This is a post by real estate investment coach and strategist, Maya Paveza. In this post, Maya will share 7 actionable tips that have helped her grow numerous profitable investment portfolios, both for herself and clients. Be sure to follow her on Twitter.
Maya Paveza, Real Estate Expert
Real estate investment tips are bantered about all over the web. If you do a search the results are cloudy at best. What content truly provides value? What content is purely created to turn your click into revenue? What content is altruistic in nature and merely wants to help you succeed.
These are questions I frequently ask, no matter the topic within the real estate industry, but more so when it comes to real estate investment strategies.
As an experienced real estate professional I find many of the writings I encounter to be both bemusing and grimace inducing, rarely do I find a true work of ingenious or innovative thinking.
So I wrote my own to share with you exclusively here. You don’t need to spend thousands of dollars on a seminar and strategic coaching to build a solid real estate investment portfolio, you just have to do it.
Here are my top tips to get you moving forward, or keep your business growing if you are already a real estate investor.
#1: Go in with an exit strategy.
No one ever just creates a business or makes an investment without thinking about the ideal end results. You should have an exit strategy for your real estate investments as well. You have invested money into each property, you want to get that back at least, and take advantage of some of the other benefits of property ownership.
Consult with an experienced and qualified real estate professional who specializes in investment properties. They can help you build systems, look at various cost vs revenues models and also advise on a variety of approaches to building your portfolio, or expanding the one you have.
#2: Don’t be an accidental investor.
It happens, you end up with a property whether through inheritance, or your own property when the time comes to move up or downsize. Do you sell? Do you rent? A great number of people are leaning toward renting the properties in the recent market changes, especially in properties that would carry “jumbo” loan products.
Liability issues could arise if you do this, be sure to consult your real estate agent who is also likely qualified to be an advisor as well as a “concierge” of sorts, with a network of people who you “need to know” to do it properly.
#3: Protect yourself, and your family.
Whether you have a single property or 30, it’s best to have a corporation established to hold the properties. This protects your personal assets and limits your personal liability. Your real estate agent can put you in touch with someone who can help you set this up, or I can recommend my personal account Ed Parker in Lincoln University, Pennsylvania. Ed can advise what type of corporation you need, set it up for you, and even makes sure to maintain the corporate paperwork. I love just getting things in the mail or email telling me where to sign and what to write a check for, I don’t even have to think about it. Ed and his staff think about it for me. He focuses on the real estate industry and works with real estate investors.
#4: The Donald Trump Method: Leverage Money to Make Money.
Don’t tie up your own assets if at all possible, use someone else’s money. A commercial lending institution can establish a line of credit which could be secured with your personal property to begin with, then use the investment properties moving forward.
This puts you in a position to keep your liquid assets liquid, act as a cash buyer (the line is not contingent upon a mortgage approval) and gives you reserves to build in the buffer of 10-15% of value on each property toward updates you should consider doing between 3-5 years of ownership, as well as the inevitable work you will need to do at tenant turn over.
It’s a fast way to grow your wealth, faster than the stock market or most mutual funds. If you purchase a $30,000 rental property that rents for $900.00 a month, you are immediately looking at a profit even if you calculate the costs to carry the property for 5 years.
#5: Prepare for the unexpected – Be insured.
Rent Loss Insurance is a great option for any landlord. It will pay you if the property is vacant for the terms stated in the policy. Insurance isn’t an option, it’s essential to protect your growing portfolio. Insurance is taking a definite risk and by paying a premium assigning the risk to someone else. It’s a bit like gambling but I have never heard an investor client complain about having those policies. They are worth every penny. Do your research, and consult with an insurance broker who might have access to a variety of products and who can negotiate rates for you based on the volume of policies you will be purchasing.
#6: Be the Lender.
If you have cash you wish to leverage, but don’t feel like adding to your portfolio. Or you are a first time investor stuck in “planning paralysis” consider being a lender yourself.
You can earn a nice percentage by using your cash to finance someone elses purchase. This isn’t for everyone, but it can be extremely lucrative especially on commercial loans or higher risk borrowers. Talk to your personal banker to learn more about how to do this, and how to protect your investment with things like mortgage insurance.
Even being a private lender for residential mortgages can be lucrative, many Jumbo Mortgage loans are backed by private portfolios and managed by lenders or banks.
A Jumbo Mortgage product is one that is over the Fannie Mae or Freddie Mac Lending limits. For more information on Jumbo Mortgage please visit Bankrate.com.
#7: Stop thinking and start doing.
You’re over thinking it. Trust your instincts and your real estate investment advisor. You might have read all the books available on Amazon.com but until you actually do it, you know nothing. Stay humble and keep alert. Track your spending and keep spreadsheets for properties to watch expenditures and income.
Find a reputable property manager, interview a few, and interview other property owners who use them. The worst mistake is shopping by price, quality does not come inexpensively most often. The old adage “You get what you pay for” is a very good one to live by as a landlord. If it seems to good to be true, it probably is.
There are so many more tips I could share with you, but these are 7 of my favorites. Be smart, be creative and ask questions. If you need help getting connected with a REALTOR who specializes in real estate investments just ask, this blog is a resource for all your needs, and we have the connection to any resource you might need.
Until next time…. keep on holding!
Simple, they know what to look for.
Two weeks ago I asked 17 real estate investment experts a simple question:
Which 3 formulas/metrics do you look at first before deciding to invest in a piece of real estate, and why?
I wanted to know which numbers and formulas they used to consistently identify smart real estate investments that generate positive cash flow and a healthy ROI.
As a real estate investor myself, I have a list of metrics that I look at closely when deciding whether or not to invest in a piece of real estate. But, there’s always room to become a smarter investor and minimize risk.
I’m also a firm believer that in order to be successful you need to surround yourself with, and learn from other successful people. In this case, I wanted to go straight to the horses mouth and find out which formulas and metrics some of the most successful real estate investors used to consistently make smart profitable investments.
Do they know something I don’t know?
Read on to discover the formulas and metrics you should look at before pulling the trigger and investing in your next piece of real estate…
…as listed by 17 of the industry’s most successful investors.
You can either skip to your favorite expert using these quick links, or kick your feet up, grab a coffee and dive straight in
1. Marco Santarelli, Investor, Author, Founder of Norada Real Estate
Here are the three metrics I consider first before I dig deeper into my due diligence on a specific property:
DealGrader Score – this is our proprietary grading algorithm that factors in many of the macro-economic factors (migration, job growth, unemployment appreciation potential). Investors need to start by looking at the market – a top-down approach as I mention in my 10 Rules for Successful Real Estate Investing.
Rent-to-Value Ratio – This will tell me fairly quickly if the property will cash-flow and how well. (But this is always secondary to the overall market conditions and neighborhood.)
Cash-on-Cash Return – this is a key financial metric that tells me the real rate of return on my investment.
The R/V ratio is the monthly rent divided by the purchase/acquisition costs. A value over 0.7 is acceptable but ideally you want a value of 1.0% or more.
The COC return is the net cash-flow divided into the total cash invested.
2. Seth Williams, Founder of REtipster.com
First and foremost, I look at cash flow. My primary purpose for any long term investment is to create a new stream of income that puts money in my pocket after all of its expenses are paid. Strong, positive cash flow is an absolute MUST for any prospective property I purchase.
Second is my cash on cash return, which is an equally important measurement that goes hand-in-hand with a property’s cash flow. How expensive will it be for me to buy this new stream of income? Anybody can buy a new source of income (it’s not difficult), but it can be challenging to buy a source of income at the right price. Great deals only exists when the income can be acquired at a great price.
Third is the reliability of the income. What is the vacancy rate in this area? What kind of repairs and maintenance will be required over the long term? Can we get tenants who will pay their rent on time and keep the property in good condition? As with any investment opportunity, the devil is in the details – and a good rental property is more than just numbers on a page. I need to understand the good, bad and ugly of any property before I make an investment decision.
3. Brandon Turner, Investor, VP Marketing at BiggerPockets
Location is my first “filter,” as I don’t care how good a deal is: I won’t buy in a bad location.
Second, I want to make sure the house is “rentable” – meaning it’s something that I could rent out fairly easily (studio apartments in my area are tough, so I will avoid them.).
Finally, I look for major cash flow – meaning at least $100 per unit, per month.
4. Michael Blank, Expert Apartment Building Investor
I’ll apply this question to apartment buildings, and I’ll assume I’m syndicating them, i.e. I have investors who provide the equity.The overarching metric I look for is the total return of the investment. The total return is the sum of cash flow distributions, loan amortization and profits from appreciation at resale and/or refinance divided by the equity that was invested divided by the number of years we held the investment:
Total return = (Cash Flow + Amortization + Appreciation) / Equity / # Years.
The total return I look for must be at least 15%. Let me say right now that that’s not easy to find these days!
You can use other metrics too, but they feed into the total return. For example, the cash on cash return gives you an indication how much cash flow an investment produces. The more, the “safer” and the easier it is to finance. For a stable property I look for a cash on cash return of at least 10%. If you’re re-positioning a property, the cash flow might be negligible or even negative. Stay away from these kinds of investments, at least in the beginning! As you get more advanced, you can price the lack of cash flow into the deal and get there as quickly as possible.
Then there’s the third metric, the capitalization rate. This is the Net Operating Income (NOI) divided by the price or value of the property. It can be used as an equalizer to quickly determine the fair market value of a property and to narrow down your search. But the cap rate is not the end-all be-all, either. Often the marketing packages advertise a 9-cap but upon closer inspection you discover the income is high and the expenses are low. So it’s not really a 9-cap but maybe more like a 7-cap.
While the cap rate is useful and the cash on cash return is important, the overarching metric I use is the total return.
5. Jake Durtschi, Expert Property Manager and Real Estate Investor
It’s important to remember that metrics are an attempt to predict performance. Ignoring other predictive factors such as property condition, market conditions, and screening is a mistake. It is important to understand strengths and weaknesses of each metric.
Capitalization Rate: The capitalization rate factors income, vacancy, and expenses. It does not factor in debt service. The formula is: Net Operating Income / Price = caprate
Strengths: The caprate factors income and expenses. The caprate gives you a ratio so you can compare other properties that have different income or different expenses.
Weaknesses: Capitalization rate can be artificially impacted by deferring maintenance or other expenses. As you reduce expenses the caprate increases (looks more desirable and demands a higher value). Other ways to artificially increase values for a short time include reducing qualification standards for tenants moving in and procrastinating evictions.
Delinquency: Figure out the delinquency ratio. This number will give information on management factors such as tenant screening, collection processes, and eviction processes. Typically properties that have extraordinarily high delinquency accounts have additional evictions and repairs needed at purchase.
Debt Coverage Ratio: The debt coverage ratio is figured by dividing the mortgage payment by the Net Operating Income. Most investors will have different comfort levels. Most investors insist on no less than 125% coverage. Others may insist on at least 150%. I recommend that older properties with more potential maintenance should have a little higher coverage. On the other hand, a lower debt coverage ratio with higher reserves may provide higher returns over a period of time.
I recommend these metrics be used thoughtfully, and not treated as black and white ingredients for success. I don’t believe there is any magic formula, but these metrics will give investors a place to start.
6. Tracy Royce, Short Sale Realtor, Investor and Foreclosure Expert
There are a few “make it or break it” formulas I consider to see if there’s some juice in the deal.
One, I look at the retail prices, to make sure there is enough equity spread depending on if I’m keeping or flipping it. Thin margins are too chancy; it has to meet a minimum spread. With that, I want to see a healthy flow of activity, not be the only one selling or one of dozens available, so there has to be a good balance of comps.
Second, I want to know how long it’s going to take me to sell/rent, based on the same comps.
Lastly, the return on my money has to make sense. I want any capital invested back as soon as possible with the highest possible return. If all these formulas add up, I’m jumping in the car to go put my eyes on the deal and hopefully buy it.
7. Andrew Fortune, Expert Realtor
Thank you Jacob Grant Property Management for taking the time to put this article together. It’s a great question. Here’s my 2 cents:
Since I’m a “fix & flip” investor, I typically look at the Days on the Market as my #1 most important piece of data. This will help me to determine how long the property may be on the market once I list it for sale.
My success as a real estate investor is directly tied to the speed in which I can close on my investment property and move on to the next one. If I get stuck with a house that takes 3 months to sell, it has a large impact on my year. When I run my spreadsheets to narrow down all of the current available investment properties to purchase, I immediately look at the days on the market and sort them by this value.
The second, and equally important metric is the Price Per Square Foot (PPSF) for the neighborhood. I calculate the neighborhood PPSF for every property that I’m interested in. This data will reveal the estimated resale value of the real estate in question, and help me to determine the popularity of the neighborhood in comparison with other neighborhoods in the area. Being a Realtor in Colorado Springs helps me determine this value, as I gather all of my data directly from our local MLS. Being a Realtor and an RE Investor is a great combination!
The third metric that I use to analyze the potential in an investment property is to calculate the distance from where I live to the piece of real estate in question. I live in Monument, CO, which is part of Northern Colorado Springs. If I find a deal in Denver, CO (about an hour away) with an equity spread of $40,000 and then find a deal in Colorado Springs (20 minutes away) with and equity spread of $30,000, I’m going to be much more interested in the Colorado Springs deal, based on the proximity to my home. When I flip a property, I’m usually there every day working on it for 2 or 3 weeks straight. Then, once it’s on the market, I’m going there to show it and keep up properly staged. Owning real estate that is close to my residence makes my life easier, so I prioritize that as a main metric for measuring the value of an investment property for myself.
8. Ali Boone, Investment Coach and Founder of Hipster Investments
Will it cash flow? If it won’t, I don’t buy it. A lot of people don’t know what constitutes positive cash flow, so that formula needs to be understood ahead of time (i.e. how to calculate cash flow). Once I run the numbers on a property, and if it suggests positive cash flow, I then look at –
Quality. The quality of the property especially (no one likes unexpected repair expenses), the quality of the specific location (is it a safe area, do people want to live there?), and then quality of the market (is it growing? Is there job creation and population increases?) Once I deem the quality to be sufficient, I look at –
Worth. Is it a good deal? Is the purchase price reasonable for what I’m getting? Is the overall investment seem strong?
9. Mark Ferguson, Realtor, Investor and Author
I look at price first. Our market has increased greatly. Any house I see under $150,000 I look at for a flip or rental.
Once I see what may be a rental property deal I look at the numbers more carefully. Why would potential rent be. What would the cash invested be. What would cash on cash return be and what is the monthly cash flow. My goals are 20% cash on cash and $500 a month cash flow.
When I see a fix and flip deal I look at the numbers differently. What are all my expenses, what will the house sell for, how much work is needed, what unknowns may come up and what will my profit be. I want to make at least $25,000 on flips I buy for under. $150,000.
10. Sharon Vornholt, real estate expert
I take a number of things into consideration.
The first thing is the neighborhood. This is probably the biggest consideration of all. Is this a neighborhood that I would want to hold property in myself? I don’t like to buy property anywhere that I myself am not comfortable working in. It doesn’t have to be an area that I want to live in. However it does have to be an area investors want to buy property in to rehab and flip or a good area for rental property that a landlord would be interested in.
Then if I intend to wholesale the property I ask myself, “Is this an area where I am likely to find a buyer for the property easily”? I know where my cash buyers on my list like to buy so I am always looking for properties in these areas. But that doesn’t mean I won’t buy in another area. It just means I will have to actually market the property to find a buyer rather than just calling someone on my list.
If I can answer yes to the first two questions it becomes all about the numbers. I will look at the comps for the area. Then I will determine the extent of the repairs and upgrades needed. Once I have that number. I will use the ” 70%” formula as a starting point for determining the ARV (after repaired value). Now depending on the ARV of the house and the area, I may use a slightly higher or lower starting point to come up with my offer.
If the numbers work I will make an offer.
11. Ben Leybovich, Real Estate Investor, Entrepreneur and Speaker
CAP Rate (Capitalization Rate) – CAP Rate is a metric of the marketplace more so than an individual opportunity. It answers the question – what rate of return are investors choosing to deploy capital at in a specific marketplace for a specific class and style of asset. The formula juxtaposes the NOI (net operating income) with Value. This formula can be used to either evaluate the marketplace by juxtaposing the sold comps with the NOI of those sold comps, or it can be inverted and used to arrive at a capitalized valuation of an asset by juxtaposing its’ NOI to the market CAP Rate. I do not underwrite to CAP Rate, but I study the marketplace and place the opportunity within the fabric of the marketplace via CAP Rate.
Value = NOI / CAP Rate
DSCR (Debt Service Coverage Ratrio) – DSCR compares the NOI to the Cost of Money (Mortgage; Debt service). The banks use DSCR to underwrite income-producing assets, and so should we. The minimu DSCR a bank would consider is not less than 1.2 – which mean that the NOI is 20% greater than the cost of money. The minimum that I would advise is 1.4
DSCR = NOI/Cost of Money
Cash Flow – this is the amount left in your pocket after all expenses are paid. This is why we buy income-producing property.
CF = Gross Income – Operating Costs – Cost of Money
CF = NOI -Cost of Money
If there is no financing (if you pay cash for the property), then the CF is equal to the NOI.
There are many other formulas we use, including the IRR, but if you cross your t’s and dot your i’s with these 3, you should be able to stay out of big trouble.
12. CJ Brasiel, Expert Realtor
3 Most Used Metrics for the Real Estate Investor
As a real estate investor, it is important to create business goal for each real estate investment as well the entire real estate portfolio. To be successful, the 3 most common used metrics when deciding to invest could be summarized as:
1.) Determine your investment goals.
Start with the WHY. Why do you want to be a real estate investor? Scrutinize your knowledge and become more educated. Know the money you have to invest, the percent you want for return and what options you have for achieving these goals. Evaluate potential on leveraged money and CASH. Understand conventional lending and hard money lending. Decide milestones for your adventure and create a plan.
2.) Evaluate the market
The three most common tools include ROI (return on investment) and Cap Rate (Capitalization Rate) for big picture valuations. If the property is a FLIP, then understand the market dynamics, the cost to hold, re-hab, remodel, and sales costs. If the property is a BUY and HOLD, the third metric, NOI (Net Operating Income) is key and it will be instrumental in setting realistic expectations for any rental. For any market, know the demographic inflow and outflow as well the employment projections to help determine if this is the right area to invest in.
3.) Plan an Exit Strategy
Managing any investment is understanding the tax consequences and all options for continuing profit and portfolio building through tools like the 1031 exchange. Understanding legacy decision and how any real estate may be transferred to heirs is a key decision point for any investor. Divid the portfolio into risk/return buckets, and know which will be used for cash flow, and which will be used for long term capital gains.
Unlike a “home”, a real estate investment is an investment that requires even more evaluation, planning, and strategy to tilt the balance to success. The reality, not all investments pay off. Make sure your plan has clear goals, strong evaluation tools, and a definitive plan to insure your success.
13. Ilyce Glink, Award-Winning Real Estate Expert & Personal Finance Expert
I only look at one thing and that’s free cash flow.
14. Debbie Drummond, Expert Realtor
When looking for investment properties, we try to keep it simple. First things we look at are:
Demand. Is it an area where homes are selling quick? If no one is buying or renting in this area, you’re wasting your time. You’ll have trouble finding and keeping tenants and the appreciation won’t be there.
We’ve been lucky the past few years. Low interest rates and home values meant positive cash flow. That will be more challenging as prices and interest rates rise. Having a negative cash flow doesn’t rule out investing. The investor needs an accurate number for the negative cash flow and they need to be prepared for it.
Repairs & Rehab.
Take a good look at what will need to be done before you buy. Don’t get stuck with a money pit. If you do, you can kiss cash flow and ROI good bye.
15. Mat Piche, Expert Realtor and Investor
The first three things I look at before buying a property are:
Is the city growing and does it have a future? (i.e. job creation, is it a “one hit wonder town” or does it have many industries like technology, insurance, manufacturing going for it, etc)
Is it in a quiet and safe neighborhood close to amenities, highway access and schools?
Does the property need structural work or purely cosmetics? (I only like the ugly and outdated homes that I can buy cheap and re-paint, install some new floors and countertops etc, and stick it on the rental market to attract quality tenants!)
Personally, I don’t really think or care about hard formulas/metrics.
What I look at, is:
Will the property cash flow today?
Will it cash flow five years from now?
Will it attract the tenant profile that I want (my ideal customer).
If those are answered all with yes, than I’m happy! I’m in this for the LONG haul. My properties will completely fund my lifestyle until I die, so I don’t really plan on selling any of them, unless they’re just not performing well for whatever reason.
Logic tells me that if I put 20% down, the property appreciates 3% per year and the mortgage is always getting paid down every month, that’s a 15% return on my money every year. NOT including cash flow.
If that’s my ‘worst case scenario’ (which it never is), I can live with that return
16. Rich Danby, Real Estate Coach and Investment Expert
My key points of interest when looking at investment real estate.
Is the surrounding area growing? Is the population growth meeting or exceeding the national average? This is an important window into the near future, and the potential value of the investment.
This goes hand in hand with population growth. It’s important that there are immediate plans for the area’s future. Renting property in a stagnant area could prove to be difficult.
Are there many jobs in the area or new jobs coming? People tend to populate areas close to work.
Is there more than one type of employment indusrty? If the only employer in town closes, many people will relocate. Be sure there is diversified employers in the area.
Proximity to Amenities
An area walking distance to shops and amenities is most desirable to tenants. Most people will choose to live closer to the grocery store than travel a far distance to run their errands. Almost everyone loves convenience. Checking the Walkscore of a property is a valuable tool.
Being close to transit is very desirable. Easy access to city transit is high on the list for most tenants, even if they own a vehicle. A potential tenant will more often than not choose a location with immediate access to transit.
17. Spencer Cullor, Successful Investor and Entrepreneur
Cost Per Unit
When we compare multifamily properties for purchase we like to look at the cost per unit and compare it to other similar age and class of apartments which have been sold recently. We feel this gives us a much better picture of the market value than capitalization rates or other measures that can be easily manipulated by a sophisticated broker or seller.
Expenses Per Unit
We really like to break down the expenses of a property by the number of apartment units. By breaking down expenses by the unit you can get a really good gauge of how the property is performing versus other properties in the area. It also cannot be manipulated as easily as other measures such as using percentages. Breaking expenses down this way allows you to quickly identify problem areas or opportunities to increase the value of the property by correcting inefficiencies.
Cash on Cash Return
We always measure the return on our investment on an annual cash-on-cash basis. We feel this gives us a very good measure of how our investment dollars are performing without over-complicating things.
HUGE thanks to everyone who participated in the roundup.
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Two weeks ago I asked 26 real estate experts and successful investors a simple question:
I wanted to know plain and simple which three mistakes most often derailed first-time real estate investors when getting started in their investment careers.
As an investor myself, I’ve spent money on coaching and paid for expensive tutorials in the hope that I would uncover the secret to real estate success. However, very few of these resources got me any closer to my goal of financial freedom. That’s why I decided that I needed to go straight to the horses mouth.
Read on to discover the three most common mistakes made by first-time investors, as listed by 26 of the industry’s top real estate experts and investors.
You can either skip to your favorite expert using these quick links or grab a coffee, get comfortable and commence scrolling.
Andrew Fortune Andrew Dougill Ben Leybovich Bill Gassett Brandon Turner Brett Magleby Debbie Drummond Don Campbell Ilyce Glink Jake Durtschi Joe Manausa Joshua Dorkin Juan Murdoch Karen Highland Kyle Hiscock Lynn Pineda Marco Santarelli Mark Ferguson MayaPaveza Michael Blank Raphael St. James Richard Silver Ryan Lundquist Seth Williams Steve Bighaus Tracy Royce
1. Bill Gassett, Top 5 Real Estate Agent in Southborough Massachusetts
Robbie thanks very much for allowing me to share my expertise on your blog. As far as mistakes go from real estate investors, I have seen some of the same things repeated more than once.
The most common issue I see is when an investor buys a rehab and underestimate the costs involved in bringing the property into what would be considered appropriate for the market and neighborhood. I have seen numerous cases where the investor actually loses money because they have either overpaid or not done enough home work on what it will actually take to renovate the property correctly.
The second mistake is buying a home that would be considered at the top of the market for a particular town and/or neighborhood. You never want to be the “cream of the crop” property when you are an investor. Middle of the market to the lower end is always a better place to be as the properties that are above you bring up your value.
The third mistake I have seen but not quite as often is an investor buying a property that has some form of functional obsolescence that makes it difficult to sell. Usually these are structural issues that cannot really be changed. For example having to walk through a formal dining room to get to a bedroom in an older home. These are all things that can squash an investors plan of making the money they thought they would!
2. Marco Santarelli, Investor, Author, Founder of Norada Real Estate
Here are three common mistakes that I would put at the top of your page:
- Investing in your local market only. Although your local market might offer you the best opportunities, the reality is that more often than not the best deals are found in other markets, often out-of-state.
- Speculating on appreciation. Appreciation is nice but if your property doesn’t make sense the day you buy it then you are probably speculating.
- Buying with financing (all cash). Leverage is one of the greatest benefits of investment real estate. It increases you cash-on-cash returns and allows you to buy more property.
3. Brandon Turner, Investor, VP Marketing at BiggerPockets
The biggest mistakes I see new investors make are:
- Not Doing the Math. They simple rely on “gut feeling” when making a decision, which tends to lead to problems and bad investments. The math is not tough, and doesn’t take a lot of time, but can mean the difference between success and failure.
- “Shiny Object Syndrome” – where the new investor bounces back and forth between new ideas constantly, never focusing. I believe you can succeed in any niche of real estate, so it’s important to pick something and stick with it.
- Not Asking for Help - People think they need to do everything on their own, or that there is some kind of competition that stops them from asking others for advice. People would find greater success (and avoid mistakes) if they only asked for more help!
4. Maya Paveza, Real Estate Coach, Investor and Strategist
My first instinct answer is the following, there are SO many more mistakes… =)
1. Rookie Mistake: Pick a REALTOR you are related to, or know, but might only work part-time or has never worked with investors. Do your due diligence in finding the right REALTOR to work with. Ask for references, check references and schedule a consultation with them prior to beginning your working relationship. Make sure they have experience in the investment process. A rookie mistake can cost you a LOT. When I train agents to work with investors I make sure the agents know about “due diligence” inspections and options for special insurance to cover lost rental income, and even system failures. It’s not an everyday real estate transaction, it’s a long term relationship. Take your time, if you are not sure then sign a short term Exclusive Buyer Agency Agreement. But committ to a single agent so you don’t waste your time, and their time. Show dedication to them and amazing things might happen, Agents who are active enough in that area may have notice before a new property hits the market, and if you are committed to your agent you will be top of mind when they get that call. They will also have leases they can share with you, and references to others you might need in the process of purchasing and owning investment properties.
2. Rookies Mistake: Purchasing an investment property with a regular mortgage product. Oops! You can buy a few this way, but at some point you need a commercial loan or a line of credit. It’s much easier to draw upon and a faster way to go when you have to act quickly, especially if in a competitive situation perhaps with a cash buyer. After acquiring a few properties use the equity (which you should have if you are investing properly) to secure a commercial line of credit which can act as cash when need be.
Have your finances ready. Better to have a commercial loan ready to go, and a company set up to protect your personal assets from your investments. There are a lot of risks for investors who own properties, especially those that are rental units. Lost rental income insurance coverage is available, and a home warranty is a great option. Have a GREAT accountant who is familiar with real estate investments and the timeline, you want to avoid showing too much gain and need to know when to turn a property over and acquire a new one.
3. Rookie Mistake: No hiring a property manager or management firm because of the bottom line effect.
You are running a business when you own investment properties, you aren’t playing guys this is the fastest way to build wealth. Cheaping out in this aspect will be the difference between true success and an expensive hobby. Consider it an additional stream of revenue while values increase. Your time is worth money, you need to really value it properly and not become your own handy man or bill collector.
Be sure to read, research and learn about the rental process in your ara, what you should be looking for, what rents are in your area, as your REALTOR ot introduce you to a reputable, and proven, property manager, it’s well worth the expense to have someone else handle the potential issues, maintenance and even licensing required in some area. A client once had a call on Christmas Eve that there had been a fire at one of his properties, he was a few hours away but because he had secured a relationship with a reputable property manager they were notified by the fire department and handled all the arrangements to secure the property, meet the insurance adjuster and act on behalf of the owner without their needing to leave their family gathering. I got the call after it all had occurred, and my client was extremely grateful I had introduced him to his property manager.
Learn the market, trust your REALTOR. They do this everyday, and if you chose the right one you won’t have to worry about the potential ROI of the property you purchase because your agent should be able to easily demonstrate that information via market analysis and statistics.
5. Ben Leybovich, Real Estate Investor, Entrepreneur and Speaker
- Assuming you need money to invest in RE.
- Assuming the bricks and mortar are the only value centers in a transaction – there are many others.
- Confusing knowledge with wisdom – they are not one and the same, and we need both!
6. Joshua Dorkin, Founder and CEO at BiggerPockets
- Overpay b/c of lack of understanding of how to evaluate deals
- paralysis analysis
- financially unprepared to support REI
7. Michael Blank, Expert Apartment Building Investor
I’ll answer the question for apartment building investing:
Mistake # 1: Not having enough cash: either to complete due diligence and get to closing, and running out of cash while owning the building. You need a reserve in case something happens. Sometimes you get into a deal and discover that half the tenants aren’t actually paying rent, or your boiler blows up etc. Once you have a handle on it and it’s stable, you can pull out some of the reserve fund and substitute that with funding the reserve out of cash flow (the rule of thumb is $250 per door per year).
Mistake # 2: Not verifying the actual rents collected. In fact, I just wrote a BiggerPockets article on this here.
Mistake # 3: Not being clear or not sticking to your underwriting guidelines. Before starting to make offers, know exactly what returns you’re looking for. In other words, how will you recognize a good investment when you see it? How do you know it’s good? I look at the IRR (the returns) for the investors – everything else is secondary. So # 1, what are your investment return requirements. Then # 2, make sure you’re underwriting the deal conservatively. Use a 10% vacancy factor, take into account bad debt (i.e uncollected rent) if your property is affected by this. Use a rule of thumb for expenses of 50% of income, and if landlord is paying utilities, increase that to 55% or even 60%.
8. Seth Williams, Founder of REtipster.com
Don’t pay for improvements and services that don’t add value.
There will always be opportunities to pay for improvements for your properties or added services in your business. These things can certainly help your operation run smoother and allow your properties to generate more revenue with shorter turnaround (both of which will be very important to the long term help of your investment portfolio).
On the same coin, we all have to sift through MANY temptations that entice us to spend our hard earned cash on things that look flashy and appealing, but just don’t add much to the bottom line. Use great discernment when it comes to the things you spend money on (especially in the beginning, when money isn’t “growing on trees” just yet). Choose your battles wisely and only invest your cash in the things that will effectively bring your business to the next level.
Don’t buy properties that cost more than they make.
Let’s face it – in order for a property to be an actual “investment”, it needs to generate a profit.
In other words, after all of your expenses are paid – how much money will you actually be able to KEEP at the end of each year? It comes as a surprise to many new investors that t’s harder than it looks to pull this off. There are an endless number of things that can (and will) eat away at your revenue and become obstacles to you making (and keeping) money. If you want to avoid the trap of owning a property that costs more than it makes – be sure to do through due diligence before you buy it and leave no stone unturned in the process. It may be tedious work that requires great patience, but you’ll thank yourself for a lifetime as a result of laying the groundwork properly.
Don’t hesitate to pay for the right expertise.
It’s the same reason I take my car to a mechanic when it needs fixing, the same reason I go to a doctor when I’m sick, and the same reason I don’t dare to pick up a hammer to fix my own properties… because I don’t have the right set of skills to do it myself.
9. Mark Ferguson, Realtor, Investor and Author
- Buying a rental property for appreciation and ignoring negative cash flow.
- Buying a fix and flip and not calculating all the costs or trying to save money by doing all the work themselves.
- Spending $20,000 on a real estate guru to teach them how to invest.
There are many programs out there that use low priced or free seminars to get investors in the door and then up charge them for more and more services until they finally bring out the big guns with a30k or 20k program that walks them through how to invest with financing. In the end they are mostly worthless and you could have bought a house with that money.
10. Joe Manausa, Real Estate Blogger, Broker and Investor
From the hip…
- No clearly defined goal – If you are going to invest in real estate, you should have an ROI/IRR goal. Your money will have to be removed from its existing use and put into real estate, so what is your minimum required return on investment?
- Not understanding active vs. passive – buy and flip is a job, not an investment. You have to take an active role in this type of “investment” so yo should not compare it with other passive investments.
- Looking at properties vs. looking at numbers – investing in real estate requires you to find a property that will meet your financial needs. Too often, new investors go and look at properties that they have yet to financially qualify as feasible investments. Do the numbers first.
11. Tracy Royce, Short Sale Realtor, Investor and Foreclosure Expert
3 common mistakes made by first time real estate investors is not sticking with it, chasing rabbits, and getting emotional over a deal. I tell anyone who starts, you’re probably going to get a paycheck 6 months from the day you start working diligently on lead generation. So many people drop off after a few weeks/months, and lose hope.
Secondly, when they start getting calls/lead flow, they chase “rabbits” that aren’t ever going to be an actual deal for one reason or another. If someone’s motivated, you’ll know. Don’t waste your time on the majority of leads that aren’t ever going to convert.
Lastly, don’t over improve a house, or buy based on emotion. Let the numbers talk and show you if there’s a deal. You can buy a lot of houses, overpay, overimprove and lose your ass pretty quickly, so your emotions need to take a back seat. It’s not worth buying a bunch of property just so you can brag to your friends you’re in real estate investing. It’s a business; think like an owner from day 1 and you’ll already be ahead of the crowd.”
12. Don Campbell, Best Selling Real Estate Author, Investor and Senior Market Analyst
The three most common mistakes of real estate investors:
- Not understanding the economic fundamentals of their target market. What is driving the market, (speculation or long term economics), is it sustainable and is it attracting the type of tenants I want for instance those with increasing income and strong job prospects.
- Buying a property because it is ‘cheap.’ Too many investors buy property without understanding value. Price is not value. Just because it is cheaper than it used to be, or it is cheaper than in other cities doesn’t mean it is a good deal. What matters is Yield – what long-term income stream are you buying when you close on the property. Is it higher than you can get in other areas or investments? Is this yield sustainable or is it just a short term shortage blip.
- Not planning a ‘sustainability fund’ when they purchase properties. We often call this the sleep at night fund. It is made up of 3 months of mortgage payment equivalent in readily available cash reserve, for EACH property. This money becomes the buffer for unforeseen repairs, vacancies and other issues. Without this sitting on the sidelines, the investor is simply adding too much unnecessary financial risk to their portfolio. With it, they can go on vacation, sleep at night or just get on with their life with fewer “What if” worries. Treat investing in real estate like the business that it is.
13. Lynn Pineda, Expert Realtor
Investing in Real Estate for the first time is a very exciting adventure for first time Investors with the hopes for great returns on their investments. Proper planning and preparation is key in anything we do and the same holds true for investing in Real Estate. Likely the most common mistakes made by first time Investors are the following:
- Not completing your local Real Estate market research
This is a big deal if you haven’t done your research when deciding on a Real Estate property to purchase. You want to make sure you’re buying in an area where you can anticipate price appreciations and/or steady demands for rentals, if you’re renting opposed to fixing and selling a property. Making the wrong investment due to lack of research is a hard lesson to learn when you end up losing money.
- Not budgeting properly for owning Real Estate
It’s so easy to get all wrapped up in the excitement of a first time property purchase that you fail to consider the expenses that go along with property ownership. You need to budget for utilities, repairs and down times, if renting. Will you have the money to fix the A/C when it breaks? What about the month or two you miss out on with no Tenant, when the prior Tenant moved out and you couldn’t immediately find a new Tenant?
- Taking shortcuts on any needed repairs or remodeling
Shoddy repairs and/or remodeling will not benefit an Investor. Have you quality contractors in place before you purchase an investment property. Taking short cuts to save a buck will not bring Buyers wanting to buy your property when you’re ready to sell or you won’t have Tenants interested in paying you top dollar for a rental unit. Quality will always pay.
14. Raphael St. James, Expert Realtor
- Not sticking to a plan or the numbers to fulfill your goal (Paying too much, not having enough capital for unexpected repairs, etc.)
- Being too short-sighted on immediate returns and not the long-term end goal.
- Buying off of impulse or emotion instead of the parameters of the property (cap rate, etc.)
15. Ilyce Glink, Award-winning real estate & personal finance expert
Timing Issues. Too many people sign a year-long rental agreement and then decide to buy.
Not understanding where you are in the cycle of life. Don’t buy a 1b/1ba and then find a long-term partner or get married and have a baby. You’ll be squished.
Not educating yourself. Read up on the process. (Buy my books, 100 Questions Every First-time Home Buyer Should Ask and Buy Close Move In!) Get educated. It’s the single biggest purchase you’ll ever make. Don’t wing it and don’t rely on people who have never been through the process.
16. Andrew Fortune, Expert Realtor
1.) Not being realistic about the learning curve. – First time investors are usually pumped full of info from blogs, seminars, and books. Most of the info that they receive will convince them that anyone can be successful investing in real estate. In reality, the chances of a first time investor doing well on their first few deals are slim to none. There will always be an unexpected expense and/or problems that will eat into profits. If you are prepared to make a few mistakes, you will learn from them and adapt with each deal. If you are not prepared to make mistakes, these unforeseen problems will crush your motivation to try it again.
2.) Remodeling for Personal Taste and Not What’s Currently Selling – First time investors have something to prove when they enter the business. One of the ways they express their abilities is through the design choices that they make throughout the remodel process. Unless the investor is looking at homes on a regular basis and noticing what materials are currently selling homes, chances are high that they will over spend on materials, or pick materials that are not desirable to the masses. Tip: Hang out with local home builders who build plenty of homes and use the materials that they use. These builders have years worth of experience dealing with choosing materials that sell homes fast for minimal cost.
3.) Getting Caught Up in the Small Stuff – As an investor, your first home remodel is exciting. It becomes personal. Once emotions and personal feelings get involved, the chances are high that small details will become more noticeable and important. Small cosmetic flaws will start to pop out everywhere you look the longer you are in the property working on it. It takes experience to know what to spend time on and what to avoid. First time investors are known for overdoing their first few rehabs because they get caught up on the small cosmetic issues that home buyers usually never notice when they look at a home. Some examples might be painting inside closets, remodeling under bathroom cabinets, or changing out light fixtures in the garage. Just stick to the main selling points and get the job done on time with minimal cost.
17. Debbie Drummond, Expert Realtor
#1. The most common issue we see is first time investors who buy with emotion. We’ve seen in-experienced investors who pass up great opportunities because something about the home doesn’t “Wow” them. It may be an investment but they are drawn to homes they could picture themselves living in.
An experienced investor will look at how quick homes in the neighborhood rent and how much rental income it will produce. They’ll leave the “Wow” factor for their own home and focus on the numbers for the investment property. Experienced investors are more likely to buy site unseen based on the numbers and thorough inspections.
#2. Many first time investors see the world thru rose colored glasses. They expect to get the property rented right away, rent checks to arrive on time and not have major issues.
They don’t allow for management fees, occasional repairs and the cost of having a property sit vacant. The expenses involved in evicting a tenant who doesn’t pay can add up. It’s always a good idea to have additional funds out away to cover the unexpected.
#3. First time investors sometimes neglect making little improvements which will help the property rent quick. Most of our investors will spend $5-$10K, depending on size and condition of the property. The extra investment adds updated light fixtures, new flooring, paint and desertscaped back yards, etc. Many of our investors buy used appliances from a local store.
Tenants see stainless appliances, nice flooring and the property rents quick for a good price. The first time investor lists the home for rent with minimal improvement and it sits on the market until they lower the price to get a tenant.
18. Kyle Hiscock, Real Estate Expert
I’d be happy to give the top 3 mistakes made by real estate investors.
- Misjudging cash flow – An investor who purchases an investment expecting to have a positive cash flow of $10,000 after all expenses only to find out after owning for a year the cash flow is $5,000.
- Thinking they will get rich fast – Investors purchasing one investment home believing they will get rich quick. Building an investment portfolio takes years and years to do. It doesn’t happen after just one property!
- Overpaying for properties – This is a huge no-no. In experienced investors sometimes will stretch when buying an investment because they have the “itch.” This often leads to a poor cash flow and poor investment. It’s important for investors to stick to the numbers and not overpay for properties if the numbers don’t work!
19. Karen Highland, Real Estate Expert
When considering an investment property purchase, the investor must know going into the project, whether they are going to buy, rehab and flip, or whether they are going to keep the home and rent it out. There are two different approaches, depending on each of these plans. Sometimes first-time investors are not clear on their goals and may change their minds when they get into the renovations on a home. The problem is, then they may have already over-invested, or underinvested.
For example, if the investor plans to renovate and flip the home, then they need to do their research and learn what buyers in that price range and in that neighborhood expect in a home. If the comparable homes are fitted with granite counters and upgraded appliance packages, hardwoods and upgraded bathroom features, then they need to have that cost figured in to the project. If they get into the renovation and find that they are short on finances, then skimping on these features will make the home less desirable to buyers in that market.
If the investor plans to own the home and rent it out for a while, then fitting the home with upgraded features is an expense that they may regret. Renters tend to be hard on a home, no matter if the finishes are less expensive, or more expensive. The wear and tear on expensive upgrades will be more costly to fix and replace down the road, compared to less expensive finishes.
Knowing whether the final product will sell for a profit depends on knowing the comps. Knowing whether it will rent well, depends on the same knowledge, but switching from one plan to the other can end in a disaster. If they find that the home doesn’t sell, or that it doesn’t rent for the money that will cover the cost that they put into it, then they have an entirely new set of problems to deal with.
20. Richard Silver, Real Estate Expert
- Think long term…
- Decide whether income will trump capital appreciation… Or vice versa…what are your goals…
- What value can you add with minimal cost??
All of this goes with knowing the market and rules affecting landlords and tenants…
21. Brett Magleby, Real Estate Expert
- Not doing enough research as to values in the area after they have fixed the place up.
- Underestimated the amount of work that will likely need done on older homes.
- Thinking they are going to STEAL a property for much less than market value.
22. Ryan Lundquist, Expert Real Estate Appraiser
After inspecting thousands of homes as a real estate appraiser, If I had to boil down three mistakes by newbies investors I’d say:
1) Having an unrealistic expectation of what the house will sell for;
2) Upgrading the house beyond what is expected in the neighborhood (overbuilding); and
3) Failing to understand minimum property standards for conventional of FHA financing.
23. Andrew Dougill, Real Estate Expert
Buying the wrong property.
As property managers, we often contacted by first-time real estate investors AFTER they have purchased a property. In a surprising number of cases we have to tell the investor that they purchased the wrong property (or the right property for too much money). It is just so important BEFORE you purchase an income investment property that you do your homework. You need to know important data to understand if it will be a good investment. For example, is in a popular rental location (close to employment, transport, schools, etc.)? What are realistic rents for the property? What are the typical vacancy rates for that type of property? What types of maintenance expenses can you expect for the type and age of the property? You must be careful about information being offered by the seller’s agent and do your own homework. If you are going to have the property professionally managed after the purchase, get your property manager involved early on and before you purchase, as they should be able to help you make an informed decision.
Not treating becoming a landlord like a business.
When you purchase an investment property and become a landlord, you have just opened a small business. As a landlord you have increased your liability profile. You must take sensible precautions to protect yourself from liability such as good liability insurance, forming an entity like an LLC and hiring licensed and insured contractors to help maintain your investment. An investment property is not like owning a mutual fund. You could get sued and lose more than your investment.
Expecting a property to cash-flow with a large LTV mortgage.
There is usually an optimum size for a mortgage on income producing investment property to maximize your return on cash invested. Rarely will you see 12% returns with, say, a 70% LTV investor loan. More likely a property will lose money with a large debt service. Recently we have been recommending our investors purchase properties for cash or to only have a small (30% LTV) mortgage to see a good return on their cash invested.
24. Jake Durtschi, Expert Property Manager and Real Estate Investor
Losing focus appears in two different areas. The first area is what is the investor’s goal and the second is what is your core competency.
Often times investors forget why they are investing. What is the goal?
Goal: Why does the investor want more money?
- More Time
- More Freedom
- Retirement (time and freedom later in life)
For example, I see many first time investors begin investing for the purpose of having free time. They decide to manage the property themselves and do their own maintenance. When they begin, this is a “short term solution.” They think, “Yes, this takes alot of time, but eventually I will hire a manager and hire out the maintenance.” In 5 years in they are doing the same thing with more properties. They can’t go on vacation because they have tricked themselves into thinking that only they can do a good job. If the investor is the only player on their team, the business is not scale-able. It cannot grow! Because they lose focus on what they really want, they actually create the opposite result.
First time investors often times believe that they will be able to reduce expenses to almost zero. Often times they believe the amount they will be collecting will be rent minus the management fee. This is unrealistic. It is important to understand expense ratios for the market and the building. A simple budget for a single family home budget will include the following. Larger properties will include more details and more expense accounts.
Investors need to understand reasonable expense ratios. For example, if rent is $12,000/yr and the average vacancy for the area and type of property is 8%, the budgeted vacancy expense should be $960/year (12,000*.08). The market average for a total expense ratio may be 30% of total rent. This depends on many factors such as utilities, market cost of maintenance, and condition of the property. It’s good to always try to be better than the market average, but goals should be reasonable.
$12,000 Gross Potential Rent (GPI)
$960 -Vacancy (8%)
11,040 =Effective Gross Income (EGI)
$3312 =Total expenses (30% of EGI)
$7728 Net Operating Income (NOI) (EGI-Expenses)
Say “No” Too Rarely
“The difference between successful people and really successful people is that really successful people say no to almost everything.”
Many entrepreneurs often have qualities similar to someone diagnosed Attention Deficit Disorder (ADHD). Any time we see something “shiny” we lose track of what we are doing and move on to the next “shiny” investment or opportunity.
Whatever you choose to do, commit to it and get good at it. You cannot be good at everything, so be really good at one thing. There are thousands of approaches, but some options could be apartment communities in a particular market, re-positioning properties, flipping, or long term single family home investment. Focus on what fits your personality, values, profit demands, and what is fun for you! Then continue to increase your competence…say NO to everything else!
25. Steve Bighaus, Real Estate Expert
- Buying too many properties at once, i.e. unknowingly going over the 4 property limit thinking everything will be ok.
- Not having enough reserves for contingencies. It is one thing to meet the reserve requirements set by lending, but what happens if your property has repairs not covered by insurance and/or is vacant for longer than expected
- Buying first and getting pre-approved second.
26. Juan Murdoch, Real Estate Expert
I’d say the three biggest mistakes that first time real estate investors would be:
- Not knowing the market. (Take enough time to study the market so you know if you’re really getting a good deal or not )
- Not knowing the inventory. (Get connected with an agent that really knows the inventory including stuff that may not be currently listed )
- Not knowing all the financing options. (Get hooked up with a good lender that can explain all the options to make sure you’re in the right program)
HUGE thanks to everyone who contributed to this post. Please share if you found it useful!