Real Estate Investing Basics

10 Lethal Mistakes to Avoid on Your First Real Estate Investment

Expertise: Real Estate Investing Basics, Personal Development, Business Management, Personal Finance
49 Articles Written
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Your first investment will be a learning process. While you’ll definitely make a couple mistakes along the way, there are a few common pitfalls that can be avoided if you educate yourself beforehand.

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From financing errors to underestimating repair costs, newbies are at risk to lose serious cash if they’re not careful. Still, a real world education is invaluable, and this guide will help steer you down the best path possible to your very first real estate investment.

You may have heard that your first real estate investment is the most difficult one. It’s true.

Your first deal is difficult because you don’t know enough. How could you?

Yet you still need to move forward and get started. If you wait until you’re 100 percent ready, you’ll never make progress.

But even though your first deal won’t be perfect, you still don’t want it to be so bad that it will knock you out of the game.

So, this article will help you avoid the 10 most lethal mistakes on your first real estate investment. Use this like a checklist to ensure that you avoid the worst case scenarios.

When you prevent the worst from happening, you will gain confidence so that you can buy your first deal, move forward, and begin your real world education.

Here are 10 lethal mistakes to avoid.

10 Lethal Mistakes to Avoid on Your First Real Estate Investment

Mistake #1: Bad Financing

Bad financing can be one of the most lethal mistakes possible. I have personally seen more real estate investors lose money or go out of business from bad financing than from any other mistake.

What is bad financing? For me, it includes a combination of the following:

  1. High interest rate
  2. Adjustable interest rate
  3. High monthly payment
  4. Balloon payment
  5. Personal recourse

Most residential bank mortgages at least save you from the first four mistakes because the interest rates are low, fixed for 30 years, with amortizing payments, and there are no balloons.

But they almost always require personal recourse, meaning you personally guarantee the loan with your other assets and future earnings. This is probably a reasonable trade-off.

Many commercial, portfolio, hard money, and private lenders, however, do not meet any of these criteria. And that could be a problem, especially on your first deal.

If you borrow at 12 percent interest with a large monthly payment, a balloon due in one to three years, and full personal recourse for the loan, you are likely taking too much risk.

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Why? Because the property will probably have negative cash flow with the high interest rate. A balloon note means you will have to refinance or sell in a very short period of time. As many learned in the 2008 credit crisis, trying to refinance when credit dries up is very difficult—even with perfect credit and good income.

And personal recourse means that if anything goes bad and your lender loses money, they could chase you around and take your other assets in order to collect.

I have always used a lot of private and seller financing for my real estate deals, and I keep this list of financing mistakes in mind. For example, I might trade off a little higher interest rate and a larger down payment in exchange for a longer loan term and no personal recourse.  

Related: The Biggest Mistake I Made as a New Investor (& How You Can Avoid It)

The beauty of private financing is that everything is negotiable. But no matter what type of financing you use, be sure to negotiate hard and avoid the worst mistakes.

Mistake #2: Bad Location

Real estate value always begins with location. The people and businesses who will rent or buy from you begin with location, and then they evaluate other criteria like the lot and the house.

Because it’s so important, you should study the best and the worst locations in your area before buying. There are investors who make money in bad locations, but it’s a challenging game that beginners should probably avoid.

I bought a lower-priced single family house once at a below market price with excellent seller financing terms. But the location was awful. I could not consistently attract good tenants because the neighbors were not pleasant (or safe) to live around.

On the other hand, I have bought properties in good locations that I made mistakes on, like paying a little too high of a price. The good location helped to bail me out of some of those mistakes.

Thoughtful hopeful African American employee looking at computer laptop screen, waiting hoping, person holding hands in praying position, expecting trouble solution, positive result, close up portrait

Mistake #3: Misjudging Resale or Rent Value

I would argue that our number one job as investors is to understand how our end customers (renters and buyers) make buying decisions and then to translate that to a value. If we can’t determine the full value potential, we will have a hard time making a confident purchase offer that earns us a profit.

This job is important. But it’s not easy. It’s a skill that you must commit to learn and then continue to refine every day for the rest of your investment career.

On your first deal, it’s likely you are not yet an expert on value, so there are a few things you can do to help yourself:

  • Reduce your target market to a relatively small, manageable area.
  • Study all of the transactions in your market daily using tools like the MLS, Zillow, or your local tax assessor. For me, this is like the daily weight training of real estate that keeps me fit and competitive.
  • Hire professionals for assistance. For resale value, find a very competent real estate agent and/or appraiser. For rental values, find property managers with multiple units in your area.
  • Take courses on valuation at your local Associate of Realtors or other continuing education school.

Mistake #4: Underestimating Repair Costs

It is inevitable that you will underestimate repair costs at some point. But you want to avoid enormous cost overruns that could cause you to run out of cash or face other problems.

To avoid large mistakes, learn a good repair estimating system. I use the one taught by J Scott in BiggerPockets’ own The Book on Estimating Rehab Costs.

Also be sure to get help from other more knowledgeable investors or contractors. Don’t be afraid to pay these people for their time and knowledge.

You can meet these people by:

Mistake #5: Running Out of Cash

Your investment properties are like your race car. Cash is like your car’s fuel. When out of fuel, even the most powerful race car in the world sits still. If you run out of cash, even the best investment property will hurt your wealth building.

So, you want to avoid running low or running out of cash.

This usually happens for a couple of reasons:

  1. Underestimating repair costs (see mistake #3 above)
  2. Underestimating future capital expenses on a rental property

Capital expenses are big ticket items like a roof or a heating-air system replacement. If these costs hit you unexpectedly, it can become a big problem.

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

Brandon Turner wrote a really good article about estimating capital expenses and budgeting for them on your rental properties.

male showing empty pockets implying moneyless

Mistake #6: Letting Emotions Drive Your Decisions

This is a huge mistake for newbies. And it’s understandable. I mean it IS an exciting chase to look for your first deal.

But you have to balance your enthusiasm with cold, hard, and objective analysis.

I love enthusiasm. It’s critical as an entrepreneur, because it helps you push ahead through the many obstacles you will face.

But I have also learned to never make big financial decisions with emotion alone. I use a process of analysis that filters each of my deals. I also run every deal by someone else, which typically means my business partner but sometimes includes other mentors and advisers.

My process begins with basic criteria, including general locations, neighborhoods, housing types, construction quality, etc. This helps me to filter down the enormous number of properties out there.

Then, I use a deal analysis process to analyze the numbers. Here is my basic go or no-go system for a deal.

I also like to calculate key metrics like the cap rate (or return on asset), the cash-on-cash return, the discount from full value, and the internal rate of return.

My favorite book to teach you the cold, hard analysis of real estate is What Every Real Estate Investor Needs to Know About Cash Flow by Frank Gallinelli.

Mistake #7: Choosing the Wrong Real Estate Strategy

Fellow investor and BiggerPockets member Erion Shehaj introduced us to the dreaded Shiny Strategy Syndrome and showed why it’s detrimental to your financial future.  

Real estate investing has MANY strategies. And as wonderful as BiggerPockets is, it’s easy to get overwhelmed or waste time chasing the wrong strategy.

Here’s a tip: You won’t find a perfect strategy. But you can find one that pretty well suits your unique strengths, your short-term needs, and your long-term goals.

So, instead of borrowing the perfect strategy from someone else, think hard about what you really want and which real estate strategy will get you there.

To get started in this process, I wrote:  Investors: DON’T Begin by Wholesaling. Take One of These 7 Paths Instead.

Mistake #8: Choosing Bad Contractors

My business partner and I bought our very first fix-flip deal in December of 2003. We proceeded to go through three different painters, two different heating and air companies, and two different carpet installers before we got the house looking decent.

These were expensive mistakes. We were lucky to even make a small profit on that first deal!

Finding contractors who will do good work, finish up on time, clean up after themselves, and charge reasonable prices is harder than finding buried treasure on a beach. Yet the people who do work on your fix-flip or rental deal will make or break its success.

J Scott does a great job discussing this issue in The Book on Flipping Houses. He discusses the different types of contractors, when to use each, and how to manage the relationship well.

light turquoise canvas shoe about to step on banana peel on sidewalk

Mistake #9: Not Using Your Due Diligence Period

Some experienced investors make offers with fast closings, in as-is condition, and with no due diligence period. This may help them get a lower price, but for your first deal this is probably not the best route to go.

Instead, include a short but reasonable due diligence period that allows you to get out of the purchase contract if you find a problem.

Here are a few of the important things I usually do during due diligence:

  • Obtain a very good professional third party property inspection
  • Repair estimates (see mistake #3 above)
  • Evaluate zoning and local ordinances (for example, the college town where I invest has a law that you can’t rent to more than two students in a residential zoning district)
  • Get a professional third party opinion of value and rental comps

Basically, you want to double check all of the key assumptions you used to make your offer. If you find that you made a bad assumption, you may need to renegotiate or walk from the deal.

Related: The Rookie Landlording Mistake Most New Investors Make

Some of your best deals may be the ones you don’t do.

Mistake #10: Not Learning From Your Mistakes

You have just read nine mistakes to avoid, and I could probably tell you another 20. But no matter what you learn, you will still make mistakes. I guarantee it.

This is called “The School of Hard Knocks.” Go ahead and listen to Annie sing “It’s a Hard Knock Life” and join the club.

But the biggest mistake you can make is not learning from this School of Hard Knocks.

In our first year of business, my partner and I agreed that we didn’t know everything. We knew we would screw up many times. But we decided to call each mistake a seminar, and then write down the lesson.

We have attended thousands of these real world seminars since then, and our education continues today.

Go ahead and decide to create your own personal School of Hard Knocks. It’s an invaluable education.

Conclusion

Real estate is an entrepreneurial venture. We entrepreneurs shoot for the stars, but we also take risks that could turn out badly.

This can be a difficult pill to swallow on your first deal.

But risk doesn’t have to be a bad word. I see it as a barrier to entry. It means that the less committed, pretender-investors don’t bother. They drop out when it gets too tough.

The successful real estate entrepreneurs aren’t perfect. They have scars to prove all of their past mistakes. But they learn to avoid the fatal mistakes that would knock them out of the game. And they learn to always keep moving forward.

Forward movement. That’s what entrepreneurship is all about.

I hope the lessons of these 10 fatal mistakes help you to continue moving forward at whatever step of the entrepreneurial journey you find yourself.

What did you think of the 10 fatal mistakes to avoid? Are there others that I missed? What challenges are you facing as a new investor?

I’d love to hear your thoughts and comments below.  

Chad Carson is an entrepreneur, writer, and teacher who used real estate investing to reach financial independence before the age of 37. He wrote an Amazon bestselling book Retire Early With Real Estate, and his story has been a featured on Forbes, Yahoo Finance, Business Insider, GetRichSlowly.com, the BiggerPockets Podcast, How to Money, ChooseFI, and more. Chad and his business partner currently focus on long-term rental properties and private lending in and around the college town of Clemson, South Carolina. Their portfolio of 90+ units includes houses, small multi-unit apartments, and mobile homes. In 2003, Chad and his business partner began real estate investing from scratch. They started by wholesaling and fixing-and-flipping properties. They also learned to rely on non-conventional financing sources like private lending, seller financing, and lease options, which remains their expertise today. After surviving the 2007 to 2009 real estate downturn (with scars to prove it!), they transitioned to more of a focus on student rentals. You can find more of Chad's writing (as well as podcast episodes) at CoachCarson.com.
    Martin Rodriguez from San Bernardino, CA
    Replied over 2 years ago
    Great article I really enjoyed reading it. I appreciate you taking the time to help new investors run into fewer mistakes!
    Jared G. from Washington, DC
    Replied over 2 years ago
    I think these are great tips, but as a beginner, how would I learn more about HOW to think these through? For example, your tip, “Because it’s so important, you should study the best and the worst locations in your area before buying.” This is something taught in a lot of beginner material, so it’s definitely stuck with me. But HOW? How do you do the studying? How do you learn what are good and bad locations (other than just looking at them)? What might qualify as a bad area that’s “on the upswing” versus just a bad neighborhood? Same thing with, “Study all of the transactions in your market daily using tools like the MLS, Zillow, or your local tax assessor.” – What information am I looking for? What numbers do I need to study?
    Chad Carson Investor from Clemson, SC
    Replied over 1 year ago
    good questions, Jared. Regarding how to study the good and bad locations, I wrote an in-depth article about it here: https://www.coachcarson.com/ideal-location-investment-properties/ For studying transactions, start with Zillow and/or asking your real estate agent for median prices in your area. For example here’s Zillow’s data for my local market: https://www.zillow.com/clemson-sc/home-values/ Then when you look at sales and active properties, start paying attention to the outliers. What are the lowest sales in your market? Why? Notice sold properties that were obviously good deals. And if it was a flip, track what the flipper sold it for. It’s nice to pick up on the trend of the lows and highs for a particular neighborhood. I wrote another article that shows how to quickly estimate the ARV (after repair value) using Zillow. That may be helpful too. https://www.biggerpockets.com/blog/2016/04/29/ultimate-guide-quickly-estimating-property-arv/ I know that scratches the surface, but hope that helps some.
    Alfred Troy Smith, Jr. from New Orleans, LA
    Replied about 2 years ago
    Great Information! very informative and precise. Thanks!
    Chad Carson Investor from Clemson, SC
    Replied over 1 year ago
    Thanks Alfred!
    Mark Reiland from Iowa City, IA
    Replied about 2 years ago
    Still great information and not just for the first time investor.
    Chad Carson Investor from Clemson, SC
    Replied over 1 year ago
    Thanks Mark. I agree – it’s been useful to review these for myself after 17 years!
    Byron Alcid Rental Property Investor from Saint Augustine, FL
    Replied about 2 years ago
    Great advice and well put together thank you!
    Chad Carson Investor from Clemson, SC
    Replied over 1 year ago
    Thanks for reading, Byron!
    G. Brian Davis from Baltimore, MD
    Replied 12 months ago
    Great overview Chad, hope your 2020 is off to a great start!
    Chad Carson Investor from Clemson, SC
    Replied 12 months ago
    thanks Brian! Same to you. So far so good in 2020.
    Michael Bocian from Melville, NY
    Replied 12 months ago
    Thanks for the words of wisdom...invaluable for a newbie like myself!
    Chad Carson Investor from Clemson, SC
    Replied 12 months ago
    you're welcome! Thanks for reading, Michael.
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied 12 months ago
    #1 Not finding local experts with years of experience in your zips/geography. Use meetup.org to find the locale real estate groups. The best are REIAs, Real estate investor associates. The old timers (pre BP) are in REIAs. Join all the REIAs and find the old timers who are doing what you want to do. Hook up!! #2 Under investing in your eduation, your knowledge. You need to deeply understand what makes your REI tactics work and where are the failure points. See #1 as a help for both successes and failures. #3 Not learning from the mistakes of others vs learning from your own mistakes. See #1. Seek out mentors, senior folks, boot camps offered by your local REIAs. #4 if you are buy and hold, you need to read the paper I linked off my BP profile, 1st paragraph: How to Buy a Bullet Proof Rental Portfolio. I packaged up all my tips. Not knowing how buy and hold actually works leads to frustrations!!! See #1. #5 Believing the nay sayers that paying for a mentor is bad idea and a waste of money. You'll be (if you are lucky) the grey haired guy driving the Porche vs the 45 yr old guy who learned from an expert from the mistakes of others... Learn from from an expert. You need to pay some times. Take all the boot camps taught by locals. I agree that the Fortune Builders traveling teachers blowing into town for a megabuck 3 day is a bad idea. Find the local REIAs offering boot camps, mentors by locals who do their own deals and teach / mentor on the side. I too would avoid the full time teachers. Find the full time investor who takes on "action takers" students for small fees or best yet deal splits. #6 not realizing you have to give before you can receive. Same with sellers. Be the selfless problem solver...
    Fred Tichauer
    Replied 12 months ago
    -Chad , I noticed you did not mention the real estate agent at all . What is your take on the value real estate agents bring to the table? Do you see it as a pitfall not using highly credentialed real estate agent? I happen to think it is the number missing piece of the puzzle that keeps people from achieving their own definition of financial freedom. 🏦💰 -I happen to think that by not using a highly credentialed real estate agent with the experience clients deserve , is the most important piece of the puzzle that keeps people from achieving financial freedom .
    Chad Carson Investor from Clemson, SC
    Replied 12 months ago
    I'm definitely a fan of competent real estate agents, Fred. The right one can certainly help you avoid a lot of these mistakes.
    Hannah Taylor Rental Property Investor from Denver, CO
    Replied 12 months ago
    Great article, thanks Chad! In a highly competitive market where closing date is sometimes a key contributing factor to the acceptance of an offer, how do you recommend first time investors proceed? For example, I have sometimes been given an hour to get an offer in, and find out less than 12 hours later if it has been accepted or declined. There isn't proper time allowed to execute the due diligence. I am mostly looking at turn-key properties, so i feel that the risk would be lower, but it is still a concern. Additionally, other buyers are putting in offers that would cover the difference between appraisal and the offer price in cash. How would you recommend a newbie combat this strategy with as little financial risk (and as little cash involved) as possible?
    Chad Carson Investor from Clemson, SC
    Replied 12 months ago
    Hey Hannah, my main recommendation is working to build leads to buy houses that aren't so competitive. Easier said than done, I know. But if you can be the only one talking to a seller, you'll have to deal with those types of situations less. Also, no matter what stick to your numbers. If you miss deals because of it, so be it. But some of the worst deals you'll do are when you get into the "auction" or pressure mentality and make an emotional decision instead of a calculated one. To help me combat that, I've often given myself a rule that I have to explain the deal to a partner, spouse, or mentor before I move forward. If I can't sell them on it cooly and calmy, I can't do the deal:)
    Jose Mancebo
    Replied 12 months ago
    I am the proclaimed newbie looking for his first deal. Thank you for this article. It is very insightful and helpful. What did you mean by: “Study all of the transactions in your market daily using tools like the MLS” Thank you.
    Chad Carson Investor from Clemson, SC
    Replied 12 months ago
    Good question, Jose. What I mean is have your real estate agent send you first all the listed properties in your target location. So, you'll see everything for sale. Then also have them send you (maybe once per week) the sold properties. These are even more valuable because you see what people actually paid for a property. It's a very helpful thing to study.
    Aaron Sdot New to Real Estate from Toledo, OH
    Replied 8 months ago
    Incredible article. I saved it so that I can take those 10 mistakes (now that I know what each of them are about), list them all on 1 sheet of paper, and put it somewhere I can read it all the time. Even though I'm just getting started in REI, I think this list will be just as important and helpful 5 years from now as it is for me today. Thank you
    Chad Carson Investor from Clemson, SC
    Replied 8 months ago
    Great idea to write them out on 1 piece of paper, Aaron! thanks for reading and for commenting.