“I’ve been investing for 10 years and this strategy has always served me well,” defended long time real estate investor, Alan*. (*name has been changed)
“Looking at your portfolio, I can see there is a lot of equity here but you’re feeding these properties over $1,000 a month on the good months,” argued my husband Dave.
Nearing retirement years, and getting a little anxious with his poorly performing portfolio, Alan had hired us to help him. He’d been trying to add to his portfolio and improve his cash flow for two years but wasn’t making any progress.
His investing strategy made him money in the boom years when prices were increasing but now it was just costing him. To continue to succeed, he needs a new plan. One that avoids his past missteps and the missteps too many new investors make when they are just starting out. That’s what I want to help you with today.
Real Estate Investor Mistake #1 – Chasing Deals
Ever seen the movie UP? The cartoon dogs in the movie are on a very serious mission. They are focused and moving quickly towards their goal … until they spot a squirrel!
Suddenly all attention is directed to the squirrel and they are no longer worried about their plan.
This is what seems to happen to a lot of investors. They either don’t have an investment plan to follow so they are always looking for squirrels or they allow themselves to get easily distracted from that plan when a new squirrel appears.
Sticking to a well thought out plan, based on the fundamentals of real estate investment (buying for cash flow in areas with good economic fundamentals), instead of chasing the latest deal destination will help you make more money, put in less effort and minimize the risks in your investments dramatically.
Real Estate Investor Mistake #2 – Buying a Property for the Wrong Reason
There are three ways to make money from a real estate investment:
- The rental income exceeds your expenses and generates positive cash flow for you each month (cash flow)
- The tenants will pay down your mortgage (equity growth)
- The property is poised to grow in value over time (appreciation).
It’s speculation, not investment and it is a very high risk game.
Focus on finding properties that will generate enough rent to cover the mortgage payments, taxes, insurance, maintenance and management of the property on a monthly basis and ideally, leave a little in the account afterwards.
When you stick to that formula you’ll find that you’re able to weather the ups and downs of the values, and you won’t have to make sure you are making extra money each month to pay for a short fall generated by one or more of your properties.
Real Estate Investor Mistake #3 – Not Weighing the Risks and Rewards
Unless it’s coming out of my mouth I rarely hear anyone talk about return on time or return on risk. I ALWAYS hear people talk about return on investment.
It’s an important number to consider, but it’s actually not the first thought I have when I’m evaluating an investment. Instead, I am asking:
– What is my return on my time?
– Then, what are the returns relative to my risks?
Time is my most precious resource. I can’t create more time. I can create more money. Money for investment is unlimited when you know how to raise it. And making money isn’t that difficult – it’s keeping it that is tricky. That’s why my biggest consideration in a deal is the time I have to invest and the risks I have to take on to get the return.
When we focused only on return on investment we were drawn to deals with a lot of risk and that required a lot of time to manage and maintain. We weren’t weighing the risks against the returns though. The cash flow was gigantic – so the opportunites seemed great.
Unfortunately, deals with big returns tend to eat up a ton of your time and energy as you manage all the risks. And if something goes wrong, pretty soon you’ll find your funds draining too.
Many real estate investors do not think carefully about the risks and rewards before entering a new investment deal and then end up unable (or unwilling!) to grow their portfolio because of a problem property or two.
Real Estate Investor Mistake #4 – Trying to do it alone
There is a temptation as a new real estate investor to pursue the exciting deals. Like a dog distracted by a squirrel, you can end up heading in the totally opposite direction than where you were going when you began. Real estate investing should not be exciting. If it is, you’re probably doing it wrong, or you’re taking huge risks that had better be coming with huge potential rewards.
Personally I would hire a real estate investing coach to help me with this part. Since we’ve started working with the right business coaches for us we work less and earn more. You can save time, stress and money by getting the right experts on your team. But regardless of WHO you work with you should get help with this part. Sit down with your coach, an experienced investor or at least someone who specializes in helping real estate investors finance their deals, to map out your investment master plan. Then, run that plan by your accountant and even your lawyer. Get input from key team members. Then, stick to that plan by focusing on minimizing risk and time investment and maximizing monthly cash flow and future potential.
The boom years of the 2000’s are behind us for now. That’s not to say that there won’t be appreciation to be enjoyed, but the value increases we are likely to see in the coming years are not likely to be large enough to make up for properties that strap you financially by losing money every month or send you off in a different direction than your master plan called for.
If you avoid these four mistakes as you build your portfolio, you’ll move closer to your goals a lot faster and easier too!