by Chris Clothier
You would be hard-pressed to find a real estate investor, at least one with some experience and time under their belt, who doesn’t have some horror story about investing in real estate.
These horror stories range from mild to downright disastrous, and they happen to all types of investors. Long-term buy and hold investors have their share of stories. Fix and flip investors have plenty to share. Note buyers, lenders, custom builders… you name it, and you can find plenty of opportunity to learn about real estate mistakes and blunders from talking to investors.
The last thing any investor wants is to get in over their heads and deep in the red, and learning from others is a great way to avoid disaster yourself. Sometimes investors are blinded by their love for a property, and other times, unexpected problems bamboozle them into spending thousands upon thousands of dollars on unanticipated repairs.
Whether due to our own mistakes or unforeseen problems, investment property flops can cost us in both money and time. Don’t allow yourself to fall into a real estate investment sinkhole with a bad investment property. Follow these tips to keep your goals and your investments on track!
4 Tips to Avoid a Real Estate Investment Disaster
1. Don’t Fudge the Numbers
One of the surest ways to keep yourself from buying into a flop is to be honest and realistic about the numbers. While numbers can’t account for everything, they can certainly act as a guide. Don’t rely on Google or online calculators to tell you the worth of a property or what it will be worth after you’ve done renovations. While online sites are good for finding data quickly on properties, such as recent sales prices and possible comparison sales, these sites are not trustworthy for giving you accurate values of investment properties. They are only as reliable as the data they receive.
Sometimes that data is not updated quickly enough either by the site itself or the place they are getting their data. Far too often the data you can find from online sites is out of date and inaccurate and not a reliable place for determining the true value of a property.
Trust a real estate professional in your area, and when possible, get multiple opinions on property values, renovation costs, long-term holding costs and rental rates. Hypotheticals will usually hurt you. It’s all too easy to fudge numbers to make a deal seem more attractive and profitable in your head.
As your reading this, if you think you are one of those special people who can be completely rational when it comes to numbers, think again. We are all able to fool ourselves and make irrational decisions. I wrote an article on this topic for BiggerPockets recently and even shot a video on how easy it is for us to make biased decisions. We are able to easily fool ourselves and look for reasons to do a deal when a rational viewpoint tells us to think again. Let logic and facts rule. Listen to local professionals who deal with the numbers everyday and let them help you put together a map of what your numbers will look like.
Pay attention to the good and the bad, and do not let “what could be” influence your decision making. At the same time, do not let anyone tell you what the “definitive real estate costs” will be. The 50% rule may apply from a 30,000 ft. view, but when you really get into the numbers, making generic assumptions can hurt you in many ways. It can make you pass on good deals or purchase bad deals.
Remember that numbers are real things. They are actual functions of location, performance, decision-making (by you and your team), and they can fluctuate up and down. The quicker you realize that the numbers on a property are real, the quicker you’ll avoid a lot of undue heartache and frustration.
2. Have an Exit Strategy
If something becomes too big for you or you end up with a flop, do you have a plan, or are you just going to be stuck with an unwanted investment property?
This is where your networking skills comes in handy. Some would consider renting and leasing exit strategies — and they are. But it’s also helpful to have contact with other real estate investors to whom you can wholesale a property that you no longer want to fool with. It is good to make sure on the front end of a decision that you have multiple exit strategies on a property. This is one of the reasons that I moved away from lower-end properties, where the only real attraction was low barrier of entry.
The cost was low to get started, but the options were limited, and, in my experience, the problems were magnified at the lower price points. When problems occurred, the options were often limited. I prefer today to work in properties where I have more options, including retail, wholesale and after market investors. It offers more protection for me personally.
No matter how you decide to move forward or what your strategy is, make sure that you are always aware of and considering what your best options are as an investor.
3. Invest Within Your Means
Sometimes the risk is just too great. I see investors make mistakes in this area everyday. You should never, ever sink your life savings into a single property. That’s why it’s so important to assess your capacity for investment before you even consider buying a property. Do you know the maximum amounts you can bid? Are you accounting for unexpected costs? If you make smart investment choices that respect your personal budget, a single bad deal won’t send you up the river without a paddle.
Investing with a Self-Directed IRA is very popular today and becoming more popular as companies are promoting it as a strategy for acquiring property. More and more people are moving their investment accounts to self-directed custodians.
Be very, very careful as an investor to not use ALL of your funds from an SDIRA when investing in a property, whether it is short or long-term. It is very difficult to get money into an IRA account, and you must know the rules before investing in real estate. If you get into a property and have unexpected costs or delays, having that cushion in your SDIRA will provide you the breathing room to be able to function. If you invest with every dollar, you have zero room for mistake or delay, and if they occur, you will be faced with the unenviable task of figuring out your next move without violating the tax rules of your IRA.
Be careful and stay within your means!
4. Trust Your Instincts
Listen to your gut. While we don’t recommend making emotional decisions about a property, we all know that feeling. Too often, we have a feeling about a property, a renter, a vendor or partner, and we don’t act on it. Acting on it may not mean walking from the deal, but it definitely means addressing whatever your concerns are. Asking questions, taking a pause to investigate your questions further — and even waking away entirely — are all possibilities when we start to address our instincts.
If you just don’t quite feel right about a deal, it’s probably better not to make it. While some apprehension is natural, listen carefully for alarm bells and red flags. You’re better off skipping a deal altogether than ending up with buyer’s remorse. That applies to all aspects of your deal, including walking away from partners, vendors or even a purchase and sale if things just do not feel right.
I am quite sure there are plenty of other criteria to be aware of when investing in real estate and trying to avoid a flop. This is such a “learned business,” and it takes time to figure out the warning signs and pitfalls.
Regardless of your experience level, the one piece of advice not listed on here, but vitally important, is to stay humble. Always believe you know less than you do and surround yourself with great people who will ask you questions and keep you on your toes. That will definitely help keep you on track with the four tips above!
Have other tips to share?
Share them below and let other real estate investors know how to steer clear of mistakes.
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