Pitfalls New Investors Need to Avoid to Be Successful in Real Estate
Over the past 16 years I have been involved in many different types of real estate, from wholesaling to flipping and owning multifamily as well as single-family. During that time frame I have seen many successful people start from what I like to call the “zero line” of not knowing anything at all about real estate, to, over time, becoming some of the most well-known, influential people in the industry.
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Like every coin, there are two sides to a story. And the same is true with real estate investing. Unfortunately there are just as many roadblocks to success and the cold, hard truth is that a far larger number of people go in the complete opposite direction. A huge percentage of investors (upwards of 87 percent according to some statistics) will leave the real estate industry with shattered dreams and aspirations, much less money in their pockets, and a shell of a former idealistic investor.
Through a mixture of my own hard learnt lessons and watching the journeys of other newcomers to the industry, I’ve seen hundreds of real estate investors come and go, and the fine line between success and failure generally comes down to a few keys points that those who fail tend to ignore, and those who succeed master.
I personally have been on both ends of this scale and I can tell you the failing side is not a fun place to be in, both financially or emotionally.
Why do some people succeed when others fail? I believe it comes down to a few different things that I have outlined below, but what they all have in common is the time and energy the individual puts in, and how willing they are to grind away to reach their goals.
Emotional Decisions vs. Actual Numbers
Investors who fail generally open up their wallets for the wrong reasons.
At one point I had over 35 single-family properties that were taking the life out of me. Very simply put they were the wrong properties for me, wrapped around a flawed business model (to be completely honest, it was likely the lack of a business model that proved the issue). I lost a lot of money and got taken advantage of by tenants, real estate agents, contractors, and sellers, you name it. The one thing that will always stick out in my mind were the sleepless nights of not knowing how I was going to fix the situation that I had put myself and my family into.
What I learned was that there are ways to avoid these common mistakes, and keep your investing career on track. You need to create a plan of action aligned with what your goals are, and know how much you will need to invest. Try to remember that mistakes are part of the investing process. But be able to recognize what they are, when you’re committing them, and how to avoid them. Spend time developing a systematic plan and stick with it. If you try to adhere to these guidelines, and keep the emotions out of it, you will be well on your way to building a successful portfolio.
Lack of Patience aka Not Doing the Research
As children we are taught the age old story of “The Tortoise and the Hare.” How many times has the power of slow-and-steady progress become imminently clear? Slow and steady usually comes out on top—be it at the gym, in school, or in your career.
Why, then, do we expect it to be different from investing? A slow, steady, and disciplined approach will go a lot further over the long haul than going for the last-minute hail Mary plays. Expecting our portfolios to do something other than what they’re designed to do is a recipe for disaster. This means you need to keep your expectations realistic in regard to the length, time, and growth.
You’re Quitting Too Soon (Perseverance vs. Time)
Not only does success take longer than we expect or hope for, it also takes a lot of blood, sweat, and tears.
I used to wonder what the reason was that some people succeed where others fail. Why is it that two people who both start from nothing can end up on complete opposite ends of the success spectrum? Is a toolset or a mindset? If they both started out investing with the same amount of money at the same date, why would some people take a completely different path? They both have access to the top-level of information either paid or free such as (BiggerPockets, YouTube, local real estate groups, Facebook etc.).
Are some people more serious about it? More desperate for money? Is it a certain personality profile over another? Psychology Today puts the blame for much of this failure to persevere onto our brain chemistry: “Neuroscientific research shows that higher levels of dopamine might separate the internal drive some people have to persevere while lower dopamine levels cause others to give up.”
Does that mean some people are just built to take the hard knocks necessary for success—and other people aren’t? Either way, I feel it always comes back to starting out with a clear game plan, and sticking to it regardless.
Having the Wrong Mindset—and Lack of Support
When I think back to when I was a child I was always told that I could do whatever I wanted, or become whatever I wanted. I was told, “The sky is the limit.” As an adult, when I said I was going to start investing in real estate, I was told the many ways I would fail. It was always the negatives that people mentioned first, along with all the problems with owning rental homes. I’d have bad tenants, issues with the property, general turmoil, etc. They’d go on and on. I used to think to myself, “Wait, I thought I could do whatever and become whoever I wanted to become?”
Thinking back, I’m not sure if this was just negativity on their behalf because they may have failed where I had hoped to succeed, or that was their way of sharing their experiences and words of wisdom. But I do find that the difference between success and failure is not normally because of tools available. To me is seems to boil down to a mindset issue.
How you think determines your outcome. The thoughts you let creep into your head from other people, either positive or negative, will determine your view on a subject. That view will determine and dictate your outcome and result. I was always told that if you are the smartest or wealthiest of the five people you spend the most time with, you may want to think about changing your group of people. The reason I bring this up is that your mental mindset is what will ultimately determine your success or failure not only with investing, but in all facets of your life.
Related: 3 Ways to Develop a Winning Mindset
Treating It Like a Hobby, Not a Business
The vast majority of why real estate investors fail is because they view owning a rental property not as a business, but more of a hobby. The fact is that most people do not do the work that is needed prior to purchasing the property. You need to set and establish clearly defined goals, create a strategy to achieve those specific goals, and then define the numbers needed to successfully run that business. The definition of a business is a commercial profitable enterprise that runs without you. If you cannot leave your business and come back after a set amount of time and have it continue to run without you, you do not have a business, you have job.
There is a big difference between the two, and definitely requires a huge mindset shift. For a business is to be successful, it needs to have an end goal, a final destination. You have to remember that whether you own one property or 50, it is still a business. Regardless of the size of the business, there are policies, procedures, and structure. You have laws that need to follow and numerous government agencies ensuring you do so.
The biggest challenge for landlords (and one that is often overlooked) is that all of these governing agencies consider you as a business. The IRS, fair housing, property code, local state and federal laws protect tenants. And numerous other governing bodies all expect you as the landlord to be running your rental property as a business. Unfortunately, the one person who does not understand that they are running a business is generally the landlord.
This is why one in three landlords are in some form of lawsuit or litigation every year. In chatting to investors, I often hear that after some type of disaster (e.g., a bad tenant vacate resulting in damage to their property) the consensus is the problems stemmed from incorrect procedures. This could be not doing a background check of the tenant, no policy in place around tenant selection, or not enforcing the rules of the lease agreement. In reality, they were not running their business correctly, and unfortunately this can be a costly error.
In Conclusion, Understand the Bigger Picture
Most newer investors buy a rental property and think they will figure it out as they go along. To me that’s the same logic as saying, “I think I’m going to pull a tooth on my own today, and if it doesn’t go well then maybe I will hire a dentist to do it next time.” The one thing I find as entrepreneurs is that we are not afraid of hard work, and we are certainly not afraid to figure things out on our own.
The challenge is when you own a rental property you have a living, breathing person(s) in your property. And you are legally obligated to make sure you are providing a safe and secure living environment for them. Fear will cause us to not take action, and overanalyzing will cause delay of action (coined “Analysis Paralysis”). I would suggest that lack of clarity can be a bigger reason for lack of action—and ultimately cause failure.
Check Your Emotions at the Door
Remember that owning a rental property is purely a mathematical equation, and although it is easier said than done, we should try to keep emotions out of it. The biggest challenge we have when owning a rental property is that we live in a house or something similar and it is hard to think of something we live in as a non-emotional object and pure numbers.
When it comes to investment properties, you will need to have the ability to shut off the emotional side of the brain and think more pragmatically, mathematically, and be more business-minded in genera. It is the only way that you will succeed.
Part of understanding that process is understanding the power that lies in the leveraging of other people, your team, and the ability to protect your own time. I have read extensively, and nowhere have I read the only way to be successful is doing it all yourself. I believe the key to being a successful investor is fine-tuning how you get that return month after month, year after year, and produce the revenue and cash flow promised by those numbers that you put down initially on a spreadsheet. The key to success in real estate is understanding that you don’t need to know everything, but you need to have the people in place that do.
It’s not a matter of you doing everything right all the time and having all the answers. It’s a matter of a team doing consistent work that keeps you within the confines of the law and also keeps your business running with processes, procedures, and structure. Think of your rental property as any other business and make decisions based on numbers and not emotions. “Trust but verify” everything in your business and always make sure your decisions are taking you closer to your goal and not further away.