The Top 5 Most Costly Mistakes Investors Make
We love to learn about investing through the successes of those around us, but the truth is that we really learn more from their mistakes.
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In this post, I want to outline some of the most costly mistakes that my company and I have made as real estate investors.
5 Common Costly Mistakes Real Estate Investors Make
1. Not having an inspection done.
An inspection is something that can literally make or break a deal for you, and foregoing an inspection to save a buck can be a very costly mistake. Unless you have had training or years of experience inspecting homes, I would highly recommend having an inspection completed on a property—even if you're buying from someone who you know and trust.
Sometimes sellers don’t really know what’s wrong with a property. It could be neglect; it could be ignorance. And although you can’t assume that you will be able to find out every nitty gritty detail about a property from an inspection, it can help you avoid particularly costly repairs. Plus, it allows you to negotiate some of those repairs with the seller.
For a few hundred dollars, an inspection could potentially save you thousands. We lost a few thousand dollars on a home we purchased that had some subfloor and window rot behind the sheetrock. If only I would have had a professional inspect the property, they would have quickly noticed that the windows weren’t sealing correctly, which caused serious damage over the years. Then, I could have easily used that information to negotiate the price with the seller.
2. Taking a seller’s word.
As much as we like to see a transaction be a win-win for both sides, remember that the seller is likely offloading the property because there is a problem. Whether it’s a money problem, a structural problem, or a relationship problem, it’s still a problem. Don’t expect the seller to be your friend, and don’t expect them to be 100 percent honest.
Keep your guard up. My first sergeant once told me, “Trust in Jesus. Check on everyone else.”
Maintain that mentality when buying a home. We purchased a property that was supposedly fully occupied. There was little to no recordkeeping to verify income or anything else, but the deal was too fat to pass up. We purchased and found out later that some of the units had not been occupied in YEARS.
Again, a simple inspection could have shown us that, too. The seller simply wanted out and was willing to tell us everything we needed to hear. He seemed super nice—even bought me lunch. But the best wolves wear sheep’s clothing, so be on guard and follow your gut.
If a chocolate bar smells like a turd, it’s probably not a chocolate bar—no matter how much the seller says he eats.
3. Not paying extra for a sewer scoping.
This is a must for anyone buying an older home. We recently got a call from some tenants, saying the water was backing up when they ran the shower and did laundry simultaneously. A sewer clean out retrieved about five gallons of hairlike tree roots out of the old sewer lines.
Yup, a $200 sewer scope could have saved me $5,000. It’s a painful lesson, but the ones written in blood are the ones that you really don’t forget.
4. Jumping into something that you don’t understand.
Always, always, always educate yourself on the investment class that you are looking to buy. You can never educate yourself enough, but having a solid foundation of knowledge will help you a lot as you move forward on an investment.
Never invest in something that you don’t fully understand. If you don’t understand the market, the money, or the details, you need to sit this one out. Understanding the market is huge. If you don’t know your target audience, you are setting yourself up for failure.
If you don’t understand the money, you also need to do some research and some math, or sit this one out. You need to know answers like where is your money coming from, where is it going, and who’s expecting it when. Larger deals get hairy and complex. If you don’t understand the money, you are likely going to get burned or go broke.
Lastly, you need to understand the fine details—particularly those relevant to your asset class. For example, I bought a mobile home not really understanding the hidden costs associated with them. For example, you have to register mobile homes annually like a car. Also, you can’t just go to Home Depot to get parts for everything; the plumbing is different and a lot of basic items are odd-sizes. Not to mention, a lot of professionals refuse to work on them for this reason. Understand what you are doing by finding someone who is doing it too and picking their brain.
5. Not hiring a professional to do your work.
My last most expensive lesson is not hiring a professional to do the work. Professionals know building codes, ordinances, and a lot of other legal intricacies that can get an ignorant investor in hot water.
A good property manager is another professional to hire for your investments. I'm still out a few thousand dollars because I was too nice to tenants and too sympathetic as a self-manager. I admittedly have a hard time being the "bad guy." That's why I realized that management is a job better suited for someone else.
All the mistakes we made were avoidable—plain and simple. I hope you are able to learn from some of them so that you won’t have to repeat any!
What’s the biggest mistake that you’ve made investing in real estate?
Post a comment below!