Business Management

The No. 1 Reason Newbies Go Broke in Real Estate (& How to Avoid It!)

Expertise: Real Estate Investing Basics, Real Estate News & Commentary, Personal Development, Flipping Houses, Landlording & Rental Properties, Personal Finance
99 Articles Written
newbie-go-broke

The TV real estate gurus advertise that you can get started in real estate with no money.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

I guess technically this is true. I stayed at a timeshare resort in Breckenridge once, and one “owner” was so desperate to get out of his timeshare commitment that he was offering his rights for $1.

There are properties in Detroit for around that much, too. So technically, you can get started with no money, but you certainly can’t continue without any.

In both examples above, the money out of your pocket doesn’t stop at $1. At the timeshare resort, there are annual maintenance fees that average $660 a year. In Detroit, $1 properties come with back taxes pretty much guaranteed. The city of Detroit is cash-strapped, so they start foreclosure proceedings as soon as the ink dries on your deed, desperate for any possible funds.

What if you CAN somehow miraculously invest in real estate with no money? What are you going to do when there’s a problem?

lose-money

That One Rental Where Everything Broke

I have friends, Ruby and Peter, who lived in a small house in my town. When they were pregnant with their fourth child, they decided that a two-bedroom just didn’t serve their needs any longer, so they bought a larger house and decided to make some quick cash renting out the original home.

Ruby and Peter don’t manage their money in the best possible way. They never have any extra cash, and Ruby has confided in me that she has missed a couple mortgage payments on her primary residence.

A few months into being landlords, the hot water heater broke. They didn’t have any reserves set aside for emergencies. Luckily, a hot water heater isn’t a huge expense. Let’s say $1,000.

I live a frugal life. I have adequate reserves for anything that comes up, so $1,000 wouldn’t have me scrambling. Don’t get me wrong, I am not actively looking for ways to spend $1,000. It’s just that sometimes, ways to spend $1,000 come looking for you.

Related: 3 Rental Property Expenses Investors Should Always Anticipate

Ruby and Peter absorbed this expense, although it wasn’t easy for them. Their rent was more than their expenses, and they started to recoup their cash for a few more months until…

The furnace broke.

And not just the blower on the furnace, which is easy to replace and runs around $100 or so for the part. Not the $30 igniter, either. Nope, this furnace had reached the end of its life and needed to be completely replaced. Of course, this only happens during the winter. (Who’s running the furnace in the summer?)

Murphy’s Law presides over furnace replacement. It will only need to be replaced when the temperature dips below zero. You can’t really shop around for a furnace guy or a furnace itself when you own a rental and the furnace is broken — you just have to get it replaced as soon as possible.

Not only are you required by law to provide heat to your tenants, your pipes will freeze if left without heat for too long.

Ruby and Peter ended up not renewing the lease for the next year and instead sold the property, not wanting to continue the financial drain.

BRRRR-strategy-deal

What a $1,000 “Free” Ski Lesson Taught Me About Reserves

In the state of Colorado, children from Kindergarten through 5th grade get a free ski pass. It comes with four lift tickets for four different resorts, plus a free lesson in January. I am an avid snowboarder and want my two children to love being on the slopes as much as I do, so I signed them up.

We scheduled their lesson for this past weekend, and a few days before we went to the mountains, the weatherman started talking about a huge storm. Snow was supposed to start falling around 3:00 p.m. on Saturday and would be pretty heavy — up to 14 inches. But weathermen are always off when they forecast the start of a storm, right? They are usually several hours off, and the lesson was only supposed to last until 3:30 p.m. PLENTY of time to get out of the mountains.

So we went, and they loved it. Mission accomplished!

Except that weatherman was off about the start of the storm — it started an hour before he said it would.

For our trip back, Google Maps routed us through local mountain roads instead of the highway. We blindly followed, only to discover that the road was closed. By the time we turned around and got back into town to take the highway, the highway was shut down, too.

I started making phone calls to every hotel on Google. “Do you have any vacancy?” “Nope. We’re all sold out.” Times 20 or so. Sometimes accompanied by a laugh.

I was extremely fortunate to get a call back from one of the hotels, telling me they just had a cancellation. I hadn’t brought any blankets or supplies with me, thinking I’d be able to make it back home before the storm. (I know, I know. Next time I’ll be prepared.)

Related: How to Estimate Future CapEx Expenses on a Rental Property

I asked how much the room would be and shouldn’t have been surprised at the answer. I live a pretty frugal life and don’t spend a lot of time in expensive hotels. I like to pay less than $100 per night for my room — I don’t spend a lot of time in it while I’m on vacation; it’s just a bed and a shower. (I know there are some of you who wouldn’t step foot inside these lower priced hotels. That’s OK. Someone has to keep these higher priced hotels in business.)

This day ended up costing us right around $1,000, when we were planning on it being free. Mountain prices are high, and beggars can’t be choosers.

I wasn’t actively looking for a way to spend $1,000, but sometimes ways to spend $1,000 come looking for you. Especially when you don’t plan ahead. Or you ignore blizzard warnings.

credit-report-loan

Protect Your Investment

The whole reason you’re investing in real estate isn’t for the stress of finding an HVAC technician at 3:00 in the morning. You also probably aren’t itching to experience an eviction.

If you don’t have money to put down on a house, you won’t have money when something goes sideways. That $100 you have left over after you pay your mortgage doesn’t cover very much of that $3,000 new furnace.

Be Prepared

Know what you’re getting into. Get a home inspection on the property you are purchasing, so you know that the 12-year-old furnace, with its average lifespan of 20-25 years, is probably going to last a little while longer.

Partner Up

Find someone who does have money to cover those surprise visits from the Furnace Fairy.

Save Up

You don’t typically find the perfect property your first time searching. Start throwing every extra dollar you have into a saving-for-my-first-property coffee can or bank account.

Related: 12 “Hidden” Real Estate Expenses That Blindside Investors

Learn While You Earn

Find someone to learn from. There is no shortage of really busy investors on our site and in your area. Connect with people and ask them if they need any help. Provide them with value and begin a relationship. Offer to work for free just to get your foot in the door — it will still cost less than those TV gurus’ classes. You’ll probably learn more, too. As you grow your relationship and experiences, opportunities just might come your way. Even if the only thing you walk away with is experience, you’ve still been paid very well.

[Editor’s Note: We are republishing this article to help out our newer members.]

What’s the biggest unexpected expense you have come across through your investing? What advice do you have for new investors who don’t have a lot of money?

Please share your experiences below.

Mindy Jensen has been buying and selling homes for almost 20 years. She buys houses, moves in, makes them beautiful, sells them, and starts the process all over again. She is a licensed real estate agent in Colorado, author of How to Sell Your Home, and the community manager for BiggerPockets.com, where she helps new and experienced investors learn the proper ways to invest in real estate to grow their wealth. Mindy is an alumnus of the School of Hard Knocks and will happily share her experiences with anyone who asks. When you can get her to stop talking about real estate, you can find her on her bike or adventuring in the beautiful mountains of Colorado.

    Brian Gibbons Investor from Sherman Oaks, California
    Replied over 3 years ago
    Mindy this is awesome. Being frugal, living on 70% of your net and banking the rest is key to being self employed as a property investor, always needing reserves for repairs, vacancies, crazy tenants, etc! I wish more people would have reserves! There are other ways to make income with property, like being a private lender, or a “terms” investor, looking for sellers that want to sell on terms and not cash, using tools like sub2, lease purchase and wraps to acquire. Nicely written, I have a 9 and 12 year old, got to get them on the slopes!
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    Thanks for reading, Brian. There is this misconception that as soon as you buy a property, you’re just rolling in cash… Boy, I wish! Bring your kids to CO – we’ll get them skiing in no time!
    David Krulac from Mechanicsburg, Pennsylvania
    Replied over 3 years ago
    Mindy, I bought the first 11 properties essential 100% financed. When I started my full time job paid $8,000 a year. I had no savings. The second property a multi-unit where I was separating the heat and installing a new furnace as there was none, (shared heat paid by me). Another building with its own heat, the furnace quit the first time it ran fortunately it was October, so not the snow and freezing temps. But now I had multiple furnace jobs going on at the same time. Never had replaced a furnace so it was training under fire. I had to precisely measure the black iron pipe needed to run gas, then take the measurements to the plumbing store to have them cut and thread the pipes, since I didn’t have that tool. Two of the things that can help investors are managing risk, and perseverance.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    Now you can get Home Depot to thread the pipes for you – just make sure you get the guy who’s been there forever, not the kid they hired last week. There are exceptions to every rule. I’m glad you didn’t get caught with no heat. Pennsylvania winters can get mighty cold.
    Toi H. Real Estate Agent from Los Angeles, CA
    Replied over 3 years ago
    I haven’t purchased my first rental yet, but thanks to great articles like this I am learning some strategies and basic common sense tips. Thanks Mindy, this is a great article.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    Thanks for reading, Toi. Good luck in your investing. You can’t ever know too much.
    Douglas Larson Rental Property Investor from Salt Lake City, UT
    Replied over 3 years ago
    Great Article Mindy!… I’m just finishing up a flip where I was the HM lender and the flippers had little money and experience. They did have construction skills but they ran into some expensive plumbing and roof repairs that were not in their budget or skill set. I could have taken the house, but I extended the terms and helped them out. The house closes tomorrow (only about 4 months after they projected) and I will get paid, but I sure won’t lend with these guys again!
    Douglas Larson Rental Property Investor from Salt Lake City, UT
    Replied over 3 years ago
    Great Article Mindy!… I’m just finishing up a flip where I was the HM lender and the flippers had little money and experience. They did have construction skills but they ran into some expensive plumbing and roof repairs that were not in their budget or skill set. I could have taken the house, but I extended the terms and helped them out. The house closes tomorrow (only about 4 months after they projected) and I will get paid, but I sure won’t lend with these guys again!
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    I bet you won’t be lending to ANYONE with little experience again. Partnerships are such a great way to learn, without losing it all.
    Carmelo
    Replied over 3 years ago
    I think your comment dampens the spirit of newbies. However, its your experience. The only think I can say is that you should have helped them if you have the knowledge since your money is on the line. Be considerate.
    Diane Russell Real Estate Agent from Ypsilanti, MI
    Replied over 2 years ago
    I agree. Don’t kick them to the curb just yet
    John Cummins
    Replied 4 months ago
    I don’t get it, the title of this article is “The number one reason… and how to avoid it.” Nice story but where is the proof and the answer. The only thing I can take away is that the author thinks it takes money to make money and all else is doomed to failure. BS – real estate is full of no money success story’s. I believe being strapped forces you to be smart and persevere, failure is not an option for successful people and their projects. Just my humble opinion.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied 4 months ago
    Thanks for reading, John. The point isn’t that you can’t invest with no money, but if you don’t have ACCESS to money, your investing is going to be infinitely more difficult. And if you truly don’t have ANY access to funding (low credit score, no money of your own, no one will lend to you) then if something goes wrong, how can you pay for it? In my experience, not having access to money is the #1 reason investors fail.
    Carmelo
    Replied over 3 years ago
    I think your comment dampens the spirit of newbies. However, its your experience. The only think I can say is that you should have helped them if you have the knowledge since your money is on the line. Be considerate. Reply
    Jessie Niu from Columbus, Ohio
    Replied over 3 years ago
    Great reminder!! After purchasing my first rental property, a seasoned investor and landlord told me at our first lunch meeting that cash reserve is very important!!! I make sure that I have enough funds in the bank, and try not to spend $$ on unnecessary stuff. I am getting used to it and actually enjoy it now 🙂
    Brock Adams from Chapin, South Carolina
    Replied over 3 years ago
    Very well said Mindy. It is the reason most people fail in any business period. While it is nice to chase the sales or revenue side, expenses are always close behind ready to pounce on you and in some cases devour you. Although the BP audience understands, if we did not have some of these unfortunate happenings occurring in the market place we would not have enough distressed sellers. I just don’t want to be one of them:)
    Tee C. from Columbus, OH
    Replied over 3 years ago
    Do you recommend getting a home warranty for a rental property to help cover maintenance issues. I totally agree with having reserves, just wondering if this will offset some of the expenses.
    David Krulac from Mechanicsburg, Pennsylvania
    Replied over 3 years ago
    I agree with Mindy. The warranties cost maybe $450 for the first year, cover roof, furnace, hot water heater and appliances. If you call for a repair there is usually a service fee, much less than the replacement costs. I don’t buy the warranties but have negotiated for the seller to buy them sometimes when I buy and sometimes the buyers want them. I just sold a house a week ago where the buyer requested a HOW. The house was 100+ years and I think that was a concern. However, the former owner replaced the windows, heat, HWH, roof, siding, kitchen and baths in 2010. when I bought I self inspected and was satisfied with the components, and everything worked when I owned it.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    I haven’t had good experiences with home warranties – they don’t seem to cover anything. I’d love to hear from people who have had good experiences. I would never recommend them. They just seem like a waste of money.
    Jesse Kindra Rental Property Investor from Newcastle, WA
    Replied over 2 years ago
    Great article! I agree that home warranties are not worth it. I have in the past purchased for rentals as an experiment and found a few issues with these “warranties”. First, they may promise to respond immediately or within 24 hours, however, that is really for referring the problem to a 3rd party company who may take a week or longer to actually get out there to look at it. Additionally, the companies they referred to me were bottom of the barrel and didn’t fix the problem the first time. Bottom line, extra time was involved, quality of work was poor, no money was saved and most importantly for me, I frustrated my tenant on a relatively simple issue.
    Dawn A. Rental Property Investor from Milwaukee, WI
    Replied over 3 years ago
    I got a “free” home warranty with my first investment property purchase which I thought, as a newbie, was great news. Until the furnace broke on a Friday and they wouldn’t send someone out until Monday. In the dead of winter. I got my own guy out there the next morning. Home warranty companies — never again!
    Whitney Tutt Investor from Mableton, Georgia
    Replied almost 2 years ago
    Same here! Mine was free but I have yet to use it because for emergencies, I can’t wait days for them to send someone out. So glad I didn’t pay for the HW.
    Kevin Prentice Residential Real Estate Broker from Beaufort, South Carolina
    Replied over 3 years ago
    As the owner/broker of a residential property management company I can speak from experience of the unfortunate adventures associated with having to deal with home warranty companies. To cut to the chase, so to speak, there is no such thing as a good experience with a HW company. I’ll bet my own house that you’ll see a pink unicorn sitting at your dinner table before you hear of a “good experience” with any HW company. The company that tops the list of most horrid has the initials AHS. Do yourself a favor and run, don’t walk, as far away as you possibly can from AHS.
    Victor Collazo from Oviedo, Florida
    Replied over 3 years ago
    Great article! Same goes with the A/C in Florida. It only seems so go out in the summer (which is 11 months, 2 weeks out of the year). My question would be, how much reserves is considered “enough?”
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    How much is enough? How much can you swing at one time? Enough to cover the mortgage for a few months without renters? Enough to replace the AC or roof or any other major system. Every landlord will have different issues. Chances are in your favor that you won’t have to replace the AC units in 5 properties at the same time, but what would you do if they all went out at the same time?
    Dawn A. Rental Property Investor from Milwaukee, WI
    Replied over 3 years ago
    What I do might be overkill, but I keep a reserve for each property. So if I have $3,000 for each property x 10 properties, that might be $30,000 set aside. But then again, what if it’s winter and I have to replace 3 furnaces at the same time? Or a couple furnaces, and a water heater, and a roof repair? It’s better to have too much than too little. I’m cash flowing enough that I can keep that money set aside and feel good.
    Mindy Zimmerman Investor from Maryville, Illinois
    Replied over 2 years ago
    I do the same, Dawn. Each property has its own “emergency fund”. Sometimes I feel it might be overkill, too, but it saves me from losing sleep!
    Don Johnston from Chula Vista, California
    Replied over 3 years ago
    How much is enough? Always just a little bit more!
    John Daley Real Estate Investor from Kansas City, Missouri
    Replied over 3 years ago
    Cash is king in real estate. I never advise anyone to use their last dollar to get into real estate investments. There are just too many things that can go wrong. If you average it out over the long term, holding rentals is a wonderful tool to build wealth…but we all need to be prepared for that year or two of negative cash flow. This is where having a portfolio of properties comes in handy as you can average out those major repairs required by one or two properties and still come out ahead. But having one or two rentals with no cash reserves is a recipe for disaster. I don’t want to discourage newbies, but I also want them to be able to weigh the risks against the rewards before they start.
    Cathy Modena
    Replied over 3 years ago
    Loved the article, I have one rental and have had it for many years. I would love to buy a few more. But find a good deal and calculating whether or not it is a good deal has me baffled. Do you have a rule of thumb to go buy when looking for a good buy?
    Daniel
    Replied over 3 years ago
    Hello Cathy, Although I would consider myself a “newbie” as I only have 2 rentals, plus my primary (of which I rent out two rooms for cashflow) it really depends on which market you are in and what you are looking for when investing. There are also many different strategies that come into effect as well. So my advice to you would be to figure out what kind of investment strategy that you are looking to implement and then working with that one. The one strategy that I like in particular that does work in my area is to find properties that are between $15,000-$30,000 a unit that is either turnkey or needs about $5K or less to get up and running outside of closing costs. Also, the cashflow in my equation would need to be at least 60% of my gross income without including the total value of the house. To put this into perspective, I like houses that are around $50K costs, plus closing costs of around $5K and any repairs. Then the cashflow on this “double or greater” would need to be around $1,500/month. This covers all my expenses and allows a pretty healthy cashflow to build up my reserves for this property or to work on paying the property down or another property down depending on which stage I am in, growth or reserves build up. Again, this is my two cents as I am still learning the game, and am interested in any people that would have any other insight to this. Thank you.
    Carl
    Replied over 3 years ago
    Daniel, that’s a heckuva market you’re in where you can rent at $1,500 and pay $55k including closing costs. Oh, to live in that market…
    Cathy Modena
    Replied over 3 years ago
    Loved the article, I have one rental and have had it for many years. I would love to buy a few more. But find a good deal and calculating whether or not it is a good deal has me baffled. Do you have a rule of thumb to go buy when looking for a good buy? Reply Report comment
    Tammy Richards from Yarmouth, Maine
    Replied over 3 years ago
    Biggest unforeseen expense? BED BUGS. Pest Control is expensive. Know your state laws – in my state I am mandated to pay for treatment by a licensed exterminator. This is such a big expense for my 4 unit, ,C-class, family apartment that I am currently studying to take the test to become a licensed pesticide applicator, so that I can legally treat my own building – this will save me thousands per year.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    Wow, that makes my skin crawl. I had no idea pest control was so expensive.
    Nic Dunn
    Replied over 3 years ago
    Tammy Richards. You are amazing! With a multi unit. That in and of itself would be worth it! My husband and I just closed the deal on our First rental property yesterday !!! We don’t have a tonne of extra cash. But it has new furnace, a/c, roof and plumbing. I was thinking of dolling it up a bit right away, but you all have convinced me to just rent it as Is for now, and sock away the $300/month til we get a good reserve going. Thanks!
    Chris Simmons Real Estate Agent from Owasso, Oklahoma
    Replied over 3 years ago
    Reserves are critical. If you don’t have a pile of cash right away, then make sure you have access to a line of credit or a credit card you can put expenses on if needed. Then work on building up a cash reserve. Your cash is your money. Lines of credit can get cancelled when you need them. Murphy’s law. I am a small time landlord that just got up to 10 units. Between units I bought and was rehabbing and existing units that were rented, I spent over $27,000 on hvac between June and September last year. Between replacing 4 whole units, 2 compressor motors, entire ductwork system under a house and one condenser, it can add up. My tenants love me because I get stuff fixed. I have maintenance agreements on my properties and get major systems serviced regularly. And because of my relationships with vendors, I get better pricing than in the beginning when I would have to shop around. I can usually get a system replaced within 48 hours, even when my vendor is slammed with other customers. Take care of your tenants and they will take care of you. (The properly screened ones at least.)
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    Having access to a line of credit is a decent alternative, the credit card less so. It would stink to pay 12-27% interest on a new HVAC system… Absolutely take care of your tenants. Renters want to know someone is going to make repairs and treat them well. A little goes a long way with most tenants. Thanks for reading!
    Robert L. from Ventura, California
    Replied over 3 years ago
    Uh, if you’re paying 12-27%, then you’re not shopping around enough or negotiating. Know that credit card companies want you to borrow from them. We get 0% all the time (my wife worked for a credit card company in the past). Try 0% transfers, for instance. Get creative with them. The possibilities are out there for those who talk to them. Plus, Ask for lower APRs/interest rates. Ask for your limit to be raised. Some even have the ability for you to raise your own limit right on their website. To worry so much about expenses, to the point that it sounds crippling, is based on limited thinking. Be creative and you’ll find more possibilities. It doesn’t have to break you.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    You are correct, Robert, in that you shouldn’t allow worrying about expenses to cripple you. However, if you have zero reserves, when something breaks you’re going to up the creek without a paddle.
    Jennifer Ramirez Investor from Chicago, Illinois
    Replied over 3 years ago
    This was a great read! My husband and I have one condo unit in Chicago that we’ve been renting out since 2008 due to it losing its value with the downturn and never recovering to anywhere near its value when we bought it. We’re currently working on our business plan to purchase more rental properties in the St. Louis area, though we’re still in the saving and planning stages. This is one of the few articles I’ve come across on BP so far that emphasizes savings and having a cash reserve. There seem to be so many more that push the whole “get started now, even if you don’t have any money at all.” I tend to stick more towards the cautious side, and to me, investing your last penny on a rental without having some way to cover those emergency expenses seems like more of a gamble than I’m interested in. Thanks for sharing this perspective and showing me that we’re not the only ones who would rather hold off a little, cut back on our spending, and make sure we have a healthy enough cash reserve to make sure we don’t become more newbies who fail.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    There is some inherent risk in investing of any kind. Why take chances? Thanks for reading, Jennifer.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    There is some inherent risk in investing of any kind. Why take chances? Thanks for reading, Jennifer.
    Alejandro Saenz Investor from Lake Mary, FL
    Replied over 3 years ago
    Great article! Last year we had a tenant buy a used couch infested with bedbugs. This being a triplex we didn’t hear about it until the neighbors upstairs found bedbugs in their unit. Needless to say it would’ve been MUCH cheaper to buy the nicest brand new couch for the tenant, than doing the bug remediation. There are some things you just can’t anticipate!
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    I wonder if it could be put into the lease that they won’t bring gross old couches into the property? Probably not legal… Sigh. Did he buy it, or did he just find it on the street? So gross…
    Derik S. from Fort Collins, Colorado
    Replied over 3 years ago
    Nice read. Coming from someone still looking to make their first investment, this was great. Makes someone who doesn’t have an income coming in, like me, kinda cringe at the aspect of having a fat cash reserve. Like I wold call my folks up at say, 3 in the morning, and say, “Yeah, do you have $3,000 I can spend on a furnace replacement,” or “Sorry to bother you, but I’m going to need some cash to pay for pest control.” I guess I just added a question to my script, “How good is the furnace?” And do a inspection on furniture from now on.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    Start building up that cash reserve now for when you do find a great deal.
    Adam Swift from Derry, New Hampshire
    Replied over 3 years ago
    This was a great read as I first bought my 2-family and lived in it for the first 6 years but didn’t have much for reserves but luckily I am a general contractor and was able to do any repairs. Took me a few years to build a reserve and glad I have had it since I have moved out and fully rented had a tenant that brought in a couch with bed bugs also luckily they informed me before they got to other tenants unit but they didn’t have the money to pay for extermination, so as something I couldn’t let go I paid for it out of my pocket but just after that that same tenant quit paying rent also as they lost there source of income so went three months with no rent before I got them out and they left it a mess with all kinds of belongings left behind. Was greatful that I had my reserve at this time cause was able to cover everything without taken from my own pockets.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    Adam, this is precisely the reason you need reserves. You illustrated my point perfectly. I’m sorry for what you went through, though. That’s terrible.
    Kevin Izquierdo from Hillside, New Jersey
    Replied over 3 years ago
    “Offer to work for free just to get your foot in the door — it will still cost less than those TV gurus’ classes” Hot the nail right on the head.Great Article, thanks for writing 🙂
    Kory Thaut Investor from West Linn, Oregon
    Replied over 3 years ago
    I love this line “If you don’t have money to put down on a house, you won’t have money when something goes sideways.” So true, and so often forgotten… even by the people who just have barely enough for a down payment to get going.
    Lloyd Jones from Azle, Texas
    Replied over 3 years ago
    Great article, thank you.
    Brandon W. from Llanybydder, Wales
    Replied over 3 years ago
    Mindy, Thank you, such a great article. I did notice someone mentioning having a line of credit or using credit cards for when things go wrong and your reply brought out good points about the interest rates, but what if someone has excellent credit and can take out a loan ( with an interest rate between 4%-6% ) to cover a down payment on a couple properties with money left to leave in the bank to cover expense? While my day job will cover payment on the loan and the properties will cover there own mortgage and still be cash flowing. Over time debt on the properties and the loan will be paid down and I could move on to other purchases. Any thought on this type of strategy?
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    This is an interesting idea, but the loan for the down payment will appear when your lender runs your credit report. It may affect your ability to get the rest of the loan, and may affect your interest rate. I’ve never taken a loan out for the down payment, so I can’t say for sure. I’d love to hear from anyone with experience in that. Thanks for reading, Brandon.
    Don Johnston from Chula Vista, California
    Replied over 3 years ago
    A few of you have mentioned Murphy and his law…”If anything can go wrong, it will.” Let me introduce you to his brother, Morton (as in Morton Salt). Morton comes along immediately after Murphy. Always consider the two as inseparable. “If anything can go wrong, it will. And, when it rains, it pours!” Thanks for the article. Don’t have my first property yet but looking at a tri-plex that has been on the market quite a while and is 20 years old. As I have been educating myself, I have thought that I would pour all cash flow back into the reserves for at least 6 months before considering using any for income. That said, what happens when there is a cap-ex expense in the first month. Gotta have a backup plan like you mentioned…credit card or Heloc or Partner.
    Jerome Kaidor Investor from Hayward, California
    Replied over 3 years ago
    I recently bought a 13-unit building. Literally one week after we closed, the central water heater burst. “Ka-CHING” to the tune of 8 grand! Stuff happens. When I was trying to get a loan, I had a chat with the underwriter. He said that they estimate $20 per month per door for capex expenses when they are analyzing a property. – Jerry Kaidor
    Jerome Kaidor Investor from Hayward, California
    Replied over 3 years ago
    I recently bought a 13-unit building. Literally one week after we closed, the central water heater burst. “Ka-CHING” to the tune of 8 grand! Stuff happens. When I was trying to get a loan, I had a chat with the underwriter. He said that they estimate $20 per month per door for capex expenses when they are analyzing a property. – Jerry Kaidor
    Steve G. from Winter Haven, Florida
    Replied over 3 years ago
    you have all made some very wise comments here, and the story says it all, but buying real estate without ones own cash is not always about being broke and can’t afford the investment. Its about using leverage as a tool to grow your investments on a quicker scale than you might , by using your own cash..
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    Thanks for reading, Steve. I suppose having access to adequate repair funds should be the moral of the story. I’m all about leverage, but you still need a way to pay for those repairs.
    Dennis Meppelink Investor from ERICA (7887), Holland
    Replied over 3 years ago
    Hi Mindy, I just invested in a vacation house. For got to check the roof. I knew there is a lot of moss on the flatroof. Just cleaning, that is good for the momenent…. is what I thought. After an inspection the roof looks very bad. Maby one year to go before it will start leaking. One of this days I will get an estimation for a new roof. Proberbly it will cost between 3500 and 7500 Euro depending on the quality of the used materials and if I choose to install insulation. I think it is good to be sure to have good insulation, so if the roof will be repaired than I will also ad the insulation. Tip from me: Let someone check your house before buying it. Best regards, Dennis Meppelink from Holland
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    Thanks for reading, Dennis. I just wrote another article about getting a home inspection. I really recommend them. https://www.biggerpockets.com/renewsblog/2016/04/04/home-inspections/
    Dennis Meppelink Investor from ERICA (7887), Holland
    Replied over 3 years ago
    Thank you Mindy for recommending the article.
    Brandon W. from Llanybydder, Wales
    Replied over 3 years ago
    Mindy, Thank you for your fed back. That is exactly what I was thinking. I just thought it would be the same as using your credit cards or a line of credit. I guess I will sit down with a Mortgage Broker and run it by them to see what they think. I was also thinking maybe I could take out the loan and move the funds into my LLC to “start my business” but I know you can not intermingle funds between your personal finances and your business finances because then if your ever caught in legal trouble ( tenant tries to sue you ) they use that to pierce your corporate shield. So I guess I will have to sit down with an Attorney and ask these questions to find out. But again I thank you for your fed back and if you have any advice I’m all ears.
    Ricardo Cortes from Dallas, Texas
    Replied over 3 years ago
    Mindy this was a great article, i can say that i will keep your advice in mind for when i come to purchasing my first deal.
    Tesseract
    Replied over 2 years ago
    Great information. I am a little confused of your website makes use of pictures of “hipsters” in most of your articles though.
    Ken Oz Property Manager from Seattle, Washington
    Replied over 2 years ago
    Never be desperate to get your place rented. Whenever I didn’t follow my gut feeling about renting to someone, because I needed it rented now, I lost five times as much when repairs and EVICTIONS followed me. That was a lesson early on that we have told ourselves we will not repeat!
    John Murray from Portland, Oregon
    Replied almost 2 years ago
    Having electrical, mechanical skill is a key function of why I make money. My uncle has a PhD in psychics and contends that the whole world is plumbing and wiring. Uncle has designed weapons guidance systems but his greatest accomplishment was building a deck and remodeled his house. Way to be uncle Fred! He makes a bunch of money too.
    Salina Robbins from philadelphia, pa
    Replied over 1 year ago
    Mindy, Thanks so much for this post. I’m working on making my first investment by September of 2018. It’s posts like this that makes me feel more and more confident in my future endeavors.
    Dave G. Investor from Phoenix, Arizona
    Replied over 1 year ago
    Just read the recent reprint of this blog. Great article with timeless information. As a new investor in my early 20s, I personally experienced the consequences of having essentially “break-even” cash flow and no reserves. I acquired 3 properties for zero down. This was not exactly a great achievement as it was during the fallout of the Savings & Loan crisis market in the late 80s. There were HUD and VA foreclosures everywhere in Phoenix. But I got my 3 properties (plus a personal residence) and was on my way! I rented them out for about break even with the financing (no-qualifying assumable loans!). Tenant screening was not hard and did not cost much $$ or time, I found good ones. But before long, maintenance issues arose. Like in Mindy’s article, I had AC units go out in the middle of summer. This is Phoenix – 115 degree weather and you must act fast! Long story short, every month something costing like $500 would break on one of the properties. It just rotated among the properties each month on where the next $500 problem would occur. I was a starving realtor at the time and was having trouble covering my own bills, much less 3 other properties. After about a 1 year of this (and accruing a large credit card balance for the on-going repairs) I realized this was not sustainable and dumped all three of the properties. I was very deflated. I did not re-enter real estate investment until another ~20 years passed (the 2008 Crash). As an investor now, it is defined within my LLC operating agreement that I’ll keep a minimum reserve value on-hand for each property. My reserve value selection is driven by property type, age and condition at acquisition. I found this to be a good safety net and clearly it will mitigate what was previously my downfall. I absolutely agree – the #1 threat to new investors? NO CASH RESERVES!
    John Cummins
    Replied 4 months ago
    I don’t get it, the title of this article is “The number one reason… and how to avoid it.” Nice story but where is the proof and the answer. The only thing I can take away is that the author thinks it takes money to make money and all else is doomed to failure. BS – real estate is full of no money success story’s. I believe being strapped forces you to be smart and persevere, failure is not an option for successful people and their projects. Just my humble opinion.
    Don Lewis Investor from Fallbrook, CA
    Replied 4 months ago
    I ran a business for 25 years and was a sole proprietor. Without cash reserves to start a business or for lean years you’re probably not going to be in business very long. Investing in property is a business, so you better be prepared for the unexpected. I recently bought a condo that the association has below average cash reserves. This could lead to an unexpected special assessment which could be thousands of dollars. For this reason I offered $10,000 less than the asking price(all cash sale) and they accepted when I explained why. I stashed the 10K into my reserve fund, hopefully I’ll never need it.
    John Cummins
    Replied 4 months ago
    I agree, but I think we are being too generous blaming lack of cash for problems. Basic business irresponsibility needs to be listed. Here are some simple but fatal mistakes. Betting on the future, (assuming income increases.) Allowing debt to climb without income offset. Dumb purchases, (gold plated kitchens, and brand new diesel pickups.) Buying the wrong property. I believe you set the stage and make your money the day you buy a property, not the day you sell it. Lastly, spending tax reserves. Remember, investors with bad credit didn’t get that way by making smart choices. I wager, many fail even with access to cash, only in more spectacular fashion. Just my opinion.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied 4 months ago
    This is a fair observation. You are 100% correct, people with bad credit didn’t get there by making great choices.