Today we are going to be looking at the mistakes beginning investors, and sometimes seasoned investors, make. It is almost impossible to lose money in this business, if you do it right.
There are plenty of ways to do it wrong, and today we are going to look at all the ways that can potentially screw up your business and lose money. Hopefully it will save you a lot of money and time.
Listen to the Podcast Episode:
Mistakes and Pitfalls
Recently, I was working with an investor who was investing in a new area. He was giving me his criteria about expenses, location, etc., but the biggest question I had for him was “Do you think this property will make $1,000 a month?
If it does, you will pocket $300 in income, but do you know for sure?
How did you come up with that number?” The investor replied that his property manager said he should be able to get $1,000 per month.
I told him not to take his word for it, but to get two or three other opinions of what the current rent would be for that property, because the last thing you want is for the rent to be $750 in rent per month.
If you have it on the market for $1,000 and nobody rents it, you will need to lower the price, which will eat into your profits.
Let’s jump into the different types of mistakes and pitfalls you want to avoid.
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Not Making Money When You Buy The Property
There is a saying that you make your money when you buy the property and you realize the money when you sell the property.
This means when you buy the property that’s when you make the money. Let’s say you buy a property that is worth $100,000, but you buy it for $75,000.
If you buy it for $75,000, you actually made $25,000 in equity when you bought it. That’s a good deal, because you made money from day one.
For investors who invest in rental properties that is a huge deal!
The lower the price of the property, the lower your expenses will be, especially if you have a mortgage on the property.
An $80,000 mortgage is about $50 to $100 less than a $100,000 mortgage. That means more money will go in your pocket.
On top of that, if you sell the property, you will make that money in income, because you sold it for more than you originally paid.
Buying A Property With Little To No Cash Flow
Cash flow is passive income that comes into your pocket every month. It’s not the amount of rent, it is the amount you get after expenses like mortgage, interest, taxes, insurance, vacancy factor, etc.
There are so many expenses that could come out of your pocket and they need to be taken into account.
Everything on top of that is your monthly cash flow.
Investors like us invest in cash flow. Buying properties that make us money from day one is essential. The number one criteria is if we are going to make money every month.
This is how I was able to take a six-week vacation all throughout Europe and not have to work a day.
Basically, all the people work for me and I made money that came in every single month in the form of passive income.
All of the expenses were accounted for and my profit on top of that paid for our house, travel expenses, airfare, etc.
Even when I am on vacation, I still have money coming in every month.
Investors who buy properties with little to no cash flow lose money every month. Your goal as an investor is to have money go into your pocket every month, not go out.
As money comes in, you can use that for your life expenses or use it to invest in more properties, which I strongly recommend.
If you are only making $50 a month in passive income, over the year that is only $600 in profit.
With a property that is vacant for one month and rent is $1,000, and your expenses are around $600 to $700, that is $600 to $700 out of your pocket every single month to pay for expenses.
If it is not rented for one month of the year, or you need to make a major repair, that $600 in profit is eaten up.
If I can make $250 or more every single month, it is a good deal. Under that, I will pass.
There are so many properties out there that will make you more. I have 30 plus properties that make me $250 to $300 a month or more. Some of them make me $500 to $600 a month, because of how I bought them.
You need to learn what a good property looks like to make money every single month.
Overestimating The Income From The Property
I questioned the investor who thought he could make $1,000 on his property, because his property manager told him he could, because I own a property in the same area and I know the going rent in that area.
He thought he could get $1,000, but I don’t see that much and I have decent properties.
I guessed he could get $850 for it, which is $150 less than he was expecting and it is below the $250 profit I recommend.
Get multiple estimates of the rent you can expect from property managers, realtors, Zillow, Trulia, etc.
Overestimating your income from a property can be detrimental to your business. Under estimate your income.
If you think you can get $850 a month in rent, plan on $800 in rent. This gives you room to decrease your rent if needed.
TIP: Go to Craigslist and find properties in the area to rent within a five-mile radius. This will give you an idea of what rent is going for in that area.
Underestimating Your Expenses
If you have a mortgage, that will be pretty set, but don’t underestimate your other expenses, like taxes. You can go to the county or city to see previous tax records.
In Houston, where I invest, I made the mistake of not knowing there was a city tax on top of a county tax and the city tax was double the county tax.
I thought I was going to be making $600 a month and that was cut in half to $300 a month because of the city tax I didn’t know about. Don’t underestimate your expenses!
To avoid this pitfall, I drop my income estimate by 10 percent. You also want to overestimate your expenses by 10 percent.
If the numbers still work out, I pursue the property.
Allowing Your Emotions To Cloud Your Judgement
I want every property I buy to be in good working order and similar to the other rental properties in the area.
I look at every single one of the properties I buy as inventory. It is not a house you will be living in.
If you need to walk away from a property, that is okay. This is a business!
Allowing Tenants To Stay In the Property Without Paying
At first glance, this one doesn’t make sense.
However, sometimes investors get lenient and let tenants stay in the property longer than they should and don’t evict them as quickly as they should.
They start taking stories like “my brother had a car accident and I needed to help him”, or “my son is in jail”—this happens a lot!
When I first started my investing business, I was so lenient.
I am not saying that every tenant lies, but I get so many lies that I need to assume every story is a lie.
Put business rules and processes in place, so when someone stops paying, the eviction process starts automatically.
For example, if the rent is due on the first of the month and is considered late on the third, I will give the tenant a three-day notice on the fourth, which is a piece of paper taped to the door saying the eviction process will start in three days.
On day four, the eviction process will begin. This is a business and you need business rules.
If you own a home, more than likely you have a mortgage on it. If the bank says the mortgage payment is due on the first and it is late, they will charge you a late fee.
When you continue to not pay, they will foreclose on you. Imagine yourself as the bank.
If you told your bank that your son is in jail, they will still follow their rules of foreclosure. Make sure tenants don’t stay in your property, if they are not paying.
Start the eviction process and don’t wait for any stories. I do this, because my family relies on the income that comes in from these properties.
If I don’t have money coming in, I can’t pay my mortgage and feed my family.
Not Saving For Future Repairs And Maintenance
You need to give yourself a cushion for repairs and maintenance.
I encourage all of my students in my investing course to put 10 percent of the income from your properties into a savings account.
If your property rents for $1,000 a month, $100 should be saved toward future repairs. It is still your money, but you need to save it in case you have repairs.
You don’t want to go into credit card debt to fix or replace a roof. Plan for these things.
When you have one property, save enough for one and a half times the rent and let it sit there.
As you accumulate more properties, you can have more or less money in the repair fund, depending on your risk tolerance.
You don’t need thousands and thousands of dollars, because there are only so many furnaces that will go out, but save enough so you will be prepared when things happen.
Not Enough Quotes For Work Done On The Property
If you need to have work done, get two or three quotes for the job.
If you have a plumbing issue, one plumber may say you need to replace the main drain and charge you $1,500 for the job.
Another plumber may be able to do a patch for $400. If it is above $500, I always get a second quote.
If it is above $1,500, I always get at least two or three quotes.
Rehabbing A Property For More Than The Area Is Worth
If you put in granite countertops in a property that is in an area of the city where they are a luxury, that is a big expense, as opposed to installing Formica which can be $1,500 less.
The granite countertops are not going to increase the amount you can charge in rent.
Don’t put in more money than what the area is dictating and what the other properties in the area look like.
Not Knowing How Much Your Property Taxes Are
Property taxes can really kill you. I gave you the example above about how I didn’t know the property I bought in Houston had a city tax.
If you don’t know how much taxes are going to be, you can really take a hit.
It ended up costing me an extra $2,300 a year for the city tax and I didn’t account for that in my numbers.
Hiring A Bad Property Manager
Having a great property manager can make your life fantastic. You don’t have to worry about anything.
They will run the business and you will make money.
Hiring a bad property manager will make your life miserable! You will always be worried about the property and you won’t make as much as you should.
A bad property manager is like having a horrible quarterback on a football team.
If your quarterback is horrible, you aren’t going to win any games. A property manager is the quarterback of your team.
They make sure your team, your business, is running well and they work with your tenants.
They make sure your income is coming in and they make sure expenses aren’t falsified.
One of my first property managers started stealing from me and I had to fire her quickly.
Hiring a bad property manager will make you lose money fast.
Listen to podcast episode 004, What to Look for in a Property Manager for your Real Estate Investing Business.
I’ve had many property managers, good and bad, and I’ve learned what to look for when hiring one.
Not Running Your Business As A Business
Put your emotions behind you, when it comes to real estate investing. I mentioned earlier that you need to make sure you have rules and business processes set up, like the eviction process.
These processes could include what type of paint you use. I use the same color of paint in all of my properties, because I can buy a five-gallon bucket and use it in multiple properties.
If you have one property, you have a business — the IRS see you as a business!
You can deduct your expenses, make sure your income is accounted for, use depreciation, etc.
Run your business as a business and it will save you time, money, and headaches.
Not Running A Background Check On Potential Tenants
It is a mistake to not spend the $30 to run a background check. In most places, you can actually have the tenant pay this fee as an application fee.
With a background check, you will see everything from their eviction history, what type of credit they have, if there were any criminal evictions, their employment history, where they’ve lived, etc.
You will be able to see what type of tenant they’ve been in the past, the type of person they were in the past, which should hopefully dictate what type of person they will be in the future.
If tenants are not going to pay that fee, I’ve found that paying for a $30 background check, credit check, and eviction history check will save me thousands of dollars in fees, eviction costs, and loss of rent.
Do this for every single potential tenant.
There was a woman who wanted to rent one of my properties and she looked great on paper.
On the application, it looked like she had plenty of income and she worked at the same place for a long time.
When I ran a background check, I found out she had been evicted four times in the last three years. I knew that I didn’t want to be the fifth.
Investing in real estate is not a get-rich-quick scheme. Some investors think they are going to make a lot of cash really quickly. It takes time and patience.
Flipping properties is different — it is a job, not investing! When you buy rental properties, it is a long-term game.
It will change your life and you will have properties and cash flow. If you think of it as a get-rich-quick scheme, you will do bad deals, because you will want to move too fast.
Real estate is a patience game. Over time, you will make more and more money and it will snowball as you buy more properties.
TIP: Don’t spend all of your profits! Put those profits toward buying more properties, because that is how you get wealthy.
Thinking That Real Estate Investing Is A Sprint
My opinion is that real estate investing is a marathon. It is a long-term game until you can quit your job. I never need to work another job again, but it took me six and a half years to replace my income.
I actually quit my job after nine years, because I realized I had enough money coming in and I didn’t need to work and I could continue to invest in properties.
Once I quit my job, life was amazing!
These are some common mistakes that investors make when they invest in real estate. Hopefully you don’t make these mistakes and lose money. I want you to learn from my mistakes!
I am showing you here how to make sure your business is running well and you are making money every month.
Now get out there and start investing!
Free Real Estate Investing Course!
I know many of you are just getting started and are learning how to invest in real estate. It takes a lot of knowledge to do it right, and I want to give you a free course to help you out.
Go to www.masterpassiveincome.com/freecourse, to learn more about my free course and to sign up. This will walk you through how to actually quit your job with real estate and rental properties.
Other Links in the Podcast:
- Top 15 Expensive Mistakes Real Estate Investors Make
- Homeowners Association Fees and How to Reduce the HOA Fees Fines
- 4 Steps to Hire a Property Manager The Right Way
- What You Need To Know About Easement by Appurtenant and All The Other Easement Types
- An Emergency Fund Can Save You from Financial Disaster and Even Grow Your Business