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

Rehabbing, Fix and Flip, Rental Properties
1

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…

2

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.

3

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 :rolleyes

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 …

4

You got it. NO MORE STOCK advice. :beer (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!!! :biggrin

5

[i][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…

6

Couldn’t have said it better myself.

Right on the money!

7

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

8

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…

9
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

10

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.

11

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

12

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…

13

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.

14

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

15

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.

16

Real Estate, like ANY business is NOT easy, boys and girls. I’ll give you simple. RE is about as simple a business as you can get. But easy. NO. If it was easy, then everybody would be doing it and making loads of money. That doesn’t happen. As fdjake said, those that have said that, hang on to your wallet. Bad karma is likely coming for you.

People fail in business, including RE, because they don’t plan for success. They don’t run a it like a business. They don’t prepare for the worst. Even “successful” businesses have went under because they did not plan on the worst. And the worst will come. That’s why this business is still “easy” to you. You haven’t seen the worst yet.

How will you fair if half your rentals sit vacant for 3-6 months? Several require major repairs? Heck all go vacant? It happens. After you survive a major ordeal or two, then come back and say “it’s easy.”

As to this whole, “why don’t you ‘leverage’ your money back?” posts, I really don’t understand you guys. The whole point in acquiring properties for investment is to pay them off in order to reap the cashflow that comes from free and clear property. And everytime that someone has the ability to actually buy property cash, the first posts we see is “do a cashout refi.” Don’t get it.

Raj

17

Roger J,
Using the term easy should have been backed up with what I do for a living and have been doing my entire life…I own a manufacturing company for over 18 years that employs over 25 people,I also work fulltime managing risk for a hedge fund (you want to talk blood in the streets brother)…So as I truly appreciate the slaps of reality I highly doubt that many have been through the tough times I have been through or witnessed…I hope no one here has but at the same time what hurts us makes us stronger…So if my worst case scenarios are vacancies,my properties burning to the ground,my boilers/furnaces going in the middle of the night,evicitons,drug dealers living in the house I’m mentally ready for it…I have lost it all and made it all back and I’m not even 40…I expect the worst because nothing worthwhile happens quickly,it takes time…I know what the bottom looks like and I’m never going back nor will I ever expose myself to be in the slightest jeopardy to make that return trip…And some clapboard pieces of crap homes won’t be the thing to take me down…I can promise you that…

I never thought I would get such a negative backlash for being happy at my decision to buy rental properties…Amazing,one can do endless research,cover all angles,buy all cash at low prices,refurbish affordably,purchase in decent areas,have what I feel is excellent property managers and still be scolded with reality checks…I don’t mean this to Roger J solely but not every person that comes to these forums is some young college kid scraping together a few bucks to live a pipe dream of being Donald Trump or that clueless baffoon Kyosaki…Some people obsessively think things out over and over and over again…If I fail at owning these rental properties and have to walk away I will do just that…But I spent a long time lurking/reading/researching every possible scenario in this real estate game…Do I know it all, HELL NO…But I’m willing to learn and business has been my life since before I could drive…It’s all I do,all I love…

I buy homes that cost between 40-70k and ALL make %2-%3 a month in rent roll vs buy price…I try to keep the taxes as low as possible,buy in the most decent areas,thoroughly inspecting (professionally) each property with my contractor and then gutting if necessary any potential problems to make a place that tenant wants to live and eventually probably destroy all over again…I work with what I feel are very sharp minded property managers who take zero BS and know just how to put stuff to the curb…They are tough guys who know how to handle everything…From my point of view I don’t know what I’m missing that puts me so much at risk in so many eyes here…I practically have no mortgages except for a few that are so small I would zero them out instantly if need be…I ask what am I missing?..Please let me know…

18
As to this whole, "why don't you 'leverage' your money back?" posts, I really don't understand you guys. The whole point in acquiring properties for investment is to pay them off in order to reap the cashflow that comes from free and clear property. And everytime that someone has the ability to actually buy property cash, the first posts we see is "do a cashout refi." Don't get it.

So if your average acquisition cost per SFH is $60,000…and you want to acquire…say…10…Tie up $600,00 in cash?

My response to rookienyc was given after noting previous posts of his and that he manages money and it’s risk on a daily basis…some mortgaging is all I suggested…not to the hilt.

Leverage is just a tool for controlling more.

I do understand your questioning the refi…(it can cripple you pretty quick if not done right).

-Mike

19
If I had six hours to chop down a tree, I'd spend the first four hours sharpening the ax. -Abraham Lincoln

I think you’re off to an excellent start.

As fdjake pointed point…probably really helps that you crunch numbers on a daily basis.

I especially like that you factored in and secured property management from the get go. With the other stuff you’ve got going on, I can see why you chose that route.

-Mike

20

Rookie,

Sorry if it seems that you’re getting “backlash” from your post. Most of these replies aren’t actually aimed at you. In fact, it seems that you’re doing better than most “professional” investors, so I don’t believe that you are ‘missing’ anything.

That said, you already had a background in business and, specifically running a business and understanding the potential pitfalls of that. Most newbies don’t have that background and they are who we’re really speaking. One of the things that you’ll have to learn as a “seasoned” investor (which you are now, btw) is that your comments will be taken to heart by many newbies that come here. So I say again, for the average new investor, RE investing is NOT easy. It’s not easy money, and it’s not easy work and it’s not a get rich quick idea. It’s a business and must be run like a business in order to be successful.

So if your average acquisition cost per SFH is $60,000…and you want to acquire…say…10…Tie up $600,00 in cash?

If that money is available to you, why not? Your monthly cashflow is stellar, you have little risk and you’re where you want to be. $600K sitting in a bank earning 5-10% or 18% (rookienyc’s number)? I’ll take the 18%.

In order to have that money available for future acquisitions all you have to do is get a line of credit against the properties. Still no loan UNLESS you NEED it.

Raj