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The 6 Dumbest Mistakes You Can Make as a Buy and Hold Investor

The 6 Dumbest Mistakes You Can Make as a Buy and Hold Investor

5 min read
Brandon Turner

Brandon Turner is an active real estate investor, entrepreneur, writer, and podcaster. He is a nationally recognized ...

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When I was in college, I decided to lead a prank against the girl’s dorm. Many of the girls had just finished watching The Texas Chainsaw Masacre and headed off to bed. So I gathered a few buddies and snuck into the dorm, tying all the doors shut to the door across the hall. Then, connecting the school’s speaker system to my iPod, we woke the women up to my own created music mix- comprised of chainsaws, screams, and creepy circus music.

It was hilarious…

The girls didn’t see the humor. Panic, terror, and anger gripped the girls dorm. Screaming, crying, praying, and other more “colorful” words soon grew louder than the music we blasted. So we did the respectable thing that any fine young men would do…

We ran and hid.

The chainsaw prank was probably the dumbest mistake I’d ever made. Not only did we almost get expelled, but I personally had to apologize to each and every girl in that dorm.

Oooph – it hurts just talking about it.

Anyways, the point I’m trying to make is that we all make dumb mistakes. It’s part of life. However, it doesn’t need to be your error to learn from a mistake. Just as I’m sure you will now never blast chainsaw circus music to a bunch of college girls because now you’ve learned how dumb the mistake is – hopefully this post will save you from other mistakes as well.

The following are the six dumbest mistakes, in no particular order, that you can make as a buy and hold investor.

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1.) Paying Too Much

There is a lot of emphasis around the real estate investing world on getting incredible deals for wholesalers and flippers – and rightly so. These kind of investors need to get amazing deals in order to make a quick profit. However, just because you plan to hold on to property for the long haul – doesn’t mean you can afford to pay too much. Yes – over time, that mortgage will be paid down to zero but that doesn’t give you an excuse to pay more than you should.

Having a mortgage that is too high means you will have a payment that is too high… and that’s obviously dangerous for your cash flow. As a buy and hold investor – spend time learning how to buy smart and get the best deal. Use the tricks and tactics of the wholesaler and flipper to get an even better deal for yourself, and create instant equity in your property.

Related: How to “Buy Smart” : Tips for Buying Only the Best Deals

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2.) Adjustable Rate Mortgages

An Adjustable Rate Mortgage (ARM) is a loan, but unlike a “fixed rate mortgage” – the interest rate can change with the economy, causing your payment to skyrocket. I understand the allure of an adjustable rate mortgage: low payments at the start. However, although you might lock in that rate for 3 or 5 years… there is no guarantee what the economy will be like in 3-5 years. For me – I want to have the most control over my destiny, and ARMs take a huge chunk of my control and put it into the hands of the US economy – a scary place to be sometimes.

If you want further proof of why an ARM is dangerous – just ask the tens of thousands of investors who lost properties after their payments began to skyrocket at the last market collapse. Take note: history repeats itself.

Related: The BiggerPockets Mortgage Center

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3.) Not Learning the Landlord Business

Yes – the landlord “business.” Landlording is a business, and like any business – the success of that business depends almost entirely on the owner’s ability to lead. Many treat landlording like a hobby, insisting on handshake agreements, loose rules, and emotional decisions.

However – that’s not you! By reading this article, you’ve already shown you are someone looking to improve your business by reading. Here on BiggerPockets, there are thousands of discussions, blog posts, and more to help you improve your landlording business. Take advantage of those resources and start strengthening your business skills today.

Related: How to Be A Landlord: Top Ten Tips for Success

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4.) Not Doing the Math

Look – no one “enjoys” doing math. No one ever woke up on a Saturday morning and said “The sun is shining, the birds are chirping… I think I’ll do some algebra.”

Well, sometimes I do. I wasn’t co-captain of my high school Math League for nothing- but that’s another story.

Many buy and hold investors simply buy property without doing all the math involved. Kevin Perk wrote a great article about this the other day called “Don’t Fall For the Hype: How to REALLY Discern a Good Deal.” In it, he demonstrates the fatal error many investors make by assuming that the amount of money that comes in, minus the mortgage payment, is going to be the monthly cash flow.

False.

There are so many other considerations to take into account such as maintenance, vacancy, management, capex, and more. By correctly looking at ALL the numbers – you will be able to discern a good deal from a bad deal and avoid making a colossal error. Trust me: math saves.

As a side note – in the next couple weeks, we are going to be launching our new “Buy and Hold Calculator” – which is going to revolutionize the way buy and hold investors analyze investment properties! I’m super stoked for this!

Related: How to Buy a Small MultiFamily Property: A Step by Step Case Study

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5.) Not Buying with Property Management In Mind

“But Brandon… I’m going to manage myself, so I don’t need to plan for property management or maintenance. I’ll do it all myself.”

Yep – that’s what I told myself when I got started. I bought marginal deals because I knew that I could handle the problems when they came up, so I didn’t need to account for property management. And honestly – it worked out just fine for a few years; but then I began to grow. When I had just one or two, it was easy, but as I began to collect more and more units, I could no longer handle all the properties. I needed management… but I didn’t buy with management in mind, so I was stuck working every free minute on my rentals.

Not cool.

What I’ve learned is this: always plan for property management when buying. Perhaps you will do it yourself – great! You’ve just made even more money. However, none of us know where we will be in one year, five years, or ten years. So buy property and do your math with the assumption that someone else will be managing (figure at least 12%) and someone else will be doing the maintenance (another 10%.)

You know the cliche: plan for the worst, hope for the best.

Related: 7 Ways to Invest in Real Estate When You Are Too Frickin’ Busy

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6.) Quitting Your Job Too Early

Finally, many buy and hold investors (ehem… why are you looking at me?!) quit their job too quickly, without the proper foundation in place to whether potential storms. Yes, quitting your job and sailing the world on a yacht with Angelina Jolie is the goal… but until you can afford to truly step away from the security of a job – don’t be in such a rush. Angelina will still be there next year.

Jobs provide some excellent benefits – like the ability to pay your bills when the tenant doesn’t, as well as the ability to obtain mortgages – so enjoy the fact that you have a job and don’t quit before you are ready.

Related: How to Quit Your Job in Less Than Six Months Using Real Estate Investing

Conclusion

Look – we all make mistakes.

However, please don’t make these. Make dumb mistakes like growing a mullet or filling the girls dorm hall up with 8 inches of water (yep, did those too… I’ll tell that another time) but don’t make the mistakes in this post.

Buy and Hold Investing is about reducing risk while growing your wealth. Dumb mistakes can raise your risk, destroy your wealth, and cause more headaches than 16 hours of watching Roseanne Barr singing the national anthem.

It will only come back to haunt you later.

Thoughts? What dumb mistake am I missing? Leave your comments below!

(Bonus points to anyone who shares their dumbest mistake!)

Photo: JD Hancock,Donald, Gaetan Lee, JD Hancock, JD Hancock