10 Real Estate Investing Mistakes NOT to Make

Ten Real Estate Mistakes to Avoid

Real Estate Investment Mistake 1 - Quick Buck Schemes & Scams

Real estate wealth was the road to riches of 9 of every 10 American millionaires. That’s why in looking at real estate we agree you are definitely going in the right direction. But few made their fortunes in overnight changes of value, or by buying their real estate for less than it was worth when they bought it. They made their fortune in buying the real estate for less than it was worth over time as they owned it. Pre-foreclosure, foreclosure, pre-construction, fix and flip, remodeling, probate, lease options, and a million other schemes count on your buying something for less than it is worth at closing. That can happen, but the most predictable real wealth from real estate comes from appreciation from market forces over time not the stupidity or lack of knowledge of sellers at the closing table.

Real Estate Investment Mistake 2 - Not Having a Business Plan

The first thing you should figure out is, what are your goals, and what road map will get you there? Do you want real estate you work for, or real estate that works for you? Do you want the independence of being in charge of your real estate like you are in charge of, say, owning your home, or do you want to turn over control and handcuff yourself to partnerships, tenancies in common, REITs, and so on? How much wealth do you need to reach your goals of independence and security at retirement? Is there a better way to get there than real estate (obviously, we think, no!)? But it has to be real estate done the right way, with the right business plan.

Real Estate Investment Mistake 3 - Not Doing Your Homework

So you need a business plan, but don’t expect to have a good one until you do your homework. Where is the right area to own? What kind of property should you own? What leveraging or financial structure maximizes ROI (return on invested dollars)? What should your acquisition costs to potential rent ratios be? How can you get a head start on your homework?

Real Estate Investment Mistake 4 - Making the Cash Flow Mistake

Cash flow is an important piece of the real estate wealth puzzle. But you can rob yourself of future profits by putting too much emphasis on just this one, albeit important consideration. Why? Because no one gets rich on cash flow. Isn’t it appreciation over time that yields the real rewards? Did the equity in your home come from cash flow or appreciation? If a slight cash flow at acquisition impresses you to the point it drives your purchase decisions, aren’t you looking at the wrong end of the telescope? Cash flow is an important indicator, but potential appreciation flow is the secret to real estate wealth. That’s why doing your homework is so important.

Real Estate Investment Mistake 5 - Forgetting That Sheep Do Not Earn the Lion’s Share

It’s human nature to follow the crowd. That’s why so many of us buy a stock after it’s gone up like a rocket, instead of before where the ride up can be significant. It’s the same in real estate. Doesn’t it make sense to anticipate growth, not follow growth, by analyzing the layering of probabilities of the elements that can presage significant growth to come? The crowd won’t be there until it’s too late to make the profits you will have made.

Real Estate Investment Mistake 6 - Being Your Own Property Manager

This is intuitively sensible, which is why so many intelligent people fall into this trap. Why not save the cost of a property manager and increase your net cash flow? Who will pay as much attention as you will to your own property? Who will care as much? Yes, but consider this. Property management is a low margin, many aspect enterprise. Experienced successful property managers will tell you a property management company does not make sense economically until it has a customer base of a hundred properties or more. Then marketing, clout with subcontractors like plumbers, round the clock staff to be attentive to tenant concerns or emergencies, and so on makes sense proportionately.

You would almost always do better to put the time you may be wasting as your own property manager into your own business or career. It will pay better. But the more important reason should be obvious. By managing your own property, aren’t you handcuffing yourself to the area where you live? That just doesn’t make sense if your goal is to own real estate in the areas most likely to appreciate the most over the coming years. Don’t let the tail wag the dog.

Real Estate Investment Mistake 7 - Not Considering Your Exit Strategy

Real estate is a wonderful reservoir of value, and the only one that serves as its own collateral, allowing ordinary good economic citizens like you and us access to the capital markets in abundance in the form of readily available mortgage money. But real estate is among the most illiquid of asset classes. Consider that when you decide you want to turn your illiquid real estate riches into cash by selling it, you want to have the largest possible pool of potential buyers. Don’t get stuck in the wrong type of real estate.

Real Estate Investment Mistake 8 = Biting Off More Than You Can Chew

It is horrible to see good people finally take action but not be prepared for real world real estate ownership. Sometimes, even in strong rental markets, your unit can be vacant. It is great to leverage your purchase, but that should be a choice, not a necessity. Sometimes vacancies happen. Sometimes emergencies happen. We vet our customers to help them avoid the shock of real world real estate ownership. Doing it right may mean buying one property this year and not two. There is no faster better or more certain path in our view to real wealth and financial independence than the right kind of real estate as part of the right kind of business plan. But slow and steady wins the race every time. Part of due diligence is learning that patience is a virtue.

Real Estate Investment Mistake 9 - Not Checking Out Your Vendors

Including Us. Your homework should include not only learning about being in the right place at the right time, but also making sure the product is the right product and that your vendors deliver what they promise. At a minimum, that means you should check out your vendors’ track records. While past performance is no guarantee of future results, doesn’t it give you a good framework to begin an analysis? What systems and methodology do your vendors use when designing the product they bring to market? What are their relationships with other necessary professionals? What do their existing customers think of them? What kind of warranties come with their product? What kind of people are they?

Real Estate Investment Mistake 10 - Not Taking Action Today!

Success in life is always a balancing act. We have tried to warn you about common mistakes above, made by rookies and very experienced buyers alike. But far and away the biggest mistake we see is not balancing your due diligence with your responsibility to take action. Very few people have achieved the security and wealth they need to retire comfortably and worry free knowing they have taken care of their responsibilities to themselves and their families. Your biggest asset is always your income from work. When our income from our careers stops at retirement most of us need at least several million dollars in assets to substitute for it. And most of us do not have that kind of number in our asset column. Time is the friend of those who own real estate and the enemy of those who do not own enough.

If you are like most Americans, as to retirement wealth, your economic house is on fire. If you have a good income from your career, in one sense that means that you are used to a certain lifestyle. We talk to many folks who are rightly proud of having several hundred thousands of dollars in 401k assets, equity in their homes and other real estate, and in the stock market. Very few are in that position. But estate planners say these folks need three to five million dollars to enjoy a secure and prosperous retirement which may last twenty or thirty years or more. If you are ten, twenty, or even thirty years from retirement you have no time to lose. We believe with all our hearts that the right kind of real estate gives the highest probability of allowing these kinds of results. But chances are, you have no time to lose. So please, take action today.

Hope this Helps :cool

Real Estate Investment Mistake 4 - Making the Cash Flow Mistake

Cash flow is an important piece of the real estate wealth puzzle. But you can rob yourself of future profits by putting too much emphasis on just this one, albeit important consideration. Why? Because no one gets rich on cash flow.

Without cash flow, YOU’RE OUT OF BUSINESS and you’ll never survive to enjoy the appreciation. CASH FLOW IS KING!

Mike

I get this from my mortgage broker and real estate brokers all the time. That is because cash flow requires work. If you say that you want cash flow all of a sudden most of the deals that they bring to you don’t work. They say look at the appreciation. But appreciation is free. I don’t create it and neither do they. I want them to work for me and guess what…when you get cash flow you get appreciation also.

There are only 2 ways to get rich slow and quick. Slow is putting money in something like stocks and because of time when you are too old to use the money you are rich. To get rich quick you have to put money into something that has more value than you pay for. In real estate that deal will create cash flow. So if you are not getting cash flow you are not getting value.

I would add another one which is getting into deal with questionable/shady partners.

After years of avoiding partnership due to a bad experience back in the 90’s, I recently started doing a few in the past 2 years, but up until very recently, only with people I know really well and can trust.

I got into a deal with a friend of a friend which has turned out to be a huge problem. This past weekend I had a meeting with another very large creditor of this partner and as it turns out ex-business partner. In discussing the individual, we both realized that both of us had both made the mistake of investing with someone we did not personally know despite 45 yrs of collective experience between us. Becuase both of us had almost exclusive invested within a close knit group of people, we failed to do enough due diligence to realy, really check this guy out and lock down exactly how things were going to work.

Mike,

You have a good point as you always do from reading your past post (you have a lot!)

One way I look at it, cash flow is great, but too much cash flow and you pay too much taxes. :frowning:

I have many properties all over the USA over 50% are less than 3 yrs old) and I look at things like the tax breaks and added value of depreciation (27.5 Year Residential). So I try to keep my positive cash flow (on paper) pretty low. I just make it up on volume.

I also always buy in the path of progress so I am in areas with expected good appreciation.

All I am doing know is like any good invetor… buying all I can at steep discounts.

So I would add this “Cash is King”

One way I look at it, cash flow is great, but too much cash flow and you pay too much taxes...So I try to keep my positive cash flow (on paper) pretty low.

Don’t take this the wrong way, but THAT IS CRAZY! When you pay taxes on income, you are only paying a percentage based on your tax bracket. Even if you are paying 28%, you’re only paying 28 cents for every dollar you make. I would MUCH rather make a bunch of money and pay 28%, in taxes (keeping 72%) than not make that money in the first place.

Mike

it really comes back to your objective. if you take cash out of the business and realize a taxable gain that great if you have something to do with it. I tend to keep my investments so that cash realized (i.e. taxable) is not at a maximun, but rather continuous trying to upgrade my properties by slow investing profits into the property (call it a rehab in slow motion). Thus, I taking a lower current cashflow today in order to maximize net cash flow (into my pocket) and value in the future.

Gosh Mike “Crazy” :frowning: What is the right way to take it? :cool

I agree with aak5454 (Thanks for understanding my viewpoint by the way - I see you get it)

Mike, I hear you but I would rather Not pay any taxes, ever if I could - 28 cents out of my Hard Earned Dollar!! :shocked

Remeber:

“It is not what a person makes but rather what he keeps”

Yeah, I know this is a Quote and shoud be under Quote of the Day, but this had to be said!

Mike, as always thanks for your point of view. I always enjoy it!

What about a self directed Roth and not worry about the taxes?

But 28% of no money made is still zero. If I can take home $720,000 of cash for ever million made I would do that every year instead of 20% of $100,000 and depreciation expense or whatever on the rest. Cash is KING… ALWAYS. Leverage means nothing until it materializes into CASH. People can borrow borrow borrow but it means nothing if you can’t servcie the debt. Period. I’m glad Mike is in Ohio, because I am too and these cockamanie appreciation dreams don’t happen here. You have to be a shrewd savvy investor to make money here. You must ALWAYS buy at the right price because you cannot depend on appreciation to bail you out. Why do you think the housing market ended up in this mess. A property here must CASH FLOW or you will end up like so many other failed investors. I wouldn’t even call them investors, if you are waiting simply for appreciation you are a speculator. Some comments in your top 10 list would bury many investors here in Ohio.

Mike, I hear you but I would rather Not pay any taxes, ever if I could - 28 cents out of my Hard Earned Dollar!!

That’s very easy. Don’t make any money and you won’t pay taxes. However, I’m still trying to understand how not making money is a good idea!!! Remember, the less you do, less you pay in taxes. If you don’t make a penny, you won’t owe a penny in taxes.

Mike

There’s some interesting thoughts in this thread! I have always wondered about peoples mindset on taxes. I often hear “I would’nt want to flip houses because the taxes would kill me”.

Obviously arguments can be made from both sides, but why cut off your nose to spite your face? Unfortunately, taxes come with making profits. No one likes it, but its part of business. Pay as little as you can while making as much as you possibly can :slight_smile:

If you earn a Million you are in a 51% Tax Bracket… :frowning:

If you earn a Million you are in a 51% Tax Bracket........

I could think of much worse problems to have… :biggrin

I have been so stupid thinking that real estate investment success is to make a Cash Purchase. For this reason, I posted an ad to solicit funding from Angel Investors. I several responses from overseas, and little did I know that they were fraudulent investors. Accepting a couple of offers, legal documentation requirement alone has landed me into a deep financial hole. I feel so stupid and frustrated as to how to come out of this deep hole - because I borrowed money from individuals with the hope of paying them back within a few weeks. Now I owe over $60,000 besides my own funds!

So having comitted such a grievors error, what can I do now to survive the harrassment of having to pay all these folks back, and at the same time cope with my daily survival?

One of my life’s goals has always been to be in the highest tax bracket… :bobble

Vaddie,

I’m having a little trouble understanding your post. Did you borrow hard money to use for a flip and now can’t flip it? What exactly is the problem?

If you want us to offer suggestions, you need to post the numbers. Purchase price, current market value, rents for the property, etc.

Mike

I’m going to have to agree with Mike & buffinvestor! Well said guy’s :beer

Hear - Hear nice to read what the experts think! :cool

I am having a hard time following the arguments. For the buy and hold investor, there are only three reasons to invest in rental property (think of the acronym CAT)

  • Cash Flow
  • Appreciation
  • Tax Benefits

Cash Flow and Appreciation are not mutually exclusive. You can have one without the other, and having one does not depend upon having the other. Tax Benefits give a preferred tax rate to the gains realized from long term appreciation. Other tax benefits for the rental property owner derive from the net passive loss allowance and the 1031 tax-deferred exchange.

Wallace is correct, cash flow won’t make you rich. Cash flow is what supports your property while the future appreciation is making you rich. Cash flow is using other people’s money – your tenant’s – to purchase the property. You also have to agree with propertymanager, too. Without a positive cash flow, you will go broke. Or from a different slant, a negative cash flow can eat up all your future appreciation and them some.

If you are invested in the stock market, would you hold a stock that is losing value or would you sell it to cut your loss maybe hoping to repurchase at a lower price later? What if the stock is paying a 10% dividend? Would a decline in price induce you to sell or would you continue to hold as long as the dividend continues on the expectation that a loss in value is just a temporary reaction to external market conditions with no reflection on the qualify of your stock.

Isn’t the same concept applicable to rental property, too? If you speculate on a property’s future appreciation you may have to sell at a loss. If your investment rental property is generating a positive cash flow, you can ride out any temporary decline in value as long as the property’s income production is not compromised.

Another thing I don’t quite get is the income tax vs cash flow debate. I don’t understand how my cash flow is any lower with depreciation. Depreciation has nothing to do with my cash flow. Depreciation may lower the income tax liability on my cash flow but not the cash flow itself. My net operating income is unchanged by depreciation. After debt service, my cash flow is unchanged by depreciation.

There is no such thing as leaving cash flow in the property to lower taxes, either. I don’t get that argument. Cash flow is income and is taxed regardless of what you do with the money. Appreciation is not “cash flow”. You can equate appreciation to a lump sum income stream when the property is sold, at which time it is a taxable capital gain, but until then let’s not use appreciation and cash flow interchangeably.

I disagree with wallace on the idea of keeping cash flow low to minimize taxes. I don’t know where the 51% tax bracket thing came from. There is not a 51% federal personal income tax bracket. For your individual tax return, the highest federal income tax bracket is 35%. Maybe you are getting to 51% by adding the 15.3% self-employment income tax rate to the maximum ordinary income tax rate. If so, then recognize that a rental property activity is a PASSIVE income activity and as such is not subject to self-employment income taxes.

Wallace is entirely correct – wealth is not what a person makes, it is what he keeps. However, avoiding income to avoid paying the taxes seems penny wise and pound foolish. Our current income tax rates do not penalize you for making more money by making your tax bill larger than what you get to keep. Make more money and you have more money after taxes. If you have more money to invest, then you can create more wealth. Your attitude toward income taxes should be “I can’t wait for the day when my income tax bill from my rental property activity is $1 million.” When that day comes, your taxable cash flow would more likely be $4 million. Who among us would turn down a $4 million passive income just because the income would have a $1 million income tax bill? Who is really going to say NO to having $3 million in their pocket after taxes?

From my perspective, serious rental property investors don’t buy properties, they buy the cash flow. They don’t buy a property that will not generate a positive cash flow large enough to make the property self-supporting. A serious rental investor will also not purchase a property with no prospect of long term appreciation. A good cash flow from a property in decline in a neighborhood in decline is still not a good investment for the average rental property investor. So remember, CAT. There are three reasons to be a rental property investor, and you usually need two of them to be working in your favor to make the investment profitable. If only one of the C-A-T reasons is favorable, you may get lucky once or twice, but you won’t be able to sustain it over the long run.

I can agree with Wallace – it is an investment mistake to put too much emphasis on cash flow – but I don’t agree with his reasoning behind the argument. Concentrating on cash flow and excluding Appreciation and Tax Benefits from the investment decision is a mistake.