Real Estate Investment Mistakes to Avoid at All Costs
Let’s be honest…Even though our parents are right when they tell us not to do something, we still do it because of curiosity or simply “It’s different with me” attitude. I’m no different especially with my “prove you wrong” attitude in my growing years. Now, coming back to how exactly this attitude relates to my real estate career, I have to admit that this attitude has in some ways encouraged me to take risks that I would have never thought of taking (i.e. leaving my comfortable and cushy consulting job for setting up an asset management company focusing on multifamily real estate investing). On the flip side, it has cost me hundreds of thousands of dollars in a few wrong real estate purchases.
Here are a few of the mistakes you will want to avoid at all costs:
Focus on the number of properties owned instead of the amount of cash flow generated from the properties
I remember in the first couple of years in my real estate career, my conversation with fellow real estate investors typically started with “how many properties do you own?” I used to think that the more properties I own, the more “experienced” I will be looked upon and therefore, I can attract more investors. As a novice investor, I also got caught up in all of these meaningless comparisons. Gradually, my focus was not to find solid cash-flow-positive properties. Instead, I was more concerned with the NUMBER of properties I owned even though some of the properties owned would never be cash flow positive.
Lesson learned: Cash flow, Cash flow, Cash flow. Only invest in properties that generate positive cash flow. Focus on your game, not someone else’s.
Manipulate numbers to fit into the projection
Let’s face it. The numbers can look as good as the preparer wants it to be. You can always lower the vacancy reserve, or repair & maintenance expense, or increase the rents because you have been told that you can charge that rent without actually doing physical market survey. Doing a physical market survey requires extra effort, time and a certain level of creativity. For example, when I’m interested in a certain property, I will visit the neighbourhood at night on the weekends to make sure no undesirable activity around the area.
Lesson learned: Go an extra mile to do market research to come up with a realistic projection. Never feel sad to walk away from a property that you have spent some time on analyzing. It’s better to walk away from a potentially good deal than walk into a bad deal!
Overly rely on real estate agent
A good real estate agent is surely indispensable on your team. But overly relying on everything that the realtor tells you without cross-checking every aspect involved in understanding the market and choosing the right property is dangerous. Never forget that their ultimate goal is to close the transaction. They don’t stick around to manage the property. They get paid when you close the property. But you get paid when the property is actually generating cash flow. It is their job to be bullish on certain areas or properties.
Lesson learned: Research your market better than anyone else and verify the information provided by the realtors. Never assume their information is all true.
That person is applying that strategy and working for him. It must work for me as well.
Just because strategies like lease options, wholesaling or flips are working for other people doesn’t mean the same strategy will work for you when you factor into your personality and skills, your overall comfort level in carrying out this strategy, your particular time frame and risk tolerance. For example, at one point, I thought I would apply lease option strategy on the few single-family properties. However, after attempting on 2 properties, I realize I don’t enjoy the process and I am not good at carrying out this strategy despite higher cash flow and supposedly easier property management. Ultimately, you need to capitalize on your strengths and not try to work on your weaknesses.
Lesson learned: Capitalize on your strengths and stop wasting time to improve your weaknesses.
Clean up the property and the right tenants will come
This statement is ONLY part of the formula when turning around a poorly managed property. There are many reasons why they are class C or class D properties. Perhaps it is due to the poor management, poor locations, or simply the market in general is attracting only that type of tenant. There is a saying “You can change the property. But you can’t change the street”. Even if you tear down the entire property and rebuild to a higher standard, the end result may still be the same if the same tenant demographic doesn’t change.
Lesson learned: Understand very well the location(s) you are targeting at. Sometimes one side of the street could be completely different in terms of rent demand and tenant profiles from the other side even though it is the same street!
Ultimately, real estate investing, in my view, is a solid way of creating wealth in the long run. It is also one of the few investment vehicles that can potentially provide financial independence as long as investments are done right with a clear understanding of the risks and rewards.
Start investing with Cacoeli today! Let’s get you on the path to financial freedom.
Written by Jedidiah Liu
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