They started investing in real estate 30 years ago, with so much hope for their future. A rental house here, a duplex there, and soon they had a rental portfolio that would make anyone proud. They actively managed their properties and worked to make sure they were operating at peak efficiency. Then, several years ago, the husband and wife both retired from their day jobs and eased into retirement—funded by their rental income and social security.
This year, they are filing bankruptcy and losing a majority of their properties to foreclosure.
Sadly, this is not a made-up example; this is the story of one of my friends’ parents, and they are not alone. In fact, 95% of the units I’ve purchased have been foreclosures that belonged to landlords who failed and lost their properties to the bank. Most of these people, I would guess, will never again be active in real estate investing. They worked hard for years to build a financial future for themselves, only to see it come tragically crashing down around them, dashing any hopes for lasting wealth creation.
This begs the question: why?
If real estate is as good an investment as we all (on BiggerPockets) make it out to be, why do so many real estate investors fail?Perhaps more importantly, how do you avoid this possibility in your own life?
This question that has been swimming around in my mind for some time now. Each week on the BiggerPockets Podcast, I ask our guest, “What is it that sets successful investors apart from those who fail?” The answers are as diverse as the personalities of the guests with whom we’ve spoken. So what is it?
I’m intrigued by this idea and scared that I may end up the same way.
After all, as Mark Cuban famously said, “Everyone’s a genius in a bull market.” Is that what real estate is? Do some people simply get lucky, while others don’t? Let’s look at some of the possible reasons rental property investors go broke and explore the things you can do to protect yourself.
1. Too Much Risk?
First, let’s talk about the elephant in the room: risk. Risk is inherent in every investment there is. After all, you know the phrase “more risk, more reward.”
However, there is obviously a tipping point at which the risk becomes too great, as my friend’s parents discovered. Perhaps it’s overleveraging properties by obtaining too many “low-down” deals that weren’t deals after all, or maybe it’s trying to buy too many, properties too fast. Maybe it’s constant refinancing of the properties, pulling out all the equity and investing it in more and more deals. Whatever the reason for the bankruptcy, the risk clearly became too great, and these investors lost.
As rock ‘n’ roller Nick Cave sang, “If you’re gonna dine with them cannibals, sooner or later, darling, you’re gonna get eaten.”
So how might someone prevent this? Avoid risk altogether? Invest only in 100% safe deals?
Of course not. Risk is required for entrepreneurs, but learning to navigate that risk will define your success. Like a team of white-water rafters braving the wild waves, you can’t always see what the future holds, where the rocks hide just below the surface, or when the next waterfall will appear. However, by having the right people
in the boat with you, keeping an eye out for potential dangers, working to avoid potential problem areas, and wearing the proper life jacket, you can avoid a premature “death.”
I caution anyone reading this chapter, including me, to think of risk as a dangerous but powerful tool—and to never forget that this tool cuts both ways.
2. Not Enough Education?
Far too many people jump into buying real estate before understanding what they are doing. They simply decide that real estate is the right path for them and start purchasing properties. There is a big difference between being busy and being effective, and this is the case with a lot of real estate investors; they believe that because they are buying properties, they are going to succeed. Never mind that they bought the wrong property in the wrong area with the wrong financing.
The solution to this problem is proper education.
I’m not talking about the “get rich quick,” late-night television kind of education. I’m talking about taking the time needed to build an educational foundation that can support your investing future. The mission of BiggerPockets is to help individuals build this foundation through a variety of methods, including our forums, podcast, blog, and this very book you are reading.
Furthermore, I encourage you to continue learning through library books, meetups, and other low-cost resources. You don’t need to spend tens of thousands of dollars for an education. Information has been democratized, so you simply need to reach out and grab it. No one can do it for you!
3. Not Enough Analysis?
When I first began investing in real estate, I thought I knew what I was doing, but I made some big mistakes, because I didn’t do a careful enough analysis. Had I continued on that path, I would have been in the same boat as my friend’s parents.
You see, so many people buy properties without doing the right math. As I often say, “Without the right math going into an investment, you’ll never get the right profit coming out of it.”
The future is impossible to know, but with solid analysis, it’s much easier to predict. We’ll talk a lot more about analysis throughout this book, and I would encourage you to look at these sections with the reverence the topic deserves. Bad math makes for bad investments!
Are You Working On Your Business or In Your Business?
Is real estate your investment or your hobby?
I believe one of the greatest reasons investors fail is that they don’t treat their business like a business.
- They never develop systems to help them as they grow.
- They treat their tenants like friends.
- They don’t create clear policies for finding good tenants.
- They simply approach investing like a church picnic, and it shows.
If you want to avoid failing, treat your rental property business the same way a CEO would look at any other business, because that is what it is. Monitor your business’s health, hire the right people to do the right jobs, and continually find ways to improve your bottom line to create a long-lasting business.
So Why Do They Fail?
A real estate investor may fail for a variety of reasons. However, in my limited time on this planet, I’ve seen the four mistakes I just listed played out time and time again in the lives of those who ultimately failed in their investments. It breaks my heart to see someone so excited about what real estate could do only to lose it all in a foreclosure or bankruptcy.
Don’t be that person.
If you want to avoid losing all the hard work you are putting in (or all the hard work you are about to put in), pay attention to the following four points:
- Understand that risk is a powerful but dangerous tool, so tread cautiously.
- Build a solid educational foundation for yourself before getting in too deep.
- Don’t skimp on the math. Always understand the numbers for any property you buy.
- Work on your business, not in it. Treat your investments like a business—which they are.
We’re republishing this article to help out our newer readers.
How do you mitigate your risk of failure in real estate?
Let me know with a comment!