Avoiding Failures
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There is a reason 90% of the world's millionaires made their money through real estate. Real estate investing is relatively easy and secure. However, some people still fail. I believe the following are some of the more common reasons for failure.
Do Nothing
Doing nothing is the most common cause of failure. For some, it is the desire to find a "perfect" property. Others spend years looking for the right book or seminar to give them the "secret" to success. Spoiler alert! There are no perfect properties, and there are no "secrets" in real estate investing.
Not Doing Your Homework
Amazingly, people spend years of savings based solely on claims by infomercial gurus or touters of turnkey sellers and such. If gurus could do what they claim, they would not be teaching classes or selling seminars. Real estate investing is easy if you take the time to understand the basics and work with a good investment team.
Not Working with an Investment Team
The set of skills, knowledge, resources, and experience needed to locate, qualify, close, renovate and monetize a property requires more skills than any one person has. Plus, there is no advantage to not using an investment team and every disadvantage. Work with a good team, and your probability of success is excellent.
Buying in a Bad Location
As long as you buy a property in a good location, all but the worst mistakes will be corrected over time through appreciation, inflation, and rent increases. However, if you buy in a bad location, you can do little to turn things around after the fact. Location is critical. Fortunately, selecting a good location is relatively easy if you use the right metrics.
Your Personal Taste
Too many investors buy properties based on what they would like to live in. First, you will not be living in the property, so what you like or dislike is irrelevant. Second, real estate investing is about numbers. You are not buying a residence. You are buying an income stream. Failure to understand the difference increases the probability of failure significantly. Listen to your real estate investment team.
Family and Friends
Family and friends are wonderful, but not in business. I regularly hear from people who bought an investment property from "aunt Edith" or their brother's best friend and are now in serious financial trouble. Don't even think about using family and friends. Real estate investing is a business, not a hobby. You have to be dispassionate and willing to replace any member of your investment team that does not perform. You need the best team members you can get, and the odds of being related to a star performer are about on par with winning the lottery.
Managing Your Own Properties
As a reality check, watch the 1990 movie Pacific Heights to see what can happen when you decide to manage your property. While the movie paints a nightmare situation, many people have found themselves in a bad situation because they managed their properties. For example, do you know all the federal, state, county, city regulations concerning renting a property? If you inadvertently violate any of the regulations, you could find yourself in an expensive legal situation. Also, do you know how to screen a tenant? Unless you have years of experience, you don't. Part of the problem is the misperception that the role of the property manager is only to collect the rent. Not true. A good property manager provides far more value than just collecting the rent.
Being Cheap
I am not talking about being cost-conscious; I am talking about cutting corners in places that matter. For example, one of our (former) clients refused to spend $350 to fix the front yard of a +$200,000 investment property he just acquired. The property sat vacant for three months before it finally rented for less than the market rate when similar properties in market-ready were renting in days. He lost 3 months rent ($1,200 x 3 = $3,600) to not spend $350.
Selling Winners and Keeping Losers
I was talking to someone about a 1031 exchange. To my surprise, they wanted to keep their loser properties and exchange their winners. Sadly, this is not uncommon. There is even a name for it, the "Disposition Effect". Investors will sell winners and marvel at their profits, but hold onto losers hoping they will "come back up." Following this approach, you almost guarantee a losing portfolio of properties over time. Everyone makes mistakes. But you do not have to live with the mistake. Sell the under-performers and buy winners.
Buying Weird
Weird properties are priced lower than desirable properties because of the limited demand for such properties. For example, a five-bedroom house with only two bathrooms. Or a property with no driveway (extremely short). Note that what is weird and what is standard is location-specific.
Properties that are hard to sell will also be hard to rent. Buyers and renters are the same demographic. If homebuyers do not want to buy a property, renters will not want to rent the property. What you want are the most desirable properties available because they rent the fastest and at the highest rate. Don't buy weird.
Summary
Millions of people achieved financial freedom through real estate, and so can you. However, investing in real estate is not infallible. If you make any of the mistakes above, your odds of being successful are greatly reduced.