Why do landlords/investors fail so often in the rental business

[rookieNYC]

I have been talking with a few close friends that I have worked with the markets for a number of years about my RE investing this past year..I go through everything that I've gone through,good and bad..Leaving no details out at all..Explaining what I have bought for,expenses the whole enchilada..Overall it's a very good ROI in comparison to other income producing vehicles..Yet I still have to hear from the quants that I work with , "why isn't everyone buying these properties then"?...Also the most common question is how someone with a 50k 3 family house can possibly lose it to the bank in a foreclosure..Surely the vacancy rates must be astronomical etc etc...Maybe I have the best property managers on the planet and the most honest but I'm truly happy with the decision to get into this business and the money I have been making for doing absolutely nothing..

So besides paying too much for properties can some of the pros tell me their opinions on why a high % of investors fail so miserably at what seems like an easy game so far..

I'm also discounting the out of town investor that buys sight unseen...

[fdjake]

I'm going to apologize first for these comments...

BE VERY CAREFUL...you have LESS than a single year of experience and you've got it down to an EASY GAME??

It is NOT an "EASY GAME."

You haven't been doing this long enough.  Wait.... like most guy's who get in and proclaim "Hey this is easy"  you'll learn........

THE HARD WAY  (like we ALL do)

In Feb. of 2006 you introduced yourself here as a NEW investor looking to buy your first property.  To make these comments less than 1 year later could lead others to believe that this IS an "EASY GAME" 

There is NOTHING simple or easy about investing in real estate.  I post this only as a warning to others.

Other than buying a lottery ticket.  Nothing that involves risking hard earned money should be regarded as an EASY GAME.

Again, I apologize for the directness of my comments.  But I do stand by them.

Oh and to answer your question....

Most NEW investors fail because they think they know more than they do.

[rookieNYC]

No offense taken..And yes I did buy a  handful of properties rather quickly but I didn't spare any details and followed the real world expenses along the way..Nothing I purchased was uninspected,or in a war zone..Everything I purchased had a monthly rent roll of %2 or more of the asking price I was paying..Most of the time more..My exit plan was already in place from the first purchase..Knowing that in the event I wanted to sell I would simply advertise my properties as owner financed and attract buyers that way...

To me this investment was more experimental at first because it's far from my primary source of income....At the same time I enjoy it and I want to hear the pitfalls from others...So fdjake feel free to type away with some advice I can use..Just no stock advice 

Any money that was invested in these properties for me is purely speculation dollars..I hardly invested without doing extensive research..I also bought very well price wise in comparison to many ..

[fdjake]

You got it.  NO MORE STOCK advice. (but if I'm right on Ford you owe me. Don't worry I'll remind you)

Hey, you may be in that small percentage that REALLY did their homework.

I have found that most new guy's think that buying anything that rents for over the mortgage payment and taxes is going to make them money.  As you know that is NOT the case.

The other MAJOR failure comes with their ability to deal with TENANTS.  This is as tough as it gets in this business.  Rehabbing, sales, buying, estimating,  all childs play when compared to tenants.  That is where you have a LOT to learn.  Even with a management company in place the JOY'S of dealing with tenants will soon be coming to a neighborhood near YOU.

You also have a HUGE advantage because of your Wall Street background.  If you spend your days running numbers on potential investments THAT is certainly going to help you.

Your in for some surprises my friend.  I'll tell you that in no uncertain terms.  It ain't all gravy.  How you deal with those surprises IS what this business is all about.

One last piece of advice................NEVER,  say "So far this has been EASY." 

I jumped under my desk when I read those words. (didn't want to get hit with the roof that may be caving in on your rental as I write this )

Right now, at this moment something is breaking in one of your rentals. All because you HAD to say this is EASY!!!

[rookieNYC]

[Right now, at this moment something is breaking in one of your rentals. All because you HAD to say this is EASY!!! /i]

I have been through a few bumps but nothing that bad..When I purchase a property the problem areas get the most attention from my inspector and my contractors (they inspect the properties together to get estimates right away)...I want to know about the furnaces,the roof,mold,wet basements,any old exposed wiring,foundation condition,bathrooms,kitchens etc...All big ticket items...I also intend on putting money into the property to correct anything before it becomes a problem..I never buy a property with the intention of not putting money into it...I figure all of this into my bottom line...In the event the buy price and repairs is too much I move on..This is why I say the RE business is not for people with little or no money..Using no money is fine for someone with money..But many times I feel new investors that come to this forum expect to literally use no money..And that I feel is a huge mistake..RE you need MONEY...Don't believe these guru's who say different because in the RE business money makes money..

[fdjake]

Couldn't have said it better myself.

Right on the money!

[allagash]

As far as purchase and rehab costs....did you use all cash or leverage them?

I seem to remember you stating you paid cash for your properties?  That you weren't keen on leveraging.

-Mike

[rookieNYC]

Mike,
  I have a few both ways but for the most part I did buy cash..I'm getting about %18 ROI on the all cash properties and %30-%35 on the leveraged properties..The only thing that bothers me about the leveraged properties is the amount in closing costs and extra expenses by using the banks..My thinking is if I have it in a money market fund making me beans why not buy cash and avoid these expenses and get a better price to boot..But I can see the allure of leveraging at the same time the returns are much more and you have much more...The verdict is still out on the cash vs leveraging for me..

%18 ROI is an incredible return in my world,especially after really taking a boatload of expenses out and %25 for vacancy/management/rehab after I renovated the place..

[propertymanager]

Everything I purchased had a monthly rent roll of %2 or more of the asking price I was paying..Most of the time more

RookieNYC,

You've already figured out why most newbies fail.  The NUMBER ONE REASON is that they pay too much for their rentals.  If you've been following the thread in the "Commercial" forum, you can see an example of this.  Most newbies simply buy a property at retail and think that there expenses will be low, often only taxes and insurance.  This results in a negative cash flow over time and they finally throw in the towel.

The other big reason newbies fail is not being able to deal with all the liars, deadbeats, drug addicts, and scumbags.  For an honest middle class person who suddenly finds themselves dealing with these people, it can be an absolute shock.

Combine the two, negative cash flow and the tenant from hell, and you've got a failed landlord.  I talk to them (and buy properties from them) all the time!

Mike

[Vacation Condo Guy]

I think a lot of investors made the mistake of thinking this is a get rich quick business. They don't relize that being $200+ a month negative adds up quick. Not to mention when the HVAC goes out and its $2k and then the roof they thought would last another 5 - 7 years only lasts 2.

Some landlords don't have the stomach to evict a family at christmas. believe me we had tennants feeling us out 3 -4 months ago. Sometimes no matter how much you screen you get a tennant that knows the system. if you do this long enough you will have one. New landlords trust other people - they haven't been burned yet.

I love the newbies who go into a property take bids on the rehab, then decide how much cheaper they can do it all for. Most of them have absolutly no experience.

There are a lot of people who bought pre construction thinking they would flip before closing, then closing came but a new buyer didn't. So they couldn't walk away from their deposit, so they closed. Now they have a property and a $1500 mortgages and best case they can only get $1000 a month.

I have a friend who bought 6 houses, he is a smart guy and has been a realtor for years, he had 2 tennants destroy one house and had to replace a HVAC on another. The total came to about $12k which completly ate all of his reserves. Then he had a tennant move out. So right now he is paying the mortgage on 3 properties with credit cards.

Its not easy - thinking back I can think of a lot of easier things I should have done. But if you hang in there and think everything out, don't over extend yourself, it is a great business.

[allagash]

I know you love the cashflow....but paying ALL cash?

I'm all for using the cash to acquire at steep discount....but I'd want that back asap.

In your position...you're at an advantage...

Sounds like you've got multiple properties that have been acquired via cash.

May want to consider pooling these together as a blanket loan....this would lower your fee costs....plus if your eligible for xyz dollars in mortgage amount...you could just ask for a percentage of that....not what they want to leverage you to the hilt.

It's REI.....might as well use SOME leverage....(they WANT to lend).

-Mike

[rookieNYC]

Mike (propertymanager),
  Yes I have followed quite a few threads...One in particular that I was astounded to find out what the rent to buy price ratio was..And this person had 100's of posts under his name before he bought..I respect the people who take the time to explain things (like you and some others) because it really helps..

I can only imagine how many underfunded and overleveraged,uninformed investors have been burned and made their way here to complain how bad a business it is..

VacationCondyGuy,
Its not easy - thinking back I can think of a lot of easier things I should have done. But if you hang in there and think everything out, don't over extend yourself, it is a great business.

That's a great piece of advice and I have tried to maintain that state of mind..I just dont see the risk doing it the way I have been..Thank you for that advice..

allagash,
   The amount I spent for what I own is very affordable for me and makes me sleep better..I definitely can see where you come from about using leverage and I plan to use the banks more in the future if need be..Thank you for that advice..

[tatertot]

Actually, I think real estate is easy. What's hard about it? There is a way to do things the right way and if you follow the lead of those who have gone before you and learn from their advice, there is nothing complicated about it.

It's not complicated, it's not difficult to understand. It doesn't require 4 years of calculus or a working knowledge of 3rd century Mesopotamian grammar, or the ability to program a computer from scratch.

Keep in mind that you are hearing about all the difficulties from people who are not investing.

Everyone wants to dream about having lots of money to spend, but very few people have the drive to do anything about it. The rest of them make elaborate excuses about why they are not making any effort to improve their position.  Their favorite excuse is always that they are too smart to do any investing.

As for people failing in real estate, I think the most common cause is laziness. Too lazy to make the effort to study how it works.

Greed causes some people to fail. They try to grasp more than they are capable of. They try to make more money than is reasonable or possible.

There are some failures in landlording because a nice, educated, middle class investor can not even conceive of how scummy, filthy, and dishonest some tenants are. They make the fatal error of turning the keys over to some one who "seems really nice".

But bad tenants are not the kiss of death to a landlord who learns from the experience and studies to find a better way to do it (back to "laziness" as a cause of failure).

Budgeting how to pay all the expenses is not complicated math. The concept of "Hey, how am I going to pay for it if the heater needs to be replaced?" doesn't require a phd in economics. It does require at least enough initiative to realize that there are going to be some maintenance issues at some point. Or, if not that, it requires at least 15 minutes of reading about how to invest in rentals.  'Cause if you read anything to prepare for investing, someone is going to tell you about expenses almost immediately.

[Tien]

Why they fail so often is because they don't have a business mindset or experience.

[Bluemoon06]

Tien is right.  I always say that the worst time to start a business is when you need the money from that business.  People don't realize that real estate is a business.

But you know looking at why someone fails is like our morbid fascination with car wrecks.  You don’t learn anything from other’s mistakes, you just get to watch the blood flowing.  What you need to do is find someone that is doing it right and mimic them.  That way you don’t make any mistakes.

I remember when I was younger and I wanted to be in business for myself.  I found an ad that had been running in a magazine month after month for as long as I could remember.  I found a product that was really similar and I bought a batch of it.  I then advertized in the same magazine a few pages away.  I got a bunch of orders that were probably confusion orders.  But it worked (until I get a letter from their lawyer asking me politely to stop).  This is the same thing with real estate.  Don’t try to be clever, just mimic what works.  Don’t get out there cutting brush…you want to follow the trail of success.