Top 10 Ways to Make a Bad Real Estate Investment
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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