14 Mistakes Real Estate Investors Make

Any time we begin any endeavor, especially a business endeavor, we’re going to make mistakes. The key is to learn from mistakes so they become a process of noble failure. In other words, we must fail forward.

This means after learning from our mistakes, we move ahead smarter and stronger in our businesses and our lives. We use these mistakes as springboards to advance us, so we can develop passive income through owning real estate.

Mistake 1: Waiting to Get in the Game

The first mistake I see new investors make in real estate investing is to start later rather than sooner. The sooner you get started, the greater your knowledge base becomes.

I heard a man say years ago, that most people live and die in a non-growth environment. How true. They never put themselves in a place where they have to stretch, and they never “get in the game.” The sooner you get in the game of real estate investing, the more it will help you in different areas of your life. Obviously, you will learn how to make money instead of just earn money. Therefore, even if you lose everything, you still know how to make it back.

So, waiting or starting later really is a mistake. You need to get in the game and learn how to play it. Some people have “analysis paralysis,” and they never move forward. They never pull the trigger, so to speak. Getting in the game helps you know how to hold the ball and throw the ball. Bottom line, you learn how to make money.

I do want to add an important thought here. Even though earlier is definitely better, it’s never too late to start investing. If you’re nearing retirement or just looking to get out of your day job, there’s no time like the present. The sooner you can start, the better off you are!

Mistake 2: Lack of Focus

The second mistake new investors make is not focusing their energy on what will make them money. What I mean by that is when you look at properties, it’s absolutely imperative that you review the deals. In other words, if you have an agent bring you pre-screened deals, you should look at properties and deals every week. Every single week you should be looking at new deals to determine if the numbers are there.

Focus your attention on crunching the numbers. When you’re considering different properties, evaluate them based on these questions: Am I getting in this property for no more than a total of 80% of its real value? Does it offer cash flow? Is there $300 positive cash flow per month on a single-family home?

When you can answer yes to the above questions, then spend your time actually writing contracts. Focus your energy on what will make money and write contracts where you know you will make money. Remember, you make money when you buy, not when you sell. The more contracts you write based on the model we have prescribed, the more likely one will be accepted.

Mistake 3: Not Maintaining a Cash Reserve

Real estate is a very cash-intensive business, and it’s easy to run out of cash. When you put money down on a property, that money is tied up in that property until you refinance it or sell it. In addition, money for repairs also can be invested depending on how you structure the loans).

It’s not just a matter of having negative cash flow on properties, but even with positive cash flow you still must manage your cash reserves.

Here are my best tips for never running out of liquid cash. First, keep some uncommitted cash. Secondly, maintain an untouchable account. Lock it up somewhere. Whenever you’re doing loans for refinances to be able to pull money out of your other properties, the lender requires at least six months cash reserves for the loan payment on that particular property. You want to maintain some untouchable money, and don’t run out of cash. Make sure your rental income from your properties is still flowing. If you run out of cash, then you stop the whole train because you can’t get approved for refinancing.

Along with keeping untouchable amounts of cash, check your credit score every month or so. There are three credit bureaus, so you have three credit scores. Most lenders go with your “middle score” but continually monitor and manage your score.

Managing your actual cash and your reserve cash and overseeing your cash flow and credit is a constant requirement for the active investor. These things need to be properly managed all the time, so you maintain cash coming into your real estate business.

Mistake 4: Flying Solo

The next mistake I see from new investors is overlooking having a good team and systems on the ground. This is one of the greatest challenges especially when you’re buying real estate outside of where you live, but it’s also just as true when you buy it in the immediate area of your own home.

The first team member you must have is a real estate agent. Find a real estate agent who does not have “commission breath” and is not just a retail agent but one who understands investors.

The second team member you need is a solid, dependable, and economical contractor for your rehabs and repairs. You probably need more than one, and they have to be fast and available in order for you to make money.

The third team member you need is a property manager to buy and hold property. I’m a huge advocate of working with property managers as opposed to managing property yourself. A major reason is if you manage the property, you will end up sacrificing a lot of time you could spend actually finding deals. Let me add a caveat here: If you’re a first-time investor, it’s important for you to learn to manage the first few properties yourself, and then look for a property manager.

The fourth team member you need is a good mortgage broker who understands investor loans, just like your real estate agent. The way most “broker shops” work is that they broker the loans to lenders. Many of them end up only working with only three to four different lenders. If the broker is not out shopping the products, it can become very limited. They will tell you, “I can only do four properties for you,” or “I can only do 10,” or whatever their number is. The primary reason they are limited is because of the quasi-government lending institutions like Freddie Mac or Fannie Mae that allow mortgage brokers to only make a certain number of investor loans. However, there are other large mortgage bond programs that will allow more loans than Freddie or Fannie. The mortgage brokers sometimes are telling more about themselves than they are about you, specifically in your financial condition. They just don’t have access to other products. So, you need to find a mortgage broker who is knowledgeable and experienced when working with investors and understands how to find particular loans.

The fifth team member you need is a banker. I’m big on having a banker especially if I want to move quickly on deals. For example, if I want to flip a property, I typically will not use an actual mortgage product. I will use a local bank, typically a community bank, and have them loan me money. We will then work out the parameters with them on the loan-to-value on the property. That loan-to-value is the size of the loan to the appraised value of the property. The local banks are typically much more flexible than any of the mortgage products, especially if you’re going to buy property and flip it.

That loan is usually good for six months to three years depending on the bank. You can obviously renew them, but I typically refinance with a mortgage broker, take the money I put in that project out, and then move onto another one. I have several banks set up so I can have several projects going on at the same time.

The sixth team member you must have is a good insurance agent who understands investor properties and how the property needs to be covered. For example, in all areas where I had properties, I used an umbrella-type of liability policy, hazard insurance and, in some cases, flood insurance on each one of the houses. I try to stay out of the flood areas, but I do have a property or two that needed flood insurance. You need an insurance agent who understands the insurance products just like you need a mortgage broker who understands the mortgage products.

The seventh team member you need is an accountant. I just can’t say this enough. Accounting is huge in order to understand how to account for your expenses. An example would be spending money on a roof. Is it a repair or is it a capital expenditure? That definitely affects you because if it’s a capital expenditure, it changes the cost basis on your property. It allows you to have more depreciation as you move forward.

The eighth team member you need is an attorney, and this will be one of the most significant members of your team. One of the things that we use in our real estate holdings is what’s called an LLC tree. We use an LLC tree around each property, a single-member LLC. Then my wife and I have a dual member LLC that we both equally own, and all the single member LLCs flow into that. We also have a trust that’s above that owned by that master dual member LLC.

This protects you and your holdings. If you were to get sued on a particular property, the only thing at risk would be the property that is in that LLC. Usually, it’s not at risk because you have insurance as your first barrier, so you’re well protected most of the time. Having an attorney as a part of your team is absolutely critical.

I want to really encourage you to get these team members: real estate agent, contractors, mortgage broker, property manager, banker, insurance agent, accountant, and attorney.

Mistake 5: Not Consulting a Professional

The next mistake I see newcomers make is not obtaining professional opinions on everything, especially on property values. Appraisers often tell me the value of a property, but if I disagree with the appraiser, I will order a second appraisal just to make sure. The three most important words in business are verify, verify, verify.

Mistake 6: Bypassing Low-to-Moderate Neighborhoods

The next mistake is bypassing the low-to-moderate income neighborhoods. This is where your best cash flow spread is. Typically, management is more intensive, but the cash flows are so much better in these kinds of neighborhoods.

Appreciation is good, relatively speaking. If you buy houses right, your rents typically are going to be good as well. If the houses are in pretty decent shape and you have decent tenants, they are easily flipped to other investors.

Mistake 7: Single-Source Financing

The next mistake is failing to establish multiple sources of financing. As I mentioned before, you need to have more than one broker. The reason is that mortgage brokers typically work with different lenders, usually only with three to four. Mortgage brokers get paid better by the lenders that they do the most volume with. What’s called a yield spread becomes better the more business they do with a particular lender. This could affect you negatively because they’re not out shopping for other products for you to get you the best deal.

I also like to have at least two bankers per each area where I am buying real estate, so I have different resources. This way, you will not run out of places to find money. We call it real estate, but really, it’s finance estate because if you can’t get the properties financed, it’s impossible to do real estate deals.

One of the biggest mistakes is failing to establish multiple sources of financing. Again, I want to stress knowing your credit score before every deal. You have to know where you are. Sometimes you don’t even know certain things are on your report that may have affected it.

Mistake 8: Cutting Down the Tree

The pecan orchard story that I shared with you in the introduction is really applicable here. If you were to cut down your trees for firewood, you would have no more pecans. This is the difference between vegetables and fruit. Many vegetables have to be killed to actually eat them. Think of broccoli or cabbage. Whereas fruit trees never have to be killed in order to eat the fruit. They just keep producing fruit year after year. This is what happens when you sell a property. You are able to “eat” the cash flow now, but for the future, there is no more cash flow because you don’t own it anymore. By selling you can end up killing the goose that lays the golden eggs.

Mistake 9: Getting Emotionally Attached

One of the greatest mistakes that newcomers make is overpaying for properties. Several years ago, I made a deal on a luxury condo in a ski area where I paid the lowest price per square foot that had ever been paid for a two-bedroom condo.

Remember, if it’s an investment property, you’re not the one who will be living there, your tenant is. You need a nice, clean, neat property for your tenants, but don’t overpay for it.

Mistake 10: Not Enough Cash Flow

Then the next mistake is not creating enough cash flow from your rentals. When you are buying and holding property, the target formula is $300 positive cash flow per month after principle interest, taxes, insurance, and management.

I encourage you to establish a repair sheet cost ahead of time. When the tenant moves into the property, take this repair sheet with the costs written on it. Put all of the repairs down, go through the property when a tenant moves in, and establish that everything has been repaired. You are covered, and the tenant knows ahead of time what the repair would cost if damage happens, and then that tenant is responsible for those repairs.

Mistake 11: Failure to Inspect Regularly

You or your manager should visit your properties once a month. Pick a certain day of the week, notify the tenants, and make note of any repairs that need to be made. Have your manager give you a written report if you can’t be there in person.

Mistake 12: Being Oblivious to Cycles

When supply is historically up—in other words, there are more houses on the market, the prices are flat, or they will be dipping some—that’s the time to start looking for potential investment property.

If you want to wait a little longer, you have to pull the trigger a little quicker. When demand begins to absorb supply, which happens right after supply is at its peak, you can wait for supply to begin to edge down a little bit and demand to pick it up. When you see that prices may be trending up a little bit, that’s also a time to buy. But you want to be always buying when there is more supply than demand.

To buy and flip, wait just a tad later in the cycle. Wait until demand begins to absorb the supply. Then start buying and flipping while the demand is increasing and before a lot of new construction begins.

Mistake 13: Being a Know-It-All

The next mistake is not having an experienced coach. When you have somebody coaching you, training you, teaching you, answering your questions, and helping you with challenges, it tremendously multiplies your chances for success. You will benefit greatly from a coach’s experience and professional advice, so start looking for a coach now. You can also go to our website wealthbuilders.org for free and find an abundance of free blogs and vlogs. If you would like coaching, we offer a one-year program and would be glad to send you information about it. Again, just go to our website wealthbuilders.org.

Mistake 14: Not Having an Exit Strategy

The next mistake is not identifying your exit strategies. You must know what your long-term goals are. Whenever you buy and flip, remember that a good goal is to set a time frame for when you will get your money back.

You have to ask yourself if you will be able to sell the house in 90 days, 120 days, or maybe even six months. If you don’t identify your exit strategies, you will not know how to put the deal together properly, and you will not know what to say no to. Knowing your exit strategy helps you understand what formula you’re using and when and how you will get your money back.

Whatever your exit strategy is, it should bring you to financial independence. You are building wealth.

Today, I’ve given you 14 mistakes that new investors should avoid making. As you avoid them, you should be able to develop your real estate business and knowledge more quickly and efficiently.