Top 10 Ways to Make a Bad Real Estate Investment

11

1.)    Buy a Property From a High Pressure Sales Team:

Too many buyers over the years have been sucked into time-shares they didn’t want or properties that were shoved down their throat by an aggressive agent. When it’s obvious that the person selling you the property has a lot to gain by your purchase, it’s important to understand their motivation and vet the investment carefully.

2.)    Buy a Property with Any Sort of Negative Amortization:

While many of these creative loan programs are no longer around, it is still possible to buy properties with bad loan terms in hopes of achieving such terrific appreciation that it supersedes the bad loan. I saw many investors make horrible decisions based on pure speculation and get stuck in very nasty loans that almost always sinks the investment.

3.)    Buy a Property Without Inspecting the Comparables Yourself:

Just because a property appears to be a good price or appears to have multiple offers does not mean it’s priced right. It is crucial for investors to study and understand both sale and rent comparables in the immediate vicinity before making a buying decision.

4.)    Buy a Property Based Purely on Speculation (No Cashflow):

I’m sure many investors bought land and other types of speculative real estate investments over the last few years that assumed values would increase indefinitely. Unfortunately, most of these investors have found out the hard way that sitting on property in hopes of rising values can be a long-term, losing proposition. I believe in 95% of situations, investors should buy properties that cash flow or at least break even.

5.)    Buy Into a Pool or Fund Without Proper Due Diligence on the General Partner:

Real estate funds are as hot as ever right now.  However, many are structured in such a way as to limit the influence a single investor has on the pool (if any). It’s important to know who is managing your money and what the specific investment plan is for a given pool of funds.

6.)    Buy a Property in a Very High Crime/High Vacancy Area Because the Sashflow Looks Attractive:

I see tons of properties being marketed today with incredible cap rates and yields. Many times, these numbers are based on the assumption that they house will stay rented and needs very little maintenance.  It’s been my observation that these types of properties almost never perform as advertised. Between ongoing maintenance costs, vandalism and vacancy, the actual numbers rarely come anywhere close to advertised returns.

7.)    Buy Into a Pool or “Program” That Promises Unrealistic Returns:

I’ve seen groups come and go offering ridiculous returns on investment. I remember a group here in Atlanta a few years back that was promising 50% returns over 90 days.  Suffice to say, the investment group imploded and got busted for running a Ponzi scheme. Perhaps they had started with a legitimate business  but eventually got greedy or just plain dumb. Regardless, if somebody is promising those types of returns, it’s simply not feasible – run for the hills!

8.)    Buy a Property Based on Current Cashflow Without Considering Future Rehab:

I get properties sent to me from wholesalers on a daily basis that are misleading to potential investors.  It’s not uncommon to see properties where there is a tenant in place and the advertised returns are based on this rental income. However, the house has not been renovated and the yields do not account for the money that will need to be spent to renovate the property when the tenant moves out.

9.)    Buy a Property Without Fully Understanding the Scope of Repairs Needed:

I’ve found that wholesalers and agents are notorious about underestimating the cost of a real renovation. They may provide a few lowball numbers for carpet and paint, but this almost never comes close to what the property really needs. Also, make sure there are not major concerns that have been overlooked such as foundation issues, water-intrusion, etc.

10.)  Investing in Overpriced Coaching/Training:

While I do not think there is anything wrong with coaching and training, I’ve seen many investors get absolutely ripped off in this area. While a new investor may think a $30,000-$90,000 investment in weekend seminars and coaching calls is worth it, I don’t know if I know anybody who has spent this kind of money without regretting it. Rather than spending these kinds of dollars on weekend retreats and a hand full of phone calls, why not take this money and buy a property? There is so much good information available to educate investors, I just don’t see how this is money well spent.

Photo: US Navy

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About Author

Ken Corsini G+ is the founder of Georgia Residential Partners, LLC - a real estate investing firm based in Atlanta, Ga focused on creating turn-key investments for investors all over the country. He's been investing in real estate since 2005 with hundreds of real estate transactions.

11 Comments

  1. Thank you for the input. However, how do you know that the property is good or not? What do you usually base your judgement on? I’m knew to this field so I don’t really understand. I especially don’t understand point 6 you made; wouldn’t you want to stay away from high crime rate places because it’s unsafe?

  2. Hey Kathleen – thanks for the post! Boy, that’s a loaded question – “what makes a property good or not good.” Wish there was enough time and space in these comments to try and answer that. I would recommend reading through some of the many articles on Bigger Pockets about buying investment property, strategies and the types of due diligence investors typically go through before deciding on an investment.

    In regards to point number 6 – perhaps the way the article was written wasn’t clear. You are exactly right – buying in a high crime/vacancy area b/c the cashflow looks good is definitely a dangerous bet.

  3. Great tips, Ken. The newbie investor is easily tripped up in most of these areas.

    As far as number 10, I place an extremely high value on GOOD coaching. My advice to anyone looking for coaching: find someone successfully doing what you want to do and willing to train you. Most national gurus are not available to you at the local level and many of them make most of their income selling their programs, not doing the business itself.

    A powerful value of coaching (with a good coach) is that they keep you on track – many people get sidelined even if they know what to do – and, coaches keep you going. We’ve found that one of the main reasons investors get stopped is fear and/or running into a problem. A good coach will get you over, under, around or through your hurdles. If you don’t get stopped, this can be an extremely lucrative business. And coaching never needs to be overpriced.

    Thanks for your article!

  4. I agree strongly with number 10. I’m sure that coaches can provide a lot of benefit but the kind of money that some of them charge is just insane. I think that with that much money an investor should try to do a small deal. I researched real estate for years before I made my first investment and I feel like I learned just as much or more in a couple months from doing my first deal. A more experienced investor is more likely to make a good decision about what coaching they need then a newbie.

    You can learn plenty from books, forums, and local real estate clubs and I have found most investors love to talk about what they do. I read somewhere that you should year intensely for a year and then make your first buy or you are over analyzing. With this education you should be able to get a couple deals together and then decide if you need or want coaching.

  5. Good tips Ken. I believe you should be looking at cash flow as the #1 reason for investing & appreciation is the bonus. #10 I agree as well & have personally met with many that have paid over 30-40,000 for those exact weekend courses and never bought anything. SAD for them. I agree with Karen a “Good” coach will keep you focused and hold you accountable for taking action.

  6. Bah! Who needs to blow their seed capital on coaches. Just jump right into the water. That’s how you learn to swim.

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