After a dozen years in the real estate investing business, one thing I have learned is that mistakes will be made. I made some pretty good ones when I first started out, and I am still making and learning from them today. Mistakes are a part of life and are something we all have to learn to deal with. Looking back over the years, I see that many of these mistakes were actually good things, as they taught valuable lessons and offered even more valuable experience.
Newbies to this business are unfortunately more prone to making mistakes simply because of their lack of experience. These mistakes can cost them a lot of money and put a bad taste in their mouths for real estate investing. I have seen more than one person make a serious mistake that they really are never able (or want) to recover from. Hopefully this post can save some of the newbies out there from making a serious mistake that kills their dreams of being a successful real estate investor. There are many types of mistakes that can be made, but in thinking about it, they seem to fall into six general categories.
The 6 Most Common Mistakes New Investors Make
Being Overly Exuberant
Many newbies are very excited to have discovered the world of real estate investing. They should be as it can change their lives. But this excitement can lead to an over-exuberance, which in turn can lead to poor decision making. Newbies will want to get started so badly that a mediocre or poor deal will begin to look good. Many will think that they just need to get their first deal and then things will flow from there. And while there is some truth to that statement, you cannot let your guard down and take any deal just to “get one done.” Rely on your numbers and intuition.
Being Too Trusting
Many first timers are simply way too trusting. The sad part of this business is the fact that you get to see a totally different side of people when dealing with tenants, contractors, and other investors. These dealings often leave us more experienced folks with a discerning eye and a fine-tuned BS detector.
I hate to say it, but you sort of have to come into this business thinking everyone is trying to get into your pocket and pull one over one you. Not everyone is, of course, but there are many out there who are. Always remember that if the story sounds too good to be true, it likely is. “Trust but verify” is a good mantra to use. Remember to get everything in writing and to be very careful about who you give your money to. It can be very hard to get it back.
Not Doing Basic Research
Most newbies understand that they have to run the numbers on any deal, but there is also some other basic research that can and should be done to prevent a potentially serious mistake. The internet has made this so simple now. Simply running the property and the seller through Google is one simple thing that may yield interesting results. You never know what you might learn.
Forcing the Numbers
Perhaps this is a bit related to item number one above, but I have seen new investors think that they can bend the numbers to their will. That they can force the deal to work. The thing is, they can’t. The numbers do not lie, and if they are telling you that a deal is not there, believe it is not there and move on. Sure, run your numbers again, look for mistakes, and even ask for advice from a trusted investor friend. But if the numbers still say no, then move on. Nothing will end your career more quickly than getting into a bad deal.
Underestimating Rehab Costs
This is a tough one to get an initial hold on. Underestimating a rehab can quickly lead to a busted budget and a quagmire. Rehabs can be very tricky and very complex. There are a lot of things that can be hiding and things that a newbie can easily miss. Your best bet when starting out is to find a simple, patch and paint rehab. Otherwise, be sure to get estimates from trusted colleagues or from contractors. Again, if the numbers do not work or if you are just not confident on the costs, move on to the next deal.
Thinking Real Estate Investing is Easy
Real estate investing is not easy. There is no simple, clear cut formula that will bring you instant success. Do not believe what many of the gurus say, and do not be so quick with those credit cards to purchase the dream they are selling. That is all it is: a dream. I can assure you that you will quickly get discouraged and end up thinking real estate investing is a scam. Yes, some education is absolutely necessary and I have bought my fair share of courses over the years. But I have found that you have to work with these courses and tailor them to your own specific needs and circumstances. If it were easy, everyone would be doing it.
Everyone will make mistakes. You will too, no matter how hard you try not to. I hope those mistakes will be small and end up good learning experiences. I know I’ve sure made plenty. Some were even pretty big. But the moral of the story is that we survived and learned from them. You can as well. But let’s try our best not to make them in the first place.
[Editor’s Note: We are republishing this article to help out our newer members.]
Care to share a mistake you made (and learned from) when you were starting out?
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.