Landlording & Rental Properties

The 3 Dumbest Mistakes Buy & Hold Real Estate Investors Make

Expertise: Commercial Real Estate, Personal Finance, Real Estate Marketing, Business Management, Landlording & Rental Properties, Real Estate Investing Basics, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing
226 Articles Written
buy-hold-mistakes

There is no doubt that even the professional long-term real estate investors are prone to the occasional slip up, so don’t feel down if you make some mistakes. After all, it is all a part of the learning process. However, do keep in mind that it is definitely an error if you consistently repeat these mistakes and fail to learn from them.

Want more articles like this?

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

Sign up for free

It may just very well be that you haven’t actually made any mistakes so far (which you should), but nevertheless, in order to give you that extra heads up, here are a few of the stupidest slips you could possibly make as a buy and hold investor.

Related: Want to Lose All Your Money & Cry Yourself to Sleep? Make These 4 Newbie Mistakes!

Overpaying

There is definitely a lot of emphasis whizzing around the world of real estate investing on always having to get the best deals if you are a flipper or a wholesaler—and fair enough. In order to be a successful flipper or wholesaler, you will definitely need to be able to get great deals to earn that quick profit.

landlording-mistakes

However, even if you are a long-term investor, this definitely does not mean that you should pay more than you should — after all, having a sky high mortgage equates to a payment that is far too high, resulting in some serious danger surrounding your cash flow. Hence, as a buy and hold investor, definitely do take the time to learn the best ways to buy low and snag the top deals. By simply trying to imitate the clever tactics of a flipper or wholesaler, you might just find yourself creating some great immediate equity on your investment!

Over-Appreciating Appreciation

One of the biggest mistakes that investors make is purchasing rental properties with very minimal (or even negative) cash flow simply based on their unsubstantiated hopes that these properties will appreciate in value. This, however, is an extremely risky move, as the market can fluctuate rather quickly, and it is impossible to always accurately predict. So it is strongly encouraged that you never purchase a property with your only profit potential being appreciation.

Related: The Top 3 Real Estate Investing Mistakes I’ve Made (& What I Learned)

Pro Tip: In fact, sometimes the best thing to do is to purchase a property below market value or improve a property to add value. In addition to this, it is a good idea to purchase a property that already has a positive cash flow, as this will allow you to bring in income as soon as you rent out the house. So, since you are investing for cash flow, don’t worry about home values; if the home value goes down, it doesn’t really matter because you are making money from the cash flow and not the selling of the property. Remember, real estate investing is a long-term play.

assigning-contracts

Not Treating Landlording as a Business

This might come as a surprise to many, but landlording is actually a business. In order to keep your assets performing, it is best to maintain property upkeep, tenant relations, and finances. So while the majority think that landlording is an easy-going game of handshake agreements, emotion-based choices and loose regulations, remember that if you want to make it in the long run, you have got to be assertive!

We are republishing this article to help out our newer readers.

Investors: Surely there are more stupid mistakes out there—which ones do you see made all the time?

Leave your comments below!

With just under a decade of experience in the real estate industry, Sterling currently manages over $10MM in capital, which is deployed across a $26MM real estate portfolio made up of multifamily apartments and single-family homes. Through the company he co-founded, Holdfolio, he owns just under 400 units. Sterling was featured on the BiggerPockets Podcast and has been contributing content to BiggerPockets since 2014, with over 200 posts on topics ranging from single-family investing and apartment investing to wholesaling and scaling a business.

    The German
    Replied almost 11 years ago
    I believe that the best real estate sales happen in the country side. It is a win-win situation and that is a market that can never slow down. In an area like rural Germany or France, the vistas are so beautiful that people can’t resist it. And the price is also pretty realistic. Nice article and all the 4 points make sense. Thanks 🙂
    Crystal Tost
    Replied about 9 years ago
    I find the advertising in other countries and in mediums that are not real estate related a waster of money and time. I think targeted advertising coupled with good pricing and proper presentation will get the house sold to a local buyer that is likely out there as we speak. Why focus on an audience that you are not even sure exists in mediums that are not targeted?
    David Grbich
    Replied over 8 years ago
    Setting a realistic list price at 10% below market may lead to a very lonely existence as a realtor – not many sellers in the California market have the equity to price 10% below market – but yes that should get the home sold. Great point overall – thanks.
    Russell M. Rental Property Investor from San Diego, CA
    Replied over 3 years ago
    Treating Real Estate Investing as “Passive Income” Regardless of whether you actively manage your properties, or have a management company, you still need to be involved and aware of what is happening. The old adage that no one cares as much about your money as you do, applies equally to your property. Don’t expect to purchase a property, set it, and forget it. Paying attention day in, day out to what is going on, from tenants, to maintenance, to bills being paid, etc. will not only allow you to address issues more quickly when they arise, but also to get a rhythm for property management and working with the different aspects of the business. The less you treat it passively, the more control you have over your profits, and the more experience you will gain as you move down your real estate path.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Russell totally agree with your statement! Thank you for stopping by for the read. It is crucial to keeping an eye on those precious assets
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Russell totally agree with your statement! Thank you for stopping by for the read. It is crucial to keeping an eye on those precious assets
    Douglas Skipworth Rental Property Investor from Memphis, TN
    Replied over 3 years ago
    Sterling, this is great! We have a whole seminar built around avoiding the 3 deadly sins of real estate investing, which are overpaying, over leveraging, and mismanaging. I’m glad our mistakes lined up so closely with yours!
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Sounds like I should have added one more mistake. Totally agree with the over leveraging. Thanks for bringing that to the light Douglas
    Dennis Meppelink Investor from ERICA (7887), Holland
    Replied over 3 years ago
    Hello Douglas, Please can you explain when a propperty is overleveraged? Maby you can give a number? Dennis Meppelink from Holland
    Constantine Vasilatos Rental Property Investor from Fairlawn, OH
    Replied over 1 year ago
    Dennis, Levereage is how much you borrow on a property. Example: You find that depressed property in a 100k neighborhood for 30k. You spend 30k to rehab it and then you get a home Equity line of credit for 60k to pay yourself back for the cost of purchase and rehab. You now have leveraged the house at 60% of the Fair market value 100k. You rent the house for $1000 a month so you should be making about $300 a month if taxes and insurance are reasonable. This is a basic Real Estate investment formula that will keep you in the black.
    Shari Lawson Investor from Maryland
    Replied over 3 years ago
    So true! Good tidbit about using tactics of a flipper or wholesaler to capture more equity. Thanks for sharing.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    You are very welcome Shari! Best of luck this year in your venture
    Andrew Syrios Residential Real Estate Investor from Kansas City, Missouri
    Replied over 3 years ago
    Paying too much is a big risk for buy and hold investors, especially since there’s no feedback mechanism. A flipper knows very quickly if they made a mistake, but buy and hold investors can rationalize mistakes because they don’t have to sell (and can always disagree with any appraisal). There is a dangerous tendency to get lazy with buy and hold that such investors need to be very careful about.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Totally agree Andrew. Have you ran into over paying for a property in your career?
    Marian Smith Real Estate Investor from Williamson County, Texas
    Replied over 1 year ago
    Once you have purchased, it matters less that you overpaid….not much you can do at that point. What matters is being able to rent profitably. If you overpaid to the extent that taking depreciation at tax time does not pop you into the black for the year you may want to consider selling your “alligator.” But at 3% inflation, sometimes just hanging on to a nice property will work out in the long run….and might be more desirable than selling and having to bring a large sum to the table.
    Billy Smith from Shawnee Mission, KS
    Replied over 3 years ago
    Yes overpaying is a huge issue on buy and hold ,if I follow my rules: 1 location ,2 buying a house close by ,3 avoiding major foundation work ,checking the sewer. I can deal with most issues after that just matter of the right price for what needs to be done, 4 priced right.
    Quandra Adams from Durham, North Carolina
    Replied over 1 year ago
    How does one check the sewer?
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Great criteria you have there Billy! How did you come up with those rules of thumb to invest by?
    Billy Smith from Shawnee Mission, KS
    Replied over 3 years ago
    Trial and error and reading ,passion to learn
    Brian Walsh Property Manager from Greenville, SC
    Replied over 3 years ago
    Three very good points. All very important. If you’re going to self manage, create systems and follow them with NO exceptions, if not you will lose.
    Billy Smith from Shawnee Mission, KS
    Replied over 3 years ago
    agree too
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Totally agree Brian! Deviating from your created systems can cause inconsistency throughout the business.
    Ben Rasche Investor from Chatham, Illinois
    Replied over 3 years ago
    Great read. As a follow-up question to a n earlier reply…how do you know you’re over leveraged? Is it just when you’re unable to cash flow?
    Dennis
    Replied about 2 years ago
    @Ben- Great question. Its a very personal one. everyones financial situation is unique to themselves. For example- when considering an real state investment. Ask your self this question- How solid is my job?- if self employed- How clear does the near future look.? Could a recession be just around the corner? or could I be getting in on the high of the market? Having been around awhile I have learned a few tips that have saved me a lot of money and frustration. And some were learned the hard way. When property values soar for a few years or so- but the Materials- Land costs- or labor costs have not risen to the same extent- this could mean that the market is heading into a Bubble. We all know what happens next in that case. I applaud your willing to get involved- This tool retired us very nicely, just go into it slow with your eyes ope and bring as much cash with you when you make your first plunge.
    Joseph Ziemba Real Estate Investor from Poulsbo, Washington
    Replied over 3 years ago
    I have found a duplex that can barely cash flow. The market around me is pretty inflated so this actually seems like a pretty good deal. And I plan on moving into one side which is what makes the deal a winner. Saving 200$ a month on rent is basically another form of cash flow. This is also my first buy. I’ve been watching the market for about 8 months now and this is the first one where my conservative numbers don’t come out red. Any advice is always appreciated! Thanks for reading
    Donald Cooley Railroad Conductor / Future investor from New Baltimore, MI
    Replied over 3 years ago
    Great article Sterling, thanks for sharing. We just recently purchased our first buy and hold, we’ve since rented it within 3 weeks forcing is to develop some systems. I find so much of the information on here to be helpful. We are making a strong effort to create a professional atmosphere with our tenant especially with using many of the forms available on BP. I appreciate many of the articles that are posted offering great advice in how to proceed to the next step or even next level. Thanks again for the info.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Glad I could contribute to your success Donald. I wish you the best of luck in your venture
    Lars Dyrendahl
    Replied over 3 years ago
    I thought about the same thing yesterday as an investor friend of mine wanted to show me his boat. We drove out to a place he has on the gulf here in central Florida. As we got there he told about the house with it’s dock and deep sea gulf access. According to him, he overpaid for it back in 2007 and it wasn’t until now he started seeing a chance of making some money on it. He then showed me another very similar house down the street that he had bought 2 years later. For 35 000.. A bargain! His logic was that if he thought the first house was a decent buy for 100 000, he didn’t let the poor market make him belive differently about the second one. As a result, he has two houses on the gulf for an average of $67 500. Prices in the neighbourhood today is north of $100 000 making his deals pretty good. Not sure why, but the fact that we should focus on how we average in total hit me pretty hard on the drive back. By staying away from over extending ourselves, thus keeping from bankruptcy, averaging good profits through appreciation shouldn’t be that hard. Time is money 🙂
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Totally agree Lars. Thanks for stopping by for the read. Sounds like your friend is doing quite well for himself
    Jessie Niu from Columbus, Ohio
    Replied over 3 years ago
    My dilemma is that I am looking for an owner-occupied duplex, but the ones in the area that’s suitable for us to live are just not producing enough cashflows (the mortgage is a lot higher etc). The cheaper ones make so much more sense, but I don’t want to live in those areas. I feel that I am over-paying for owner-occupied duplex, yes I can save on rent, but what happens after I move out? It will probably just break-even with very little cashflow.
    Deanna Opgenort Rental Property Investor from San Diego, CA
    Replied over 3 years ago
    Might other multi-family options work? Are mother-in-law unit, rentable guest house, legal garage conversion, etc. House splits, etc reasonable options in the area you are looking at?
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    You make money when you buy. If the numbers are not up to your standards then search until you find a deal that does. Having negative cash-flow is no good in my opinion.
    Jessie Niu from Columbus, Ohio
    Replied over 3 years ago
    Thanks for replying Sterling! always enjoyed your articles, very helpful for a newbie like me. It’s no negative cashflow, but just very little, I did deal analysis at BP, only less than $100 positive cashflow, the rent definitely doesn’t meet the 2% rule, actually only 0.95%. I can get the same rent with a duplex that’s almost 50~60k less, but the area is not as decent. Should I make compromise due to owner-occupancy?
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Jessie I would just keep digging until you find a deal that feels right. From the context you have given me it feels as if you are a little unsure about both the deals you are looking at. You will know when the deal is right! Hope that helps
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Jessie I would just keep digging until you find a deal that feels right. From the context you have given me it feels as if you are a little unsure about both the deals you are looking at. You will know when the deal is right! Hope that helps
    David Mincey Flipper/Rehabber from Randallstown, MD
    Replied over 3 years ago
    Another awesome article. I’ve made ALL of these mistakes. I could’ve written this article myself. I love BiggerPockets posts!
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Glad you enjoyed it David!
    Allen Thomas Real Estate Agent from Austell, Georgia
    Replied over 3 years ago
    Preach! I know some buy and hold investors who didn’t care in the slightest about the crash (beyond the temporary impact it had on their net worth), because their properties cash flowed the same in 2008 as they did in 2005 and as they do now. They weathered the storm and came out unscathed because the bought right, financed right, and were investing for the long term.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    That is gold Allen! Thank you for sharing that experience
    Allen Thomas Real Estate Agent from Austell, Georgia
    Replied over 3 years ago
    Preach! I know some buy and hold investors who didn’t care in the slightest about the crash (beyond the temporary impact it had on their net worth), because their properties cash flowed the same in 2008 as they did in 2005 and as they do now. They weathered the storm and came out unscathed because the bought right, financed right, and were investing for the long term.
    Sherwood Sohmers Investor from Crete, Illinois
    Replied over 3 years ago
    Good comments from all. I just need to clarify two things. Today appreciation is very low, so counting on it or not does not make a difference in your purchase since this can not be a prime benefit anymore. Second point is that real estate investing is long term. That is true, but each buy needs to be evaluated on its own. Therefore, you need to be willing to let go several years after you purchase a property, even at a loss, if it is not performing. Hopefully you will end up with some cash that you can re-invest.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Great points Sherwood. Luckily in my market when you ‘buy right’ you do not have to worry about negative cash flow at all usually. The income of the property covers all expenses and leaves left over cash.
    Yatznira Rodriguez Real Estate Investor from Amherst, Massachusetts
    Replied over 3 years ago
    This is a great post. Thank you for writing it. Can you provide an example of over leveraging?
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Great question Yatznira. Overleveraged is when a investor’s asset(rental property) is carrying too much debt(loan), and is unable to pay interest payments from loans. Overleveraged investors are unable to pay their expenses because of over excessive costs.”. Investor X puts 1M down on apartment worth 4M and has monthly payments of $14,322.45 for the 3M loan. At purchase the apartment brings monthly income of $20,000.45 thus leaving room to pay off the monthly loan. If a economic downturn happens and the rents are cut in half leading to apartment bringing in $10,000 then the loan will not be covered due to debt over-exceeding the income asset is bringing in. That was a very simplistic breakdown. Hope that helps.
    William Yeh Investor from Walnut Creek, California
    Replied over 3 years ago
    Great post! On a more nuanced note, not studying the rental market thoroughly enough can also impact long term financial performance. To explain, I’ll share a story. I help put together a portfolio of a dozen SFR rentals and have several more in my personal portfolio, all in the area I grew up in. In putting these buy and hold investments together, we did all the typical pro forma analysis and purchased those homes that fit our model (in our case it was purchasing homes that performed at a 5.5% net cap or better). What we observed over time is that with the bull market of 2013, each property was subject to the micro climates of each neighborhood, both in terms of property appreciation and, more importantly, in terms of rental increases. One of our homes happened to be in the most desirable part of town and in an HOA with a max rental ratio limit and had rents go up from $1795 in 2010 to $2195 today. Then we have homes that have barely budged from their initial rental rates because they were impacted parts of town. Mind you all of our homes had the same starting point in terms of the pro forma. Long story short, do more than just your basic pro forma. Having an intimate understanding of ALL of the factors which will affect your investment’s performance can and will pay dividends. Obviously that’s easier to do when the property is under your nose vs. out of state. Hope that helps someone and happy investing!
    Fernando Landeros from Robstown, Texas
    Replied 6 months ago
    Can you give some examples of micro market conditions that affected the homes in each area?
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied over 3 years ago
    Great points William. Being in the know of market factors is critical. Having the early scoop of city real estate developments helps tremendously as well.
    Charles Johnson from Bronx, New York
    Replied over 3 years ago
    This was a great post, actually all of the comments are great as well. I really want to thank everyone for being so involved in this community. I am new to investing and I am about to close on my first deal (fingers crossed) a buy and hold. The asking price was 120k and I got an accepted offer at 100k. I couldn’t find comps because it was the only triplex in the area so I went off cashflow to determine if it was a good deal for me or not. How in the future can I get comps if there aren’t any similar structure in the immediate area. Also I know there are people who will fund flips but are there any funders that wont charge a large amount of money for buy and holds?
    Shawn Ginder Investor from Lititz, PA
    Replied about 2 years ago
    Love the article, agree all the way!
    Nida
    Replied about 2 years ago
    Nice article and well said. I agree with you as these are the most common mistakes done by the real estate investors.
    Josh Garner Lender from Bend, OR
    Replied over 1 year ago
    So true! At least on the West Coast, there’s a lot of negative cash-flow properties being purchased, in the hopes of appreciation. A dangerous game to play! If you’ve got equity built up on the West Coast, why not plug it in to a positive cash flow environment somewhere safer? If only a book had been written about this:)…David Greene?
    Kristina Lobrin
    Replied over 1 year ago
    This is so true! 3 great points on the common mistakes done by the real estate investors. Thank you for sharing. Very insightful.
    Kurt
    Replied over 1 year ago
    Over the long haul, buying in the right location makes a huge difference. If you look at the price differences between a great area and a good area in California 20 years ago, it was maybe $50-100K. Now today that difference is $500K-$1M. So it was penny wise and pound foolish to be narrow minded about cap rates and “overpaying”. Those things lose their significance over a long period.
    Kurt
    Replied over 1 year ago
    Over the long haul, buying in the right location makes a huge difference. If you look at the price differences between a great area and a good area in California 20 years ago, it was maybe $50-100K. Now today that difference is $500K-$1M. So it was penny wise and pound foolish to be narrow minded about cap rates and “overpaying”. Those things lose their significance over a long period.
    Colin March Rental Property Investor from Portland, ME
    Replied over 1 year ago
    Not reinvesting excess equity built up over time.
    RodTra Smith Rental Property Investor from Red Oak, TX
    Replied about 1 year ago
    Very good article Sterling! I strongly believe that over appreciation is just as bad as paying too much….especially if you put too much into the rehab expecting to get it back based in what you think it will rent for. I’m a Realtor and I don’t always trust the comps because there are too many variables behind the scenes when pulling comps…DOM, $/ST Ft., renter motivation…..the list goes on. Comps are a great place to start . You gotta know what works in your purchase area and stop watching HGTV. I blame everything on HGTV! -Tracie (from RodTra Smith)
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 1 year ago
    well said! what is your recommendation to dig deeper when pulling comps, Rodtra?
    Virginia H Rockwell from N Brunswick, New Jersey
    Replied about 1 year ago
    Our mistake was not getting a rock star property manager for our out of state properties. This cost us tens of thousands, multiple court appearances, lawyers and collection agencies, a forclosure, 2 personal loans to cover expenses and many, many sleepless nights. Spend the time it takes to find the very best team! (Btw, we are still dealing with this financial fiasco but we do have a good property manager and we have sold the non- producing properties.)
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 1 year ago
    glad you were able to learn from the lesson. having a solid property manager is key, Virginia!
    Robert Shedden Rental Property Investor from Rockford, IL
    Replied about 1 year ago
    Great read! My wife and I are looking at getting into our first rental property. I’m trying to wrap my head around how to raise capital… my concern is that while I will have a positive cash flow (if I purchase the right property) I will still have all the capital tied up in the property. I’ve read a few articles that suggest flipping a house to generate the capital to get into rentals… but I don’t want to be a newbie at two areas of real estate investing to start off!
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 1 year ago
    you can always refinance at some point and pull most if not all of your cash out. those proceeds can be used to acquire another property.
    John Murray from Portland, Oregon
    Replied about 1 year ago
    I have been in this game a really long time. The way I have made the most money is knowing way more than most. I work harder than most. The combination of knowledge and hard work has served me well. The one last gift was luck, I am luckier than most. If you ask most successful people they will tell you how lucky they are. Most will never complain how tough they had it or how easy it was. We correct and drive on and rarely dwell on the past. Freedom is our drive, not money. This is what we understand more than any other concept.
    Sterling White Rental Property Investor from Indianapolis, IN
    Replied about 1 year ago
    thank you for the input, John. A wise man once said “the harder i work the luckier i get”. sums up most of what you said.
    Megan E Boizot
    Replied 8 months ago
    Sterling, Thank you for this article! I am a newbie who is doing extensive research to hopefully start my real estate investing in the near future. This article is short and concise but important factors to keep in mind with my real estate journey. I really appreciate any newbie articles.
    Megan E Boizot
    Replied 8 months ago
    Sterling, Thank you for this article! I am a newbie who is doing extensive research to hopefully start my real estate investing in the near future. This article is short and concise but important factors to keep in mind with my real estate journey. I really appreciate any newbie articles.
    David Ingle from Chandler, Arizona
    Replied 6 months ago
    I”m a Private Wealth Advisor with over 25yrs experience I real estate. We help our client avoid the common mistakes real estate investors make and create financial and investment plans to help them avoid being over-leveraged and maintain adequate liquid reserves. We provide our clients with some of the best loan programs, rates and terms in the country