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?
- 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.
- 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.
- They are blinded by dollars and visions of carefree lives funded by real estate investing.
- They believe real estate investing is easy.
- 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.
- 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.
- 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
- 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.
- 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?
- 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.
Photo: designatednaphourNew Investor Mistakes: Advice for the Real Estate Investing Novice by Michael Zuber