7 Deadly Sins That Cause Real Estate Investors to Fail

7 Deadly Sins That Cause Real Estate Investors to Fail

9 min read
Paul Moore

Paul Moore is the managing partner of Wellings Capital, a private equity real estate firm.

Experience

After college, Paul entered the management development track at Ford Motor Company in Detroit. After five years, he departed to start a staffing company with a partner. They scaled and sold the company to a publicly traded firm five years later.

After reaching financial independence at the age of 33 and a brief “retirement,” Paul began investing in real estate in 2000 to protect and grow his own wealth. He completed over 85 real estate investments and exits, appeared on HGTV’s House Hunters, rehabbed and managed dozens of rental properties, built a number of new homes, developed a subdivision, and started two successful online real estate marketing firms.

Three successful commercial developments, including assisting with the development of a Hyatt hotel and a very successful multifamily project in 2010, convinced him of the power of commercial real estate.

Press

Paul was a finalist for Ernst & Young’s Michigan Entrepreneur of the Year two years straight (1996 & 1997). Paul is the author of The Perfect Investment – Create Enduring Wealth from the Historic Shift to Multifamily Housing (2016) and has a forthcoming book on self-storage investing. Paul also co-hosts a wealth-building podcast called How to Lose Money and he’s been a featured guest on 150+ podcasts, including episode #285 of the BiggerPockets Podcast.

Education

Paul earned a B.S. in Petroleum Engineering from Marietta College (Magna Cum Laude 1986) and an M.B.A. from The Ohio State University (Magna Cum Laude 1988). Paul is a licensed real estate broker in the state of Virginia.

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WellingsCapital.com
Email [email protected]
LinkedIn
Twitter @PaulMooreInvest
How to Lose Money podcast

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Recently, a BiggerPockets reader posed the question on a forum: Why do 97 percent of real estate investors fail? While many people debated real estate investor Sadrud-Din’s “97 percent failure rate” statistic, one thing is clear:

Most people who set out as real estate investors don’t achieve the success they expected. And I would guess that the majority fail.

So the Question Is… Why?

We all know, or at least most of us believe, that real estate investing has built more wealth than any other single occupation on the planet. You could look through the list of the Forbes 400 wealthiest Americans and see that the majority either made their wealth from real estate or have invested in real estate to sustain it.

I have outlined seven reasons that I believe most real estate investors fail. Before you jump up and protest, understand that I could have come up with a dozen or more other reasons, and many of them would be as valid as these.

But these are my top seven and I’m sticking to them.

…But First, Some Stray Observations

Before I launch into these seven deadly real estate investor sins, allow me to make a general comment on entrepreneurship.

As a recovering serial entrepreneur for almost three decades, I have started and ended a whole lot of businesses. And I’ve seen a lot of others do the same.

I believe we can expect that the majority of real estate businesses will fail because the majority of businesses in general fail. This is the natural course of things, folks.

Michael Gerber, in his groundbreaking book The E-Myth, says that four out of five businesses never make it to the five-year mark. That’s an 80 percent failure rate. Here is a quick summary of his book if you haven’t read it.

So the nature of business startups includes the potential of failure.

But I’m writing this so it won’t happen to you. I don’t want you to be a casualty.

Related: 7 Life-Changing Lessons I Wish I Knew as a Real Estate Newbie

A Crowded Field

The explosion in HGTV and other fixer-upper/fix-n-flip shows has led to an explosion in the number of real estate investors—or at least investor wannabes. I’m not criticizing them. We all started somewhere and that is a wonderful benefit of living in a country where we have the freedom to own property and make a profit from it.

But the combination of these types of shows and the ubiquitous nature of real estate ownership in the U.S. (there are 138 million homes owned—not including commercial and other property types) make real estate investing a common business. [1]

So perhaps you could even expect a higher failure rate in this business. Again, I don’t want that to be you. So let’s talk about the seven deadly sins that I believe cause most real estate investors to fail.

#1: Failure to Discern Between Investing and Speculating

investment-thinking

Warren Buffett’s hero is Benjamin Graham. Graham, in his epic books Security Analysis and The Intelligent Investor, explains the difference between investing and speculating. My paraphrase:

Investing: When your principal is generally safe, and you have a chance to make a return.

Speculating: When your principal is not at all safe, and you have a chance to make a return.

It’s fine to speculate, as long as you understand that is what you’re doing—and as long as you don’t use all of your available capital to do so.

I mean if you continually play double or nothing with all of your capital, you’ll eventually land on nothing. Then what will you have left to double? Nothing.

Paul Samuelson, the first U.S. winner of the Nobel Peace Prize in Economic Sciences, said, “Investing should be more like watching grass grow or watching paint dry. If you want excitement, take $800 and go to Las Vegas.”

Real estate investing has an inherent safety if done right. Those who speculate are necessary to the real estate ecosystem (we need new buildings and subdivisions). But if you don’t know what you’re doing, you could get burned.

And you could fail big time.

Real estate speculators are among the wealthiest people on the planet. But some of them are delivering pizzas for Domino’s, too, to supplement their income. Be careful. If you’re going to speculate, consider doing it with a larger, more experienced partner first.

#2: Failure to Discern the Truth about Risk and Return

This is closely related to No. 1 and could have been part of it, but, after all, it is the seven deadly sins…

Seriously, class, complete this sentence:

Low risk leads to low return. High risk leads to ______ return.

It’s natural to fill in that blank with “high” isn’t it? But that’s not true.

Higher risk leads to higher potential return. And higher potential loss, as well. In fact, there’s always the potential of a complete loss (see point No. 1 above).

I talk about this in detail in my book, The Perfect Investment. Check out this graph illustrating my point:

 

 

We entrepreneurs are an optimistic bunch by nature. And that is great! But if we let our optimism blind us to the risks and realities of deals, markets, and cycles, we do ourselves a great disservice. We would be better off listening to the greatest investor in history. Warren Buffett said, “Successful people say ‘no’ a lot. Really successful people say ‘no’ almost all the time.”

Learn to live with a default of no. This advice will serve you well.

#3: Failure to Understand and Act According to Cycles

When I was buying and flipping expensive lots at Smith Mountain Lake in Virginia, I was having the time of my life— and churning profits like a machine. It was 2004 to 2007, and my partner and I couldn’t believe how fun and easy this was.

Then we saw a magazine cover headline (I think it was Fortune or Entrepreneur Magazine): “The Real Estate Bubble Is About to Burst.”

Of course, I believed this and stopped investing immediately, right? Yeah, right.

No, as a rookie investor (I’d been at it for eight years) I charged forward. I justified it, too. I said things like, “It’s different this time.” And, “Those big statistics have nothing to do with my market. What do they know anyway?”

It’s easy to have confirmation bias and to live and invest from it. This is a disease—er, I mean a condition—where we stakeout a favorable position, look for all of the evidence to back it up, and ignore (or twist) any contrary data.

Don’t do this. See point No. 2 above about learning to say no as a default.

I recently read Howard Marks brilliant book Mastering the Market Cycle: Getting the Odds on Your Side. He describes the importance of knowing where we are in the cycle and acting accordingly.

When the Market Is Hot

On one hand, Marks says that when the market is near the top, the risk is highest. (Sure, call me Captain Obvious.) And investors should be taking the least amount of risk and not tolerating the resulting razor-thin margins. Many investors would be best to sell at this point.

Related: Worried About a Stock Market Crash? Prepare for the Bear Without Fear

But unbridled optimism and the corresponding lie that “it’s different this time” leads to foolish buying decisions that drive prices up even further. Margins of safety go out the window and normal evaluation metrics are stretched or ignored.

But trees don’t grow to the sky.

When the Market Is Cold

On the other hand, in a trough, when the market is in a free-fall, Marks describes why this is the time to buy—and buy all you can. He and Buffett call it “catching a falling knife.”

In the worst weeks of the Fall 2008 plunge, Marks was buying all he could get his hands on. When a reporter questioned him on this: “Wait, you mean you’re selling now, right?” Marks replied with, “No! I’m buying now! If not now, when?”

Buffett shared his sentiments and purchased a large chunk of financial equities while the market was in free-fall.

We would be wise to think about how this applies to our real estate investing careers. As I write this, San Francisco, New York, and L.A. are experiencing softening markets. Is this a sign of things to come? Or are things different this time? Ha ha! (This is why my firm invests in recession-resistant assets by the way. It took me years of pain to get to this place.)

#4: Failure to Discern Between Teachers and Gurus

online-partner

This post is running long, so I’ll summarize. BiggerPockets was created to teach you the truth about real estate investing without all the hype. You know in your heart of hearts who the gurus are and who the true teachers are. Don’t fall for the lies and the hype.

Now I’m not saying this applies to everyone, but if you see pictures of your potential instructor in front of his mansion or Rolls Royce… and if he promises an easy path to wealth… and if you’re invited to a weekend seminar where you’re asked to invest a lot more money to learn more… then you might be ready to fall under a guru’s spell.

Run away!

My friend Whitney Sewell spent countless dollars and time in his 20s on a guru track. He spent more and more on each weekend seminar that gave him almost enough to succeed but left him hanging on to spend more at the next seminar. It gave him just enough knowledge to get burned.

Whitney hired a true coach in 2018, and he is now on track to soar. It wasn’t cheap, but he is getting real value from his new coach. He is about to close on his second large multifamily property this year. I have a similar experience. In two of the most successful ventures of my life, I spent $25,000 (each) to hire a great mentor. And I’ve never regretted it.

Choose your teacher wisely, young grasshopper.

#5: Failure to Discern Between Knowledge and Action

I imagine there is a psychological description of this condition. Have you noticed this? I do it.

Sometimes when I learn a new truth, I somehow think I’m living it. And I even begin to look down my nose at others who aren’t. It’s crazy, I know. But I’m chuckling as I think about the times that I’ve done this.

Here’s an example. I’m working with two friends to write a book on Buffett’s rules for real estate investors. I’ll read a new truth from Buffett’s wisdom and it will resonate with me deeply. Then I’ll somehow mentally believe that I’m living that truth. And then I’m at risk to look down on others who aren’t.

Like when he first taught me to say “no,” I was an investor who often said “yes.” But it took me some time to align my actions with my knowledge. Hopefully, you can relate. Or maybe I’ve just invented a new form of personal psychosis.

Either way, please don’t confuse more knowledge for action. Don’t spend your life and a small fortune continually gaining more and more knowledge but failing to act.

Successful real estate investors learn—then they act. It may be time for you to act.

#6: Failure to Say No

This sin is pretty self-explanatory. I may have mentioned it once or twice before…

But if you want more detail about when to say no and to what, read these related blog posts.

#7: Failure to Build Wealth Slowly

King Solomon was perhaps the wealthiest dude who ever lived. And he was known for his wisdom, too. He said, “Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.”

The world’s wealthiest and most successful real estate broker calls it enduring the monotony of success. Gary Keller says that the road to success is often boring. It’s doing the same things over and over. It can become mechanical, and a lot of entrepreneurs get bored and move on to chase something new.

Don’t do that.

A Simple Reminder

Airbnb CEO Brian Chesky was once invited to the prestigious Sun Valley annual event for the world’s wealthiest and most successful entrepreneurs. He asked Jeff Bezos about the most important advice Warren Buffett ever gave him.

Bezos said he once asked Buffett: “Warren, your investment thesis is so simple. Why isn’t everyone just copying you?”

Buffett replied: “Because no one wants to get rich slow.”

Think about that.

In Conclusion

I wrote a post called “3 Simple Steps to Becoming the Wealthiest Person on the Planet.” As an application to that article, a wrap-up to this post, and my answer to our forum post, I will say this:

You can succeed in real estate investing. There are a variety of ways that you can do this. You don’t need to be one of the many failures.

And if you’re on the BiggerPockets platform to learn and grow in your investing career, you’re in the right place to learn all you need to learn (without the hype).

Sources

[1] https://www.statista.com/statistics/240267/number-of-housing-units-in-the-united-states/

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What are the most common ways you’ve seen people fail at real estate? What about impressive paths to success?

Share your thoughts and comments below!