New Investor Mistakes: Advice for the Real Estate Investing Novice

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I am very fortunate to get the opportunity to speak and correspond with real estate investors of all experience levels.  I find these conversations to be very valuable as I get to see the investing landscape through additional sets of eyes.

As you might imagine my most common communication is with new investors who have not bought their first properties yet, but they are very excited and are ready to go.

I find new investors break down into one of two camps.

The first camp is filled with folks that have no money and think that real estate is their path to financial security.  They have heard stories, seen a late night infomercial, or feel that real estate is their last hope.

The second camp is filled with people who have a pile of investable cash and they know real estate will set them free. They likely have been burned by the stock market, they can’t earn interest in savings, and they read in the paper that real estate is on sale.

I bring up these two camps because in most cases they suffer from the same issues and risk-making terrible mistakes.

What issues do new investors with and without cash have in common?

  1. In most cases, they have an unquestioned faith that real estate investing is the answer to all of their immediate and long-term financial problems.
  2. They want to get started immediately and thus are easy targets for people to sell them something; it could be a book, an investment seminar, or in some cases, an actual property.
  3. They are blinded by dollars and visions of carefree lives funded by real estate investing.
  4. They believe real estate investing is easy.
  5. They want to understand the methods to secure great deals and they will buy every “Great Deal” they are given.

 
Below, I am going to rebut each of the issues above point by point.

  1. Real estate investing takes hard work and a long term plan, and can only begin once a new investor has put in the work required to understand their market.  Faith in real estate investing is a great trait to have, but it must be tempered.
  2. Rookie real estate investors would be much better served going out and looking at 50-100 houses or properties before purchasing a property, an investment seminar, or even a book.  Okay, you can buy a book before looking at a house, but only one :-)
  3. Buy and hold real estate can take a long time to turn into a meaningful stream of cash flow.  Many would-be successful investors give up half way through the process because life happens and plans change.  Thus, the initial work and success is lost because the investor gives up or adds more expenses to their lives which starts the process all over.
  4. All I can say about this one is that if it were so easy, everyone would do it! How many people do you know live off cash flow from rental properties?
  5. This one frustrates me the most.  Many phone calls I have typically lead to the following statement or question:  “Michael, give me a call the next time you find a great deal that you can’t buy”.  This bugs me on many levels.  First, the caller doesn’t know me very well because if I find a great deal, I am going to buy it one way or another.  Second, the caller doesn’t know me, so I could just throw a junk property his way and move on.

 
In the end, I believe most new real estate investors would be best served by taking a deep breath, going out in the real world, and looking at properties in their investment market.  This exercise will have several positive benefits.

First, they will be able to meet some people and get a real world feel for what real estate investing is all about.

Second, they will see if their temperament is ready for active real estate investing.

Finally, they will be able to differentiate an average deal from a good deal, and from a great deal.

Good Investing

Photo: designatednaphour

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About Author

Michael Zuber is an active buy-and-hold real estate investor who still has a full-time job. Michael is not an agent or broker, and simply uses the internet and agent relationships to drive his business. He currently averages at least one deal a month and has developed laser focus on his 5 step process.

34 Comments

  1. Ready…Shoot…Aim!

    Great post Micheal,

    Such good advice that is very logically stated. I hope newer folks really heed your advice and words of caution. What you are saying here is not popular or the “cool” thing to say as it requires a level head and the rational that real estate investing may not be the easy vehicle for freedom some newbies are hoping for.

    Best,
    John

    • John

      I appreciate the note and agree my advice is not sexy and I suggest work but that is my advice if you want to be successful

      Good Investing

  2. I couldn’t agree more Michael. #4 is my favorite.

    Real estate investing is hard work. Most people make big mistakes when they rush in without spending time to learn the business. Like you, I don’t know too many landlords that have great cash flow in those early years.

  3. Great points. Agree 100% – if it was easy, everyone would be doing it! This is not for the person inclined to the shotgun approach. Real estate investing truly does take long-term planning and patience as you building up not just your experience and skill set, but another key aspect — RELATIONSHIPS.

    Here in Hawaii, so much of one’s success comes from, you guess it, not what you know but WHO you know. Of course, WHAT you know is important as well! But the ‘who’ doesn’t just come from being ‘out there’, it comes from forging real honest beneficial relationships with others in the industry. And that’s something you don’t learn from an infomercial.

  4. Michael,

    give me a call the next time you find a great deal that you can’t buy – lol!! j/k

    In all seriousness, there is some gold woven throughout this post. This business is great, but I think most people don’t have the stomach to wait and build up their portfolio. They want dollars without the work – that ain’t going to happen.

    Cheers!

    AG

  5. Great article Michael, thanks for writing it! I also believe a lot of newbie investors out there are lured into real estate investing thinking it is a way to get rich quick, which is so wrong. This sets them up for utter disappointment and articles like yours really help newbies manage their expectations and zap them back to reality (I hope!).

    Real estate investing may be simple, but it is not easy, and it really takes a lot of hard work, patience, and perseverance.

  6. Hi Mike, thank you for this post esp. since you invest in Madera & Fresno CA. I am still trying to buy my first property here in the Bay Area for the last two years. It has not been easy, but this post has been especially encouraging not to give-up but to keep on learning and someday…

    • Hi Mapo

      Good luck on your search for a deal in the Bay Area. We have some crazy real estate prices. But if you do your homework you will eventually come across a great deal.

      Good Investing

  7. Mike,

    Spot on as usual. Most new folks fail to realize it is a business. Fail to treat it as such and it could cost far more than just money.

    It took 3 years before I didn’t have to put money into the business to pay the mortgages. (I still put money, but no longer to stay afloat). I often cringe when I hear folks talking about cash flow when their mortgages are only a few hundred dollars below rent.

    Jason

  8. Cash flow is non-existent here in the Bay Area, CA. Mike I’ll have to read your past articles and hope you present actual scenarios to deals you have done in the past. I have analyzed so many properties here in the Bay Area and can’t seems to find one that I would not have to pay some of the expenses. Maybe it is doable in Fresno but not in the Bay Area.

    • Hi Mapo

      Every article on my site is an actual deal I have done and more importantly they are deals I have done in the last 2 years.

      A lot of real estate investing depends on the market you chose. I live in the Bay Area and spent years looking for properties. I never found one so I went some where else

      In the end I believe – Live where you want and invest where the numbers make since

      If you chose to stay focused on the Bay Area you shouldn’t be upset or even distracted by yields in other markets. As very few markets are like the bay area

      I since frustration in your note so I would ask you to take a deep breath and ask why you are focused only on the bay area.

      Good Investing

  9. It is a good question! There’s alot of negative news about fresno and east bay areas. Mike why did you choose Fresno/Madera? How in the world did you have the time to travel from Bay Area to Fresno area to check out the properties? I saw your website and your wife is doing this with you. That is huge! My husband is not board with me. That’s why I keep looking around in my neighborhood so he would feel a little better.

    • Mapo

      I believe in the simple statement of live where you want and invest where the numbers make since and Fresno is the closest market to where I live. My other option when I began was out of state and I am too much of a control freak for that.

      Have my wives support is key. I simply couldn’t do it without her.

      If active investing is proving frustrating you might want to look into passive real estate investing

      Stay positive and keep working at it

  10. Thanks Mike…glad all your wives support you.

    Do you have any contact for hard money lender someone who will lend in Fresno area? Someone you have worked with and would recommend.

    Thanks again.

    • Mapo

      I don’t use Hard Money lenders very often as I finance with Private Investors. None the less their are several hard money lenders in Fresno and you can Google them. But they will want to talk about a deal or a property so you will need to do some homework first

      Good Investing

  11. Thanks Michael for a really interesting post!
    It is really hard for newbie investors to get into this profession. I would rather say take a good knowledge about appreciation and Income, cap rates, leverage and other important things you need to know as an investor. Real Estate is not a simple profession, needs hard work and good presence of mind.

  12. Good information Michael,

    As I am one of those new investors. From what I have learned from Bigger Pockets, I most certainly know that it is not as easy as some people try to make it. I know that hard work, and not being afraid to ask if don’t understand something will go a long way in this business.

    • Garrett,

      Keep working at it and you will find a deal

      Remember if it were easy everyone would do it

      Good Investing

  13. I meet so many investors, especially now that the market is turning who tell me, “I have to buy a property!” I remind them that they need a property that fits their investment goals. Many do not even know what that means, they have no investment goals they just know they “need to buy a property.” I agree that the best thing they can do is take a breath. Then set your investment goals. How much cash can you afford to invest? What minimum cash-on-cash returns do you require? What return on unrealized capital gain do you require? How will you analyse your deals? How will you determine your rehab requirements and the cost? What method will you use to rent the property and how will you vet the applicants and so much more….thanks for the great article!

    • Lynn

      You are welcome. I agree as the market turns and investors flock to real estate again many will jump in without looking. The early ones might be saved by a rising market. But I remember what happened when the market turned to the unprempared, ouch!!!

      Good Investing

  14. So true! Ive been investing since 2009, and NO, i dont take the first months rent and buy nice piece of jewelery…I usually have to pay to get the other property rental ready for the next tenant I want in another property…Its like most people year end bonuses goes towards a vacation and new electronics, my goes for a new carpet and paint job :p

    Its not easy, but im going to keep ploughing through it!

    • Lisa

      Nice work. We have been doing this for 10 years now and I can tell you it is not easy but well worth it. Especially as you start to grow your portfolio

      Your sacrafice today will be well rewarded in the future

      Good Investing

  15. Just what I needed! Now that I have a task that won’t make me feel like I am wasting away my life, my current goal is now to look at, 50 houses. I wouldn’t have known to look at this many houses before buying. If I didnt read this I would have bought the first property that I woulda thought was a deal. !Mistake! thanks for the article very helpful.\

    P.S when you say to go out and look at 50 -100 houses do you mean to, go look around the neighborhood, or to actually go to open houses, set up appointment with the realtor and look at the house?
    Will not being able to drive cause one to fail also? (if not how do you go about it)

  16. While I understand that you’re coming from a place of real-life experience, I have to say that this is the first pessimistic article I’ve read on BP. Honestly, as a novice, I found the tone a bit condescending with barely a whisper of advice as to how *not* to be THAT type of ‘eager beaver’.

    I, as I’m sure many novices reading through this site’s wealth of information, know that REI isn’t easy; we of course know it’s hard work. But there are plenty of people who aren’t willing or don’t have the desire to do the research, learning, and work (rehab!) to get there. Therefore it makes sense that opportunities abound for almost any of us who are, with patience of course.

    I’ve been reading the articles and lurking on the forums for weeks, and I find that for the most part, the content is encouraging and empowering– without blowing smoke. And I appreciate that. Can you offer any words of wisdom- and encouragement- for those of us who are not born-millionaires about how to take BABY steps into the world of REI?

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