Where Too Many Real Estate Investors Go Wrong

You're about to discover where too many real estate investors go wrong. Margin of Safety. It's incredibly simple to explain but can be surprisingly difficult to actually do in the real world. Margin of safety is the concept that you have extra room in a deal
in the event some of your assumptions were wrong.

As you may pick up from my other articles and videos, I Phil Pustejovsky believe that humans are lousy at predicting the future and are terrible forecasters. In real estate investing, making a mistake on even one assumption can be very costly. The reality is, no matter how experienced you are, you're always going to fall short of perfection when it comes to your assumptions.

Therefore, if it is human nature to make assessment mistakes, it stands to reason that smart investors account for this likelihood by making sure that they build in a margin of error when deciding on how to approach a real estate deal.

This isn't a new concept. Benjamin Graham, the mentor to Warren Buffett, was the first investment advisor to bring this concept to the forefront of investor strategy. He argued that you should only invest in deals that have a margin of safety. Warren Buffett credits
this particular piece of advice among the most valuable he ever received from Mr. Graham. In fact, it formed the basis of Buffett's two rules of investing. Rule # 1 - Don't lose money. Rule # 2 - Don't forget rule # 1. In interviews, Buffett has said he feels one of the main reasons for his success is that he never made any big mistakes and went backwards. Freedom Mentor He may not have always hit home runs, but he never lost ground.

Real estate investors make the mistake of not having a margin of safety way too often. Specifically, I am referring to deals whereby the investor closes on the property, either with their own money or someone else's money. (EXCLUDED from this discussion is any form of flipping, wholesaling, assigning or commission-based compensation whereby the investor is not becoming the owner and therefore is just making a fee for putting a transaction together). Usually, the investor is doing a rehab deal that is subsequently being resold to a retail buyer or rented to a tenant. The two assumptions that can so easily be mistaken with these deals are;
(1) What the property will sell (or rent) for after it is renovated and;
(2) The total cost to renovate the house to retail buyer (or tenant) standards
In the real world, properties rarely sell for as much as you predicted and the costs to renovate almost always exceed what you planned for it to cost.

What is the magic number for margin of safety, the perfect percentage? Freedom Mentor Review There isn't one. Every deal is different. Percentages and amounts break down when the price either is very low and really high. Instead, its deal specific. But you'll know when you have a deal with a large margin of safety. Whereby, even if you were wrong on your renovation assessment by a large factor or you completely over-estimated how much it would sell for, or both, you would still make money.

Truly successful investors are optimists by nature. But when analyzing how much a property is really going to sell for or how much it is really going to cost to fix up, you must be pessimistic! Herein lies one of the problems with actually putting into practice this concept of margin of safety. You have to be pessimistic when you may be optimistic by nature.

In addition, and perhaps even more problematic, only doing deals that have a margin of error presupposes you can actually find deals that are that good! It sure sounds good to talk about only doing deals that have a ton of room in them, but in the real world, how often do they actually come around? The answer is rarely. Most of the deals you'll come across are thin deals with very little margin of safety. Herein lies another challenge with actually
putting this concept into your every day investing endeavors. You have to maintain the patience and discipline to say "No" to a bunch of thin deals and have the initiative and intelligence to be able to go out there and find the rare deals that actually have margins of safety.

When you apply this principal, it can have a major impact on your business. It will force you to either figure out how to find better deals. You may not be able to keep a renovation crew busy on just your deals all the time. You may go through a several month draught before you next rehab deal. It will prompt you to want to make money through transactions which may push you to go get a real estate license which is fine when you see these Phil Pustejovsky Reviews.

But for all that change, the rewards will be sweet. You will end up doing less deals but making more money. You may progress a bit slower than you want but you'll never lose ground. And years down the road, you'll be the one on top. You'll be a day early and a dollar long (rather than a day late and a dollar short).