by Theresa Bradley-Banta
Are you a real estate investor? If not chances are you’ve thought about it—maybe even dreamed about it.
Real estate can create real and lasting wealth. It can provide enough income through cash flow to quit your day job.
Sound familiar?
You’ve probably heard stories about how easy it is to get rich by investing in real estate. It almost sounds to good to be true, doesn’t it? But there are caveats.
Before you jump in with both feet think about how you can avoid these easy mistakes. . .
5 Biggest Mistakes Real Estate Investors Make
1. Buying the “Right” Property in the Wrong Area
A mentoring client of mine recently came across an amazing apartment building that had the “cool factor” in spades.
The all brick building was a former school-house with incredible architecture. It had:
- gorgeous stairways
- crown molding
- unique floor plans
- high ceilings
- wood floors
- stunning windows
. . . you get the idea, right? It was a very unique and beautiful property.
The building, near the downtown area, is surrounded by boutiques and small shops in an upcoming neighborhood—although the neighborhood had not quite “arrived.” It was potentially on the verge of discovery. At least according to the broker and the current property owner.
Did my client buy the property without first investigating the neighborhood? Did he accept the claims of the listing parties as hard fact? Hardly. As his mentor I would never let him do that.
Instead he visited with the police, local merchants and several property management companies who all (mostly) agreed on one important matter. The area was rife with crime, drugs and tenants of a highly transient nature—and was unlikely to change for years.
What if he hadn’t done his research? What if he had failed to see beyond the cool factor?
The apartment building would have performed extremely well in the right neighborhood and with well-thought-out upgrades. But not today. Not in the current market.
2. Hiring the Wrong Team for Your Property
As I said, the local professionals my client interviewed “mostly” agreed about the neighborhood. With a single exception. He interviewed a property manager who suggested he could replace the current residents with local college students and young ‘upwardly mobile’ professionals.
A stretch, at best.
The property was not in a safe neighborhood. If young students and professionals agreed to rent units they would be the first of their kind moving to the area. The neighborhood had potential but it wasn’t there yet.
So why would a prospective property manager suggest this?
Good question. Maybe he wasn’t familiar with the market. Or, maybe he was just trying to get a new client by making outrageous promises (it happens).
Now here’s the very scary part.
What if my client went ahead and bought the property and hired this particular property manager because he liked what he was hearing? And he wanted to believe it was true?
Your team must know and understand
- your market
- the reputation of the entire neighborhood
- local demographics
- current trends
- your ideal/target resident
- what sells units in terms of upgrades and amenities
and they must have a proven track record.
3. Lack of Due Diligence
In the story above my client exercised extreme care in conducting his due diligence of the rental market. He absolutely loved the property but he didn’t stop there. Believe me, he wasn’t happy to hear that he could purchase and renovate the property only to end up with a very cool rental property with no tenants to appreciate it.
He did the right thing. He investigated. He listened. He did his homework. And he moved on to other opportunities.
Sometimes it’s easy to fall in love with an idea. To believe everything you’re told. To have a difficult time believing that a seller or broker might exaggerate the truth.
But it happens to all of us.
The most important thing to remember is that you are not insulting the seller or the listing broker when you verify everything that’s presented. This includes inspections of the
- property (structural, mechanicals, property condition)
- financials
- neighborhood
- rental market
- historical income and expenses
- pro forma financials (projected income and expenses)
- existing leases
- and all documents on the property.
You can download a free and comprehensive due diligence checklist by visiting and opting in at Free Multifamily Investing Resources.
4. Relying on Pro Formas
When you look at a property listing and you see a financial category under the heading “Pro Formas” don’t mistake these numbers for the current financials.
Pro forma numbers represent what would happen in a perfect world under your great management and rental property operations know-how.
These numbers suggest what you might get in the future.
In most cases pro forma numbers will show higher rental amounts (therefore higher income) and lower property expenses—used to “justify” a higher asking price for the property.
It’s your job to ask for the historical income and expenses (a.k.a. Annual Property Operating Data, or APOD). Go back at least two years. I rarely visit a property until I’ve had an opportunity to look at two years trailing financials.
The loan underwriter will review these numbers as well.
Experienced real estate investors consider both sets of numbers before presenting an offer to buy. The question is: Can you actually realize those pro forma projections in a reasonable amount of time without an unreasonable amount of cash outlay beyond the purchase price? If not, you should adjust your offer price accordingly.
5. Believing Real Estate is a Way to Get Rich Quick
You can’t. It’s a measured process. It takes time, energy, education and good planning to get rich investing in real estate.
Have you heard of house flippers making a fortune in three months by quickly fixing and selling a rental property? Think twice before you believe claims of great profits. All but the most experienced flippers (like those with their own TV shows) end up over time and under budget. Many are lucky to come out ahead.
Real estate investing can be a job. Each step takes time. But you can succeed if you
- get an education
- find successful investors to mentor you
- locate good solid investment properties
- team up with experienced partners and professionals and
- successfully manage your property.
Think about this for a minute…
According to Forbes, after technology, real estate produced the largest group of self-made Forbes 400 Billionaires.
And many support their wealth through real estate investments.
Related Articles:
6 Habits of Successful Real Estate Investors
Why Invest in Real Estate?
New Year’s Real Estate Investing Resolutions
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