know if your investment is performing properly.
A number of diligence shortcuts made by many investors are:
· Insuring you are buying in a sustainable market: Personally I find this to be the single most important piece of diligence you can do: the sustainable market diligence.
· Overpaying for a property: This is where a good local market expert (Realtor) comes in. Do not rely on automated valuations. There are too many variables to consider. You
may overpay or you may skip buying the perfect deal because faulty automation suggested you may be paying too much when in reality you would have a great deal. It can go both ways.
· Failing to properly analyze cash flow: Items like repair contingency and vacancy factors should always be a line item in your expense category. You may go months or years without these expenses popping up, but when they do you will have the funds for it and in the meantime your cash flow will be sustained.
· Underestimating repairs: This is always tricky, if you overestimate you may pass on
what would have been a good deal, if you underestimate you may indeed buy a bad deal. This of course builds strong cash for buying turnkey freshly renovated property. A rule of thumb that I have found that works well is to estimate as accurately as you can. Then add 15% to the total to cover unforeseen expenses. That has been a pretty reliable tool for me.
Looking at the 3 things that can go wrong can quite honestly be simplified down even further, to simply poor diligence. All 3 of these, in and at the core, are a process of doing proper diligence. Know what you want to accomplish and then talk with your real estate power team and execute the plan.