{"id":114960,"date":"2019-09-02T12:00:00","date_gmt":"2019-09-02T18:00:00","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=114960"},"modified":"2021-03-16T14:55:39","modified_gmt":"2021-03-16T20:55:39","slug":"7-deadly-sins-causing-real-estate-investors-fail","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/7-deadly-sins-causing-real-estate-investors-fail","title":{"rendered":"7 Deadly Sins That Cause Real Estate Investors to Fail"},"content":{"rendered":"

Recently, a BiggerPockets reader posed the question on a forum<\/a>: Why do 97 percent of real estate investors fail? While many people debated real estate investor Sadrud-Din\u2019s<\/a> \u201c97 percent failure rate\u201d statistic, one thing is clear:<\/p>\n

Most people who set out as real estate investors don\u2019t achieve the success they expected. And I would guess that the majority fail<\/em>.<\/p>\n

So the Question Is… Why?<\/em><\/h2>\n

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.<\/p>\n

I have outlined seven reasons that I believe most real estate investors fail<\/a>. 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.<\/p>\n

But these are my top seven and I\u2019m sticking to them.<\/p>\n

…But First, Some Stray Observations<\/h2>\n

Before I launch into these seven deadly real estate investor sins, allow me to make a general comment on entrepreneurship.<\/p>\n

As a recovering serial entrepreneur for almost three decades, I have started and ended a whole lot of businesses. And I\u2019ve seen a lot of others do the same.<\/p>\n

I believe we can expect that the majority of real estate businesses will fail because the majority of businesses in general fail<\/em>. This is the natural course of things, folks.<\/p>\n

Michael Gerber, in his groundbreaking book The E-Myth<\/a><\/em>, says that four out of five businesses never make it to the five-year mark. That\u2019s an 80 percent failure rate. Here is a quick summary<\/a> of his book if you haven\u2019t read it.<\/p>\n

So the nature of business startups includes the potential of failure.<\/p>\n

But I\u2019m writing this so it won\u2019t<\/em> happen to you. I don\u2019t want you to be a casualty.<\/p>\n

Related: <\/strong>7 Life-Changing Lessons I Wish I Knew as a Real Estate Newbie<\/a><\/em><\/p>\n

A Crowded Field<\/h3>\n

The explosion in HGTV and other fixer-upper\/fix-n-flip shows has led to an explosion in the number of real estate investors\u2014or at least investor wannabes. I\u2019m 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.<\/p>\n

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\u2014not including commercial and other property types) make real estate investing a common business. [1]<\/p>\n

So perhaps you could even expect a higher failure rate in this business. Again, I don\u2019t want that to be you. So let\u2019s talk about the seven deadly sins that I <\/em>believe cause most real estate investors to fail.<\/p>\n

#1: Failure to Discern Between Investing and Speculating<\/h2>\n

\"investment-thinking\"<\/p>\n

Warren Buffett\u2019s hero is Benjamin Graham. Graham, in his epic books Security Analysis<\/em><\/a> and The Intelligent Investor<\/em><\/a>, explains the difference between investing and speculating. My paraphrase:<\/p>\n

Investing: <\/strong>When your principal is generally safe, and you have a chance to make a return.<\/p>\n

Speculating: <\/strong>When your principal is not at all safe, and you have a chance to make a return.<\/p>\n

It\u2019s fine to speculate, as long as you understand that is what you\u2019re doing\u2014and as long as you don\u2019t use all of your available capital to do so.<\/p>\n

I mean if you continually play double or nothing with all of your capital, you\u2019ll eventually land on nothing. Then what will you have left to double? Nothing. <\/em><\/p>\n

Paul Samuelson, the first U.S. winner of the Nobel Peace Prize in Economic Sciences, said, \u201cInvesting should be more like watching grass grow or watching paint dry. If you want excitement, take $800 and go to Las Vegas.\u201d<\/p>\n

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\u2019t know what you\u2019re doing, you could get burned.<\/p>\n

And you could fail big time. <\/strong><\/p>\n

Real estate speculators are among the wealthiest people on the planet. But some of them are delivering pizzas for Domino\u2019s, too, to supplement their income. Be careful. If you\u2019re going to speculate, consider doing it with a larger, more experienced partner first.<\/p>\n

#2: Failure to Discern the Truth about Risk and Return<\/h2>\n

This is closely related to No. 1 and could have been part of it, but, after all, it is the seven<\/em> deadly sins…<\/p>\n

Seriously, class, complete this sentence:<\/p>\n

Low risk leads to low return. High risk leads to ______ return. <\/em><\/p>\n

It\u2019s natural to fill in that blank with \u201chigh\u201d isn\u2019t it? But that\u2019s not true.<\/p>\n

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

I talk about this in detail in my book, The Perfect Investment<\/em><\/a>. Check out this graph illustrating my point:<\/p>\n

 <\/p>\n

\"\"<\/p>\n

 <\/p>\n

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, \u201cSuccessful people say ‘no’ a lot. Really successful people say ‘no’ almost all the time.\u201d<\/p>\n

Learn to live with a default of no<\/strong>. This advice will serve you well.<\/p>\n

#3: Failure to Understand and Act According to Cycles<\/h2>\n

When I was buying and flipping expensive lots at Smith Mountain Lake in Virginia, I was having the time of my life\u2014 and churning profits like a machine. It was 2004 to 2007, and my partner and I couldn\u2019t believe how fun and easy this was.<\/p>\n

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

Of course, I believed this and stopped investing immediately, right? Yeah, right.<\/p>\n

No, as a rookie investor (I\u2019d been at it for eight years) I charged forward. I justified it, too. I said things like, \u201cIt\u2019s different this time.\u201d And, \u201cThose big statistics have nothing to do with my market. What do they know anyway?\u201d<\/p>\n

It\u2019s easy to have confirmation bias and to live and invest from it. This is a disease\u2014er, I mean a condition\u2014where we stakeout a favorable position, look for all of the evidence to back it up, and ignore (or twist) any contrary data.<\/p>\n

Don\u2019t do this. See point No. 2 above about learning to say no<\/strong>\u00a0as a default.<\/p>\n

I recently read Howard Marks brilliant book Mastering the Market Cycle: Getting the Odds on Your Side<\/a>.<\/em> He describes the importance of knowing where we are in the cycle and acting accordingly.<\/p>\n

When the Market Is Hot<\/h3>\n

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.<\/p>\n

Related: <\/strong>Worried About a Stock Market Crash? Prepare for the Bear Without Fear<\/a><\/em><\/p>\n

But unbridled optimism and the corresponding lie that \u201cit\u2019s different this time\u201d 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.<\/p>\n

But trees don\u2019t grow to the sky.<\/p>\n

When the Market Is Cold<\/h3>\n

On the other hand, in a trough, when the market is in a free-fall, Marks describes why this is the time to buy\u2014and buy all you can. He and Buffett call it \u201ccatching a falling knife.\u201d<\/p>\n

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: \u201cWait, you mean you\u2019re selling<\/em> now, right?\u201d Marks replied with, \u201cNo! I\u2019m buying now! If not now, when?\u201d<\/p>\n

Buffett shared his sentiments and purchased a large chunk of financial equities while the market was in free-fall.<\/p>\n

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.)<\/p>\n

#4: Failure to Discern Between Teachers and Gurus<\/h2>\n

\"online-partner\"<\/p>\n

This post is running long, so I\u2019ll 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\u2019t fall for the lies and the hype.<\/p>\n

Now I\u2019m 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\u2019re invited to a weekend seminar where you\u2019re asked to invest a lot more money to learn more… then you might<\/em> be ready to fall under a guru\u2019s spell.<\/p>\n

Run away!<\/strong><\/p>\n

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.<\/p>\n

Whitney hired a true coach in 2018, and he is now on track to soar. It wasn\u2019t 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\u2019ve never regretted it.<\/p>\n

Choose your teacher wisely, young grasshopper. <\/em><\/p>\n

#5: Failure to Discern Between Knowledge and Action<\/h2>\n

I imagine there is a psychological description of this condition. Have you noticed this? I do it.<\/p>\n

Sometimes when I learn a new truth, I somehow think I\u2019m living it. And I even begin to look down my nose at others who aren\u2019t. It\u2019s crazy, I know. But I\u2019m chuckling as I think about the times that I\u2019ve done this.<\/p>\n

Here’s an example. I\u2019m working with two friends to write a book on Buffett\u2019s rules for real estate investors. I\u2019ll read a new truth from Buffett\u2019s wisdom and it will resonate with me deeply. Then I\u2019ll somehow mentally believe that I\u2019m living that truth. And then I\u2019m at risk to look down on others who aren\u2019t.<\/p>\n

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\u2019ve just invented a new form of personal psychosis.<\/p>\n

Either way, please don\u2019t confuse more knowledge for action. Don\u2019t spend your life and a small fortune continually gaining more and more knowledge but failing to act.<\/p>\n

Successful real estate investors learn\u2014then they act<\/em>. It may be time for you to act.<\/p>\n

#6: Failure to Say No<\/h2>\n

This sin is pretty self-explanatory. I may have mentioned it once or twice before…<\/p>\n

But if you want more detail about when to say no and to what, read these related blog posts.<\/p>\n