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The Seven Deadly Sins of Real Estate Investing

by Brandon Turner on September 9, 2012 · 26 comments

  
7 deadly sins of real estate investing

Have you committed one of the seven deadly sins?

No, I’m not referring to gluttony, wrath, or sloth. I’m talking about the Seven Deadly Sins of Real Estate Investing. Ok, maybe they aren’t physically deadly – but they are possibly catastrophic to your business. If you are concerned about the health of your investments, make sure to steer clear from these seven sins:

  1. Buying Based On Future Value
    Also known as “pro forma” numbers, many investors buy property based on what it “could” be worth, not what it is worth. Real estate agents are especially known for emphasizing the future possible value (they are the eternal optimists) but neglecting the facts on the ground. Make sure you don’t fall victim to this sin and always know exactly what the current value is and don’t buy anything for what could be.
  2. Blindly Following A Guru
    Real estate investing is not a system. Anytime I see that phrase I cringe just a little bit. The typical real estate guru would have you believe that by simply following a step-by-step system you can make millions in real estate. Millions can be made, but its not by following a system – it’s from following your brain. Investing is about solving problems, and if your “system” is unable to account for flexibility or challenges – your dead in the water.
  3. Being Unrealistic With the Math
    The one deadly sin nearly every investor has made is not being realistic with the math. Whether overestimating future value, underestimating the repair costs on a project, or simply not taking the time to actually do the numbers- poor math will destroy an investment.
  4. Relaxing on the Record Keeping
    For many investors, “record keeping” is nothing more than an attic full of vintage Barry Manilow albums (get it? “record keeping”… no? Okay, easy – I’m an investor, not a stand up comedian!) If you don’t know the health of your investments – how can you make informed decisions for the future of your investments? By keeping adequate records and staying up-to-date with your finances, you position yourself to know exactly how well your investments are performing while also ensuring the long-term stability of your investment plan. Additionally, keeping good records makes tax time a breeze as well as simplifying the process when applying for a loan. For more information on record keeping for investors, check out Arthur’s post on record keeping.
  5. Confusing Investing with Gambling
    Do you invest or do you gamble? Do you even know the difference? Buying something with the hopes that it may someday bring a profit is gambling (or speculating). Flipping, building spec homes, and investing in raw land often resemble gambling much closer than investing. Notice I didn’t say that gambling was one of the Seven Deadly Sins of Real Estate Investing. The sin is not in gambling, but in confusing the two. Each strategy requires a different skill set and different financial resources. Be sure of what you are trying to accomplish and make sure you have the tools necessary.
  6. Over Leveraging Yourself
    Perhaps the most common real estate sin over the first decade of this century, over leveraging is the act of carrying too much debt than what the properties can maintain. If you are financing everything to the point that there is no cashflow, it is very difficult to weather the storms when they rise up. Just ask the thousands of bankrupt investors who learned this lesson the hard way.
  7. Getting Bored and Getting Fancy
    The path to wealth through real estate investing is not difficult, but it also isn’t super fast. In an earlier post on BiggerPockets, I mentioned how real estate investing was like playing a game of Super Mario Bros. The game is fairly simple and straightforward, thus easy to master. The difficulty, however, is that once the system has been mastered it is easy to get bored and decide to get fancy. Many investors know that wealth and retirement can be created using real estate, but get bored and try to hurry the process up by speculating and buying deals that don’t fit their plan. This is a sure-fire way to lose most or all of one’s wealth. Remember, it can take years to build up a solid retirement portfolio but only one stupid mistake to lose it all.

Have you committed any of these deadly sins? I know I have (you don’t want to see my organization system right now…)! Let’s talk about it! Add your comments below.

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{ 25 comments… read them below or add one }

Mark Van Dyke September 9, 2012 at 8:15 am

Well put. I’d like to add Deadly Sin #8. Not focusing on one niche to become successful. Nowadays everyone is a guru with a kajabi site selling a different slant on how to make money in real estate investing. The trouble is that some investors don’t focus on one method to become successful-rather they try every approach and find they spread themselves to thin! Stay focused on one niche till your successful and then, replicate your success, rather then trying new methods that you really shouldn’t be working. Focus, Focus, Focus!

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Brandon Turner September 9, 2012 at 8:26 am

Mark, what an excellent comment! I agree wholeheartedly! There are tons of ways to make money in real estate, but it only takes one, and getting really good at it, to get there. Thanks Mark!

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Dale Osborn September 9, 2012 at 9:03 am

Good Information. I’m sure there are many investors who wish they had seen this list before the bubble burst in their area. Gambling on the future values got many into trouble along with following the gurus advice to over leverage all properties. When things turned sour, they encountered the domino effect and lost everything.

Dale

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Brandon Turner September 9, 2012 at 2:00 pm

Yeah, I sometimes wish I had been around for the real estate boom of the previous decade – but then I think about the amazing lessons I learned from those who got into trouble and realize this is the best time ever to get into real estate and I’m actually super lucky to get to invest now. Thanks for the comment Dale!

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Jason September 9, 2012 at 10:48 am

well written! Hope this serves as a wakeup call to many investors!

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Brandon Turner September 9, 2012 at 1:59 pm

Thanks Jason! Me too!

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Eric H September 9, 2012 at 12:47 pm

Hey, I like Barry Manilow!
How about old Neil Sedaka albums instead?

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Brandon Turner September 9, 2012 at 1:52 pm

At the Copa, Copacabana… ;)

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Dwayne September 9, 2012 at 2:13 pm

#9 Don’t go at it alone.

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Brandon Turner September 11, 2012 at 10:14 am

Definitely! I’ve done that one… not fun.

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Joshua Dorkin September 9, 2012 at 3:04 pm

I think the first and most important one is:

Don’t jump in unprepared! I was a victim of this one, and over the past few years, I’ve come across countless others who have also. The dangers of doing so can be costly both legally and financially.

So . . . PLEASE be sure you know what you’re getting into before you decide to just buy investment property on a whim.

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Brandon Turner September 11, 2012 at 10:14 am

Luckily we have BiggerPockets to fight that sin! :)

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lynn andris September 9, 2012 at 7:36 pm

Great article. What I am seeing now is a lot of new investors saying, “I have to buy a property.” Instead of, “I have to buy a property that fits my investment model.” They get frustrated and just want to buy “something” and lose sight of the numbers ending up with a deal that does not work well for them and does not get them closer to their goals.

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Brandon Turner September 11, 2012 at 10:16 am

That is super wise Lynn. Investing in real estate is getting popular again (and rightly so – the fruit is ripe!) However, as the cycle always goes – people start buying stupidly!

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Ayaz September 10, 2012 at 12:12 am

HI Brandon!

Great information and certainly great advice you have given not blindly follow guru’s in real estate business and I feel you can take their good points and can learn from their mistake’s but when it comes to making decisions just follow the current pointing of time trends.

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Brandon Turner September 11, 2012 at 10:16 am

Thanks Ayaz!

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Steve Toohey September 10, 2012 at 8:00 am

Well done Brandon. No matter how many times I hear it, the reminder is always helpful… it takes a long time, don’t over-leverage, and stick with the model.

I understand the concept that some promote of ‘taking what the market gives you’ but when you do so, you must realize that it is likely you will also be taking on new problems that you have not dealt with before, possibly did not anticipate, and may take longer than normal to resolve.

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Brandon Turner September 11, 2012 at 10:18 am

Thanks Steve! I write for myself first and foremost so I remind myself not be “sinful” in these areas!

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Mike LaCava September 10, 2012 at 10:07 am

Brandon, your posts rock man. Very cool insights mixed with great headlines, catchy themes, etc. I especially like “Being Unrealistic With the Math”…who hasn’t been guilty of this one?

I’m curious how do you keep that in check? I use the old tried and true 70% Rule myself and it works well….as long as I religiously stick to it. Keep it up, great stuff.

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Brandon Turner September 11, 2012 at 10:20 am

Hey Mike! I do like the 70% rule of thumb, but more than that I have a spreadsheet that I use to analyze every deal. I’ve been tweaking it for five years and its finally to the point where I can quickly enter in all the pertinent numbers and it tells me what’s up.

And I see what you did there … “religiously stick to it”… Ha! ;)

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Philip Wade September 11, 2012 at 2:48 am

Hi there

Its wake up call to property investor. Great article. Seeing the market now is a lot of new investors saying that want to buy a property. This is good time for real estate market.

Thanks
Philip Wade

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Brandon Turner September 11, 2012 at 10:21 am

I think so too – as long as its a solid deal. There are still a LOT of crappy deals out there. Sure, they may turn out okay if the market picks up – but if not, a lot of those deals are still rough. Thanks for the comment Phillip!

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Ziv Magen September 14, 2012 at 1:40 am

Great article, agree with every word (sorry, technical problems and work made me take ages to actually get to it :))

I’d probably add that, while indeed you don’t want to rush out and get something “just because I’ve been waiting so long”, the opposite is also true- analysis paralysis is a common ailment, and there are many who read books, take guru seminars, and just analyze every deal to death for fear of making a mistake (a post in another forum mentioned someone who took ten years to get his first, extremely mediocre propert). It’s a fine balancing act, but at some stage, you do have to “just do it”, too.

Once again, awesome article, thank you!

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Brandon Turner September 14, 2012 at 9:44 am

Thanks Ziv. That is totally true, and I love that phrase “analysis paralysis.” This, I suppose, is when good coaching, a good mastermind group, or just getting involved on BP helps give a good kick in the pants.

Thanks for the comment!

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Melanie July 12, 2013 at 9:02 am

Great article. I would say the biggest of these mistakes I have done was following a Guru blindly. I’ve come across a deal in the past that the numbers worked very well, but I didn’t have the capital. I was planning on wholesaling when my Guru offered to partner up. But he was forcing a no money down that just wasn’t working. I ended up losing the option of having a decent wholesale opportunity.

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