Real Estate Investment Mistakes to Avoid at All Costs
Let’s be honest…even though our parents were right when they told us not to do something, we still did it because of curiosity or simply because of our “I’ll prove you wrong” attitude. I have to admit that during my real estate career this “I’ll prove you wrong” 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 multi-family real estate investing). On the flip side, it has also cost me hundreds of thousands of dollars due to a few wrong real estate purchases. To help prevent you from going down the wrong road, here are a few real estate investment mistakes to avoid at all costs:
Don’t focus on the number of properties owned
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 owned, the more “experienced” I would look and therefore I would be able to attract more investors. As a result, my focus gradually shifted from finding solid cash-flow-positive properties to growing the NUMBER of properties I owned even though some of those properties I owned would never be cash flow positive.
Lesson learned: Cash flow, cash flow, cash flow. Only invest in properties that generate positive cash flow.
Don’t manipulate numbers to fit into the projection
Let’s face it. The numbers can look as good as the preparer wants them 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 a 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 there is no undesirable activity around the area.
Lesson learned: Go the extra mile. Do market research so you can come up with a realistic projection. Never feel sad to walk away from a property that you have spent some time analyzing. It’s better to walk away from a potentially good deal than walk into a bad deal!
Don’t rely too much on your real estate agent
A good real estate agent is indispensable on your team. But 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. It is their job to be bullish on certain areas or properties. 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.
Lesson learned: Research your market better than anyone else and verify the information provided by your realtor. Never assume their information is all true.
Don’t believe that if a strategy works for one person, it will work for you
Just because strategies like lease options, wholesaling or flips are working for other people doesn’t mean the same strategy will work for you. You need to factor in your personality and skills, your overall comfort level in carrying out a specific strategy, and your particular time frame and risk tolerance. For example, at one point, I thought I would apply a lease option strategy on a few single-family properties. However, after attempting to do this on two properties, I realized that I didn’t enjoy the process and I wasn’t good at carrying out this strategy despite it leading to higher cash flow and supposedly easier property management.
Lesson learned: Capitalize on your strengths and stop wasting time trying to improve your weaknesses.
Don’t assume if you clean up the property, that the right tenants will come along
This statement is ONLY part of the formula when turning around a poorly managed property. There are many reasons why there are class C or class D properties. Perhaps it is due to poor management, poor location, 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 tenant demographic doesn’t change.
Lesson learned: Thoroughly understand the location(s) you are targeting. Sometimes one side of the street could be completely different in terms of rent demand and tenant profiles vs. the other side, even though it is the same street!
Ultimately, real estate investing, in my view, is a solid way to create 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
Twitter: Follow us @investcacoeli
Email us: Jed@cacoeli.com
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