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Why Are So Many Real Estate Investors Going Bankrupt?

by Brandon Turner on July 12, 2014 · 66 comments

  
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They started investing in real estate 30 years ago… with so much hope for their future.

A rental house here, a duplex there… and soon they had a rental portfolio anyone would be proud of. They actively managed their properties and worked to make sure they were operating at peak efficiency.  Several years ago both the husband and wife retired from their day jobs and eased into retirement – funded by their rental income and social security.

This year they are filing bankruptcy and losing a majority of their properties to foreclosure.

This is not some made-up example… this is the story of one of my best friend’s parents, and they are not alone.  In fact, 95% of the properties I’ve purchased have been foreclosures purchased from landlords who have failed and lost their properties in a foreclosure. Most of them, I would guess, will never again get into real estate investing.  They worked hard for years to build a financial future for themselves, only to see it come tragically crashing down around them – dashing any hopes for lasting wealth creation.

This begs the question: why? 

If real estate is as good of an investment as we all (on BiggerPockets) make it out to be… why do so many real estate investors fail?

Perhaps more importantly: how do I avoid this possibility in my own life?

This is the question that has been swimming around my mind for some time now. Each week on the BiggerPockets Podcast I ask our guest “what is it that sets apart successful investors from those who fail?”  I’m intrigued by this idea and scared that I may end up the same way. After all, as Mark Cuban famously said “everyone is a genius in a bull market.”  Is that what real estate is? Do some people simply get lucky, and others not so? What are some of the trends that lead to this failure… and what are some trends that can minimize this risk?

I thought I’d take the opportunity to hammer out my thoughts here and get your feedback as well. Definitely jump into the comments below and let’s talk.

Too Much Risk?

Let’s talk about the elephant in the room first: risk.

Risk in inherent in every investment there is. After all, you know the phrase, “more risk, more reward.”

However, there is obviously a tipping point where the risk becomes too great, as my friend’s parents discovered. Perhaps it’s over-leveraging properties by obtaining too many “low down” deals or maybe it’s trying to buy too many, too fast. Maybe it’s constantly refinancing the properties, pulling out all equity and investing it in more and more deals.  Whatever the reason for their bankruptcy, it’s clear that the risk became too great and they lost.

As rock ‘n roller Nick Cave sang, “if you’re gonna dine with them cannibals; Sooner or later, darling, you’re gonna get eaten . . .

So how should someone prevent this?  Avoid risk altogether? Only invest in 100% safe deals?

Of course not. Risk is required for entrepreneurs, but learning to navigate that risk will define your success. (Click Here to Tweet That Quote!)

Like a team of white-water rafters braving the wild waves, you can’t always see what the future will hold, where the rocks hide just below the surface, or where the next waterfall will be.  However, by having the right people in the boat with you, keeping an eye out for potential dangers, working to avoid the problem areas, and wearing the proper life-saving jacket, you can avoid a premature death.

I would caution anyone reading this post, including myself, to think of risk as a dangerous, but powerful tool. Never forget that this tool cuts both ways.

Not Enough Education

Far too many people jump into buying real estate before understanding what they are doing. They simply decide that real estate is the right path, and they start buying properties. There is a big difference between being busy and being effective, and this is the case with a lot of real estate investors; they believe that because they are buying properties they are going to succeed. Never mind the fact that they bought the wrong property in the wrong area with the wrong financing.

The solution to this problem is proper education.

I’m not talking about the “Get Rich Quick” late-night TV kind of education. I’m talking about taking the time needed to build an educational foundation that can support your investing future.  At BiggerPockets, our mission is to help you build this foundation through a variety of methods, like the Forums, the Podcast, the Blog, and more.

Furthermore, I encourage you to continue your education through books, meetups, and other low-cost sources. You don’t need to spend tens of thousands of dollars to gain an education. Information has been democratized, so you simply need to reach out and grab it. No one can do it for you!

Related: BiggerPockets Presents : The 21 Best Real Estate Books Ever

Not Enough Analysis?

When I first began investing in real estate I thought I knew what I was doing… but I made some big mistakes because I didn’t do a careful enough analysis. Had I continued on that path, I would have been in the same boat my friend’s parents are in.

You see, so many people buy properties without doing the right math. As I often say, “without the right math going into an investment, you’ll never get the right profit coming out of it.” (Click Here to Tweet That!)

The future is impossible to know, but with a solid analysis – it’s much easier to predict. It’s for this reason that I began to invest a lot of time and effort into building an in-depth spreadsheet that I could run all my potential deals through. Soon after, we took that spreadsheet, added a ton of new features, cleaned it up, and turned it into the BiggerPockets Property Analysis Calculators that hundreds of people are using every week to analyze their potential deals.  It’s my hope that this tool will save tens of thousands of investors from making the same mistakes that millions of others have made.

No matter how you do your math, just make sure you are doing it – and doing it right.

Are You Working ON Your Business or IN Your Business?

Is real estate your investment or your hobby?

I believe one of the greatest reasons investors fail is because they don’t treat their business like a business.

  • They never develop systems to help them as they grow.
  • They treat their tenants like friends.
  • They don’t create clear policies for finding good tenants.

They simply approach their investing like a church picnic, and it shows.

If you want to avoid failing, treat your business the same way a CEO would look at a business, because that is what it is. Monitor your business’ health, hire the right people to do the right jobs, and continually find ways to improve your bottom line and create a longer-lasting business.

Related: How to be a Landlord: Top Ten Tips for Success

Let’s Sum Up

There are a variety of reasons that a real estate investor may fail. However, in my limited time on this planet, I’ve seen the above four mistakes played out time and time again in the lives of those who have failed in their investments. It breaks my heart to see someone so excited for what real estate could do – only to lose it all in a foreclosure or bankruptcy.

Don’t be that person.

If you want to avoid losing all the hard work you are putting in (or the hard work you are about to,) pay attention to the four points in this article:

  • Understand that risk is a powerful but dangerous tool, so tread cautiously.
  • Build a solid educational foundation for yourself before getting in too deep.
  • Don’t skimp on the math. Always understand the numbers for any property you buy.
  • Work ON your business, not in it. Treat your investments like the business that it is.

Questions? Comments? I hope you can add more to this discussion by sharing your thoughts below!

Finally, if you enjoyed this article, I’d love if you click the buttons below and share it on your Facebook or on your Twitter. Perhaps, together, we can save others from failing in their investments.

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{ 66 comments… read them below or add one }

David Krulac July 12, 2014 at 5:59 am

Somebody I knew lost 32 rental houses to bankruptcy and foreclosure. His MO was buy a house at a bargain price, fix it up, re-finance and pull out cash. Things were going so well that he quit his secure high paying government job to do this full time. Rinse and repeat 32 times!
Then one day he went to cash a check and it bounced, no more money in his real estate account. He hired a bankruptcy attorney, who told him that he could NOT collect the rents after he filed for bankruptcy.

About half the properties were vacant and the other half that were rented didn’t have to pay rent and were living there rent free. And since there was zero rental income, of course there were no repairs done. When the properties needed repairs either the non-paying tenants fixed it themselves or they moved out. Code violations started pouring in, and were all ignored per legal advise. The vacant properties were often vandalized, and all the cooper pipes, wiring, furnaces (many of which were new), new electric services, kitchens, baths and any metal were stripped out of the houses. He gave keys to some other vulture “investors” who helped themselves to appliance and furnaces and hot water heaters.

One property he was able to find a buyer and the attorney told him to proceed with the sale, but the attorney assumed that there would be no proceeds as the property was heavily debt encumbered. When the attorney found out that there was to be proceeds to the owner, he changed his mind and required a $7,000 legal fee which wiped out all the proceeds.

The investor lost all 32 houses, some to mortgage foreclosure, some to tax foreclosures, and lost his sole source of income. He became severely depressed and ended up in a mental institution. He’s out now, doesn’t have a job, and can’t find a job. He does odd jobs, wherever he can, cleaning out properties for other real estate investors, doing trash removal and what ever work he can find.

The whole real estate investing experience for him was life altering, and not in a good way.

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Brian Hamrick July 12, 2014 at 2:21 pm

David – it sounds as though your friend was managing his own properties, and that he probably wasn’t very good at it. Why did he have so many non-paying tenants?
Most people aren’t cut out for property management and should pay for a professional management company. Sure it can cost 10% or more, but in the long run it saves you time, money and headaches.
It’s also been my experience that professional management can turn units quicker, get them rented to better qualified tenants, and push for top dollar. The very good ones can also help you control your expenses by recommending improvements and keeping an eye on energy efficiency. One of my management companies will be installing energy efficient lighting and timers on a 71-unit apartment complex I own. This will cost $500 and save me over $1,000 a year!

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David Krulac July 13, 2014 at 9:04 am

The BK attorney told him he could not collect rent and could not re-rent vacancy. Per his attorney he was complying with Federal Law.

Pro management would have caused the end of his investing life sooner, since there would have been that expense.

His main problem was money management not finding tenants.

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Dan Clark July 13, 2014 at 11:36 pm

His problems started the day he devised his cash-out refinance strategy. Not a very conservative approach.

I did that once, but it was a big once. I pulled $400,000 out of my free and clear personal residence (worth about $550k at the time) to buy a pool construction clean-up business that had doubled sales each of the previous 2 years ($200 to $400k, then $400 to $800 when I took over). Things went fantastic for the first year. The business was killing it and I started thinking I was on easy street. So, thinking I was a rock star, I got even less conservative. I bought a beach house in Mexico and a brand new Escalade. I also had 5 rental properties at the time.

Guess what year I bought the business? 2006. All us real estate folks know what happened next, right? As the housing market imploded, so did the pool building business. If no one’s building houses no one’s buying pools either. Over the course of the next several years my second largest customer went from building 100 pool a month to 2 or 3. My largest customer stopped using us completely, trying to keep their employees working doing SOMETHING (in this case what we had previously done for them). Eventually there wasn’t even enough business to keep insurance on my trucks and we shut it down.

Unable to afford my house payments, I lost my house. The Escalade was repo’ed. I hax to sell the beach house for less than half what I paid, including losing $100k I had put down on it. Divorce cost me 3 rental properties, but thankfully I still had 2. I had to go live in one of them for a couple of years while I regrouped.

And it all started with a cash-out refi and an epically bad wrong place, wrong time situation.

Robert July 14, 2014 at 8:56 am

By the same token, if he had 100% occupancy instead of 50% occupancy, he would have gone much longer, too!

He would have ruined any business he was in. Terrible money management skills and terrible business skills isn’t a recipe for success anywhere. Real estate didn’t have thing one to do with it. Blaming it on real estate is just an attempt to avoid responsibility for one’s own failure.

Eric July 12, 2014 at 6:48 am

You really need to treat a RE career as a business, not a hobby. Leverage is great, as long as you stay on top of it. It is like a house of cards, one misstep and it all comes crumbling down.

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Brandon Turner Brandon Turner July 13, 2014 at 2:19 pm

exactly Eric! And yeah – house of cards – great way to put it!

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Sue Goldthorp July 12, 2014 at 7:05 am

Something that I never see discussed anywhere and I think is related to this, what happens to the properties that don’t fit our analysis as a good deal, what happens to the potential tenants that don’t fit our criteria? Someone is still buying them, the tenants are still finding homes. If they didn’t there would be a lot more vacant unsold houses and a lot more homeless people than there are. Think about it we always reject more deals than we close, reject more potential tenants as unsuitable than we rent to. For every successful investor that we hear about, there are probably 10-20 who don’t make it or just scrape by. Great article Brandon thanks for bringing the subject up.

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Eric July 13, 2014 at 9:34 am

I think about this too. I analyze deals and then follow the ones on MLS I don’t take. I see them sell for way more than they should, and I see them come back on MLS as rentals that are priced too high for the market. I haven’t followed them long enough yet to see them come back around as bank owned foreclosures, but that is just a matter of time. You can’t buy a duplex for half a million dollars and then rent out each side for $800/mo. It’s just not sustainable!

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Brandon Turner Brandon Turner July 13, 2014 at 2:20 pm

Excellent question Sue – I wonder the same. The only thing I can think of is – there are a LOT of people out there who don’t know what they are doing! Thanks for reading and commenting!

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Nick July 12, 2014 at 7:29 am

Great article Brandon!

I think far too many people rely on the TV for their info and make decisions based off of it. They flip on CNBC or Fox Business and hear how great RE is and then if they have some money, go out and buy a property because it’s the “right” thing to do because “everyone” else is doing it. It leads right into your points of no education because they are buying deals that clearly don’t even come close to cash flowing. I’ve spoken with so many non RE investors who think cash flow is your rental income minus your mortgage. These are the same people who lose money in RE and say things like…it’s too hard…or….RE is so risky.

It’s the same as starting any kind of business. Most people are quick to point out the stats of how many startups fail however they don’t realize that the numbers are severely jaded. So many people who start a business quite honestly shouldn’t. They are setup for failure before they even begin because of poor mindsets, no research, no knowledge, no niche, etc… These people are mostly the ones who make up the 90% of startup failures.

Sorry for the rant! :)

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Brandon Turner Brandon Turner July 14, 2014 at 10:13 am

Hey Nick, I agree! Someone on the podcast, a while back, talked about the “taxi driver effect” that says “When you taxi driver starts talking about a certain investment… it’s too crowded.” I think that’s a big problem with a lot of investments and business ideas – including real estate!

Thanks for the awesome comment Nick!

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Brad July 12, 2014 at 8:53 am

Discipline for me has been an issue in the past, example a lot of my tenants pay cash and usually on Fridays well you have bunch of cash on the weekends it may cause some trouble come Monday when you visit the bank. I’ve long since taken care of this for me but I’m sure I’m not the only one this has happened to.

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Brandon Turner Brandon Turner July 14, 2014 at 10:14 am

Hey Brad, thanks for the comment! Have you checked out PayNearMe? I make all my tenants who want to pay cash use that now. They just go to a local 7-11 and pay with cash their. Works great, and free for the landlord! :)

http://www.paynearme.com/biggerpockets

Good luck!

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Leigh Ann Smith July 12, 2014 at 9:04 am

Even though we are newbie investors, one advantage that my husband and I have is that we are in our mid-50’s. It’s one thing to have heard that the market cycles from time to time, but it’s another thing to have experienced it. We know it’s true.

We live in Houston and in the mid 80’s there was a bust in the energy industry. Houston was struggling badly, and it took awhile for my husband to find a job when we returned here after his military service ended. When he did get a job, the tables were turned for us. We were ready to buy a house, and houses were cheap. Although we looked at lots of existing homes, new homes were selling for slightly less. Who wouldn’t prefer a new home to an old home? We got a VA loan with $200 down. Those were the days…..

Perhaps I am too cautious, but I remember all of those vacant homes, and I am not willing to buy anything that we can’t make the payments on if it sits vacant for awhile. I’m not sure yet if we will back off that when we acquire more properties. It’s not likely that ALL of them would be vacant at once, after all.

Because we are older, we cannot invest as aggressively as younger investors without threatening our retirement prospects, but knowing what we know, I wouldn’t do it anyway.

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Brandon Turner Brandon Turner July 14, 2014 at 10:15 am

Hey Leigh,

That is a GREAT point. I’ve only really ever seen one market (bad) and I would love the experience that you and your husband have! Use that to your advantage and never forget it! Thanks for the excellent comment!

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Rick Fonseca July 12, 2014 at 9:23 am

Good information Brandon,
I’m currently self employed since 2004. It has nothing to do with Real estate investing but as you have commented in this article a lot of people do not take their business seriously. I have seen quite of businesses around me fold as quickly as they came in. For all of us here we need to remember what this is all about.. our future. Do you want to change the legacy of your entire family or do you just want to be another statistic?

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Brandon Turner Brandon Turner July 14, 2014 at 10:17 am

Great point Rick! Yeah, I’ve seen the same thing. It’s no wonder 90%+ businesses fail!

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GBanchero July 12, 2014 at 9:24 am

Yep! I know someone personally who cashed out the equity on a SFR three times (3!!!) and subsequently lost the house when the market tanked. He was simply underwater and ended up owing $30,000 more than he was able to sell it for. Lesson learned, and thank you for the reminder!

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Brandon Turner Brandon Turner July 14, 2014 at 10:18 am

Ouch – yeah that’s not fun! Sometimes leverage can be a cruel mistress!

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Jeff Brown July 12, 2014 at 9:30 am

Hey Brandon — I’ve seen the BK of far too many investors. Most of the time investors don’t file for BK, they just lose the properties and the invested capital. The common thread in the last 35 years from what I’ve observed first hand is the DIY approach, combined with being kneecapped by the answers to questions they never knew to ask.

Real estate is not simply a ‘hobby’ that also builds net worth and cash flow. When treated as such, it tends to rain unintended consequences on investors who never knew what they never knew. For those who’ve experienced the terrible loss of losing almost everything, I can empathize somewhat, as back in the day I lost 3 properties myself. It still hurts.

Knowledge and experience matters. Principles of investments (the physics of economics, if you will) won’t be mocked for long. The DIY approach is for hobbies. It hurts me every time I learn of an investor losing property or being forced into BK. Ignorance is akin to a smart bomb. Everything’s fine ’til it’s not, and there’s no warning.

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Glenn F. July 12, 2014 at 6:06 pm

For me, going the DIY route is actually the safer bet. If I was using a PM, at least 10% would be sliced right off the top. However, if one doesn’t have the skills or they have a large portfolio then using a PM is worth it.

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Brandon Turner Brandon Turner July 14, 2014 at 10:19 am

“Real estate is not simply a ‘hobby’ that also builds net worth and cash flow. When treated as such, it tends to rain unintended consequences on investors who never knew what they never knew.”

I couldn’t have said it any better. You are a wise, bald man, Jeff Brown!

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Karen M. July 12, 2014 at 10:02 am

Great article, Brandon. Thank you for reminding us that failures happen. Those aren’t the stories we’re going to hear on the BP podcast (where everybody’s a winner), but the failures are very important stories to know about and learn from.

In addition to the BP podcast, I regularly listen to Dave Ramsey podcast. His advice on real estate is to pay cash, period. This means you might start with a cheap house, and it also means you might learn how to manage all of the hard parts, like lower rent tenants and capes right from the start. Of course Dave also says you should be 100% debt free including your own mortgage before investing in real estate.

The disadvantage to starting very small is the temptation to treat it like a hobby and not a business and investment.

While I’ve heard that real estate is “very forgiving”, I also have to keep in mind that it is a huge commitment. Not easy to get in and out of, and it’s a lot to manage. Investing is a heavy responsibility. Thanks again for sharing these important stories.

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Brandon Turner Brandon Turner July 14, 2014 at 10:20 am

Thanks Karen! Maybe we should have a “Failures” show on the podcast? I think that would be fascinating!

I also LOVE Dave Ramsey – though I don’t follow all his advice, I try to stick as close to his philosophy as possible when it comes to my personal finances!

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Leigh Ann Smith July 17, 2014 at 7:18 pm

I would LOVE to hear a “Failures” podcast! Maybe there are some people on BP who have seen their RE empire come crashing down but then re-built it! If it came crashing down and they didn’t rebuild it, they probably aren’t on BP anymore. :-/

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Bippy August 19, 2014 at 11:03 am

I, too, would love to see a failures podcast.

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Sharon Tzib July 12, 2014 at 10:12 am

Really, really good post, Brandon! Why wasn’t “They simply approach their investing like a church picnic, and it shows.” a tweetable topic? LOL

Seriously, I think this one sentence you wrote nailed it: “Never mind the fact that they bought the wrong property in the wrong area with the wrong financing.” I also think many investors do not have enough reserves for emergencies, and it causes them a whole lotta heartache when things go wrong (because they always do).

The stories and commentary in this post are very good lessons for others.

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Brandon Turner Brandon Turner July 14, 2014 at 10:20 am

Lol – you can still tweet it! Thanks for the comment Sharon!

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Jimmie Adams July 12, 2014 at 10:16 am

This is what all new investors are afraid of. Fear of the unknown which paralyzes. You need the best education you can get know your numbers inside and out. Take the plunge and learn the lesson if doesn’t work. I very much appreciated this article.

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Brandon Turner Brandon Turner July 14, 2014 at 10:21 am

Thanks Jimmie! Yeah, I see both sides too often: people who jump in without the knowledge, and others who never jump in. People need to find that middle ground!

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tri phung July 12, 2014 at 12:57 pm

You learn more from your failures than you do your successes. Thanks for posting this article which highlights some of the pitfalls of RE that don’t get glamorized.

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Brandon Turner Brandon Turner July 14, 2014 at 10:21 am

Thanks Tri!

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SCPP July 12, 2014 at 2:40 pm

Great article!

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Brandon Turner Brandon Turner July 14, 2014 at 10:21 am

Thanks!

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Mike McKinzie July 12, 2014 at 3:33 pm

After reading this article by Brandon, I got to thinking what could be done to reduce the possibility of Bankruptcy. After some thought, I decided to use a “Ten Commandment Format” and here is what I wrote:
The Ten Commandments of Real Estate Investing
1. Thou shalt not invest in what thou doesn’t not know.
2. Thou shalt be conservative in estimating expenses.
3. Thou shalt be conservative in estimating income.
4. Thou shalt do thine own research and not GUESS.
5. Thou shalt treat tenants like customers, NOT friends.
6. Thou shalt have a minimum of six month reserves (including mortgage payments)
7. Thou shalt NOT get emotional with any property.
8. Thou shalt reassess assets at least annually (determine market value)
9. Thou shalt not use leverage recklessly.
10. Thou shalt treat thine investing like a BUSINESS.
While there are hundreds of other “commandments” that could be written, if a new investor starts with these 10, it will create a good foundation for you Investing Business.

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Linda B July 13, 2014 at 10:24 am

I love these commandments. Well said.
Also I truly believe in education and more importantly Coaching and masterminding. I have found it very helpful to brainstorm solutions to challenges that inevitably come up.

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Brandon Turner Brandon Turner July 14, 2014 at 10:22 am

AWESOME Mike! This is excellent! I’m thinking you should turn this into a blog post over on the Member Blog part of the site – get more eyes on it! Let me know if you do and I’ll promo it on our social media!

http://www.biggerpockets.com/blogs

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Alex Craig July 15, 2014 at 8:55 am

These 10 commandments nailed it. Especially 5, 6 and 7. Be courteous to tenants and maintain a good relationship, just like any other business, but be firm in the policies. While my number is lower, the bottom line is have a reserve that works best for you and your budget. 7 is so important, it is very hard not to, but emotion could cause bad business decisions. Really emotion making any decision is not good.

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Walt Payne July 12, 2014 at 4:42 pm

This site has a lot of good informational articles, but this is one of those that stands out above the rest. Great job, Brandon.

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Brandon Turner Brandon Turner July 14, 2014 at 10:23 am

Thanks so much Walt! I really appreciate it!

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Serge S. July 12, 2014 at 10:03 pm

Hey Brandon – good work with this one. I constantly think about this and try to learn from the mistakes of others. The two that I think you missed here:

Taxes – A full time investor is carrying tax risk any way we slice it. One day you get a big white envelope and after a few months of audit find out a couple 1031 exchanges are disallowed, professional status challenged, and expensed repairs that should have been capitalized. For multiple years this adds up quick. Most new investors do not grasp the amount of record keeping and knowledge necessary to thrive in this business.

Consumption – this is probably number 1. Lets face it, we never truly know year to year what we are making like the corporate wage slave. We can estimate using prior year as guidance but a growing RE investor just cannot know how much capex, flip inventory, and a million other factors depending on the part of RE you are in. For guys like us that have been doing this less than 10 years, understanding TRUE long term cash flow is even more challenging. Think about what you thought your first SFR would make and now compare that to today’s reality. Thus you find young guys with 10 houses and 10 mortgages that think they are really making it and then they go and start buying a Lambo Diablo. Just because you can afford it today does not mean you can afford it tomorrow..

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Brandon Turner Brandon Turner July 14, 2014 at 10:23 am

Hey Serge, thanks for the comment! And you are 100% correct on those two! Very smart ;)

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Darron Stewart July 13, 2014 at 6:09 am

Heard it said many times, slow and steady will win the race. For those that prefer food related quote, prefer to be eating from the crockpot than microwave, dinner never tasted any better than when it took a while to prepare and many want it fast, to only lose it faster. In the recent post asking if they should invest in one house of many with $100k, I chose two deals at $50k and save the income, buying properties as the money came in and was enough to pay for the next in full. Only would take 5 1/2 years to buy 5 houses using this method and they would be completely paid off! Race would be won actually quicker than buying 5 on 15 year mortgages and if you wish, could buy about 20 in the same 15 year time frame…so crunch the numbers and think at how good you will sleep at night after eating that crockpot meal and having all the rental properties paid for completely!

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Brandon Turner Brandon Turner July 14, 2014 at 10:24 am

Lol I love that analogy Darron – with the home cooked food vs. microwave! Thanks for the great comment!

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chris July 13, 2014 at 9:12 am

Good article. I would love to see a follow-up interview of the bankrupt parents to find out what really happened. I learn so much more from peoples real life honest mistakes than theoretical discussions.

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Brandon Turner Brandon Turner July 14, 2014 at 10:25 am

Hey Chris,
Thanks! I didn’t wanna burden them (they are private people) BUT if I had to guess, they lost it all because they did all the work themselves- and then the husband ended up getting to old to do the work anymore, but they never transitioned to working “on their business” so things just went down hill quick.

Thanks for reading and commenting!

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Mark Ferguson July 13, 2014 at 5:08 pm

I have seen. Few investors lose many houses to foreclosure. One was a real estate agent who bought over 150 houses in a couple ears before lending regulations tightened up. These were mostly new houses that did not cash flow. He assumed prices would go up and he would get rich. Then the market tanked and he lost most of them. He talked to me about them and was very honest. He makes a lot of money as an agent and has come back from his mid calculations.

Another investor heavily leveraged their properties to the point they no loner cash flowed and then rents decreased. They ended up losing half their portfolio and kept half that they had not over leveraged.

Then I know an investor with 160 doors that has been just a landlord for 15 years. He does great. Another investor has 80 houses all bought with cash, hard to go down when you do that.

I focus on buying below market with great cash flow. If you do that it is hard to mess up. I have refinanced a couple properties but not all of them and only at 75% loan to value still with cash flow. To me it is not risky if you stick to your guns and only buy great deals.

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Brandon Turner Brandon Turner July 14, 2014 at 10:26 am

Thanks for the comment Mark! Yeah, I try not to get more than 75% LTV, just in case. I also make sure the property will cash flow no matter what!

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Pyrrha Rivers July 14, 2014 at 6:42 am

Brandon,
This is a great topic for discussion and reality check.
Like many have already said, these are the stories we don’t generally read about in BP where most members are either successful or just trying to start but not yet in the BUSINESS.
The ones who had great starts, temporary success and ultimate failure are not here posting.

I believe that much of the wise advise that’s shared on this site comes from knowledge of facts like these either through personal experience or like in your case, seeing it from very close. However although other posters have learned great lessons and share their wisdom through wonderful advise, few share the actual story as completely as you have here, and most importantly invite the community to brainstorm preventive measures for avoiding devastating experiences such as this.

Thank you for fueling such a great thoughtful discussion that has yielded commandments, the sharing of similar experiences and great advise with much more to come.

Here is my contribution to the brainstorm from the newbie perspective:
1. This article greatly reinforces the need to learn but we must not hide behind the fear of getting started by remaining in perpetual learning mode. “Look before you leap, but do get off the ledge.”

2. Taking a leap of faith, although required to get started does not mean a blind leap of faith. Learning how to run the numbers and not skipping the thorough analysis of each and every prospective acquisition is great insurance.
3. Leverage is like salt in cooking. Great in moderation but disastrous as soon as you get even a little careless or over confident. “When in doubt, leave it out.” A salt-less dish may not be as delicious as a skillfully salted one but it is still edible. However, a salty dish has to be discarded. This says to the newbie in me…”Buy cash at the start. Use leverage such as refinancing moderately and just because I can get 10 mortgages doesn’t mean I should. ”

Thanks for sharing!

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Brandon Turner Brandon Turner July 14, 2014 at 10:27 am

Thanks Pyrrha! Excellent addition to the conversation! I agree with all 3 points!

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Sonny July 14, 2014 at 9:07 am

The common reason investors fail is debt, too much debt. You never hear of investors with mostly free and clear properties failing. Even with a lot of reserves you could end up a position to feed debt and eventually fail.

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Blake July 14, 2014 at 10:09 am

This is great stuff Brandon. Id love to see a good article about managing risks through reserves. Unlike purchasing properties, it doesn’t appear that we there are good rules (like the 50% rule) for how much to have in reserve. I realize that its varies a ton based of age and condition of the property, but it sure would be nice to have something to provide as a strong guide.

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Brandon Turner Brandon Turner July 14, 2014 at 10:28 am

Hey Blake, thanks for the comment! I think that’s a great idea for a post – I’ll see what i can do! :)

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Dan July 14, 2014 at 11:02 am

Real estate investment is like all types of businesses-not for the faint of heart. “Investment” is really a misnomer, because it’s not an investment the way a mutual fund is an investment (at least not for the small-timer investing in single family rentals). It IS an investment, but I think some people hear that word and think of passivity. It is not passive and it is almost never glamorous. It is really self-employment.

Having been a landlord for nearly 14 years, there have been stretches of time when I don’t have any problems or repairs or vacancies or really even contact with my tenants for months at a time. But there are other times when it has felt like I can’t catch a break. Repairs, thefts, vacancies, complaints, court appearances, spending holidays at a property…you name it. It is during these times that you truly learn whether or not you are cut out to own rentals. If you make it through those times and come out the other side asking for more then you know at least you have what it takes. That doesn’t mean you will succeed, because there are many other variables at play, but at least you know you are cut out for it.

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David July 14, 2014 at 9:26 pm

Great article and many thanks to those who opened up and shared their personal stories.

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Rob Fitzpatrick July 15, 2014 at 5:28 am

Thank you for the warning! Most RE investors need this reminder. It is the temptation of the old fable “killing the golden goose.” You buy a goose that lays golden eggs. You enjoy the golden eggs and the things the golden eggs buy. In your greed, you do not feed the golden goose. Production of golden eggs decrease. Then in your frustration, you cut open the golden goose to find eggs inside and your goose is dead and you are cooked.

Too many investors plunder the asset of all it is worth. They buy a house. Enjoy the rents for a while. Reinvest into buying more homes (feeding the goose properly). Then they move too fast (ignoring capital improvements) or spend too much on living it up (starving the goose). Then they refinance, burn the cash and keep poorly maintained property and wonder why it is hard to find tenants (starving the goose). Eventually they lose the properties through bankruptcy(killing the goose). I have not experienced this personally and hope I never do but reading others posts and reading your article hopefully will keep me and other investors scared straight! Thanks!

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John Casmon July 17, 2014 at 11:09 am

Great article Brandon and excellent analogy Rob.

If you treat RE as a business you know that your customer is your tenant and your RE is your product. You would only sell a product at a price that allowed you to be profitable, hiring the right folks to do their jobs in the process. Keep your product desirable, your good customers happy, manage expenses and profitability and you should be fine. Most businesses mess up when they sacrifice these things and the same goes for RE investors.

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Deborah Burian July 15, 2014 at 8:28 am

A wonderful discussion overall. Thanks for starting it and keeping us thinking as always. We are long term SFH investors who always bought for cash flow and didn’t do much with leveraging equity on existing homes because the goal has always been to have paid-off properties.

In the last year, using resources from Bigger Pockets and local investors, we made a sea change and invested in a small multi-family. While in the end, because we are fundamentally conservative and got a little bit lucky, it looks like that project is going to work out ok but there were moments, and they involved virtually every error mentioned above including tax miscalculations, that it was possible to imagine this one GREAT IDEA taking the entire company down.

Never believe this is easy or straightforward.

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Alex Craig July 15, 2014 at 8:50 am

I don’t think it is lack of education for many, I think sometimes it is over education and over thinking the process. Also, some people are just not cut out for it, or lack the very important of skills of how to handle people. I am not cut out for many industries, one would be how to manage my stock/mutual fund portfolio, so I outsource that to experts. Real Estate is no different, if one does not lack the skill set or time to do it, they should outsource it to those who are experts in the field. I have seen many individuals lose their homes too–the common theme for most is lack of time and expertise to succeed in this.

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Pete T July 15, 2014 at 6:54 pm

People have trouble bc of:
Over leverage or unprepared rapid growth
Lack of education/due dillegence
Lack of reserves
I think REI is one place you can make a lot of mistakes and still wind up ok.

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Patrick D. July 16, 2014 at 8:21 pm

In the 80s, for their personal residence my parents had a ARM mortgage (which is typical in Canada). My father went to see 2 bankers to ask them if he should lock in at 10%. They both said no way, this is crazy, it’s going to drop.

Not long after the interest rate was 18% and my parents were BK.

There’s a lot you can do to protect yourself but some situations are out of your control.

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Albert July 17, 2014 at 2:17 pm

I would love to hear more reasons why investors fail. Has a lawsuit ever taken down an investor’s portfolio? What about a catastrophic loss that insurance would not cover? Those are areas of concern for me.

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Shaun July 18, 2014 at 12:51 am

Great article and good food for thought.
The comments on this are awesome too!
Seems that the best way to protect yourself is to find killer deals then don’t over leverage them, and don’t milk all the equity out of them (continuously).
As you mentioned Brandon you HAVE to take some risk as an entrepreneur and investor to make any traction. The key is not to take stupid unnecessary risks that can sink you fast.

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Jordan Thibodeau August 11, 2014 at 5:22 pm

Great post Brandon!

Good old fashioned greed. The road to RE disaster is paved with killer deals.

Build up cash reserves, there’s nothing wrong with having money in the bank that’s not earning a huge return. Cash provides you with time to think, time to wait out uncertainty, and the ability to pounce on opportunities.

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Ian August 18, 2014 at 7:12 am

Hey Brandon Turner,

I’m kind of more interested in your friends parent’s story, and how they failed. My guess is over leveraging, bad management, as well as failure to increase rental prices.

I’m very interested because my wife and I are doing the same thing, and we kind of do what you recommend doing already. I think reading about real life failures is just as important as reading about real life successes when trying to emulate positive behavior.

Thanks,

Ian

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