Reasons Novice Real Estate Investors Fail

Over the years, real estate has become increasingly more appealing to people looking get their money working for them. Unlike the stock market, real estate can lead to major ROI in a short period of time when executed effectively. The advent of HGTV and DIY networks hit shows showcasing the Average Joe hitting it big in real estate has many running to their local real estate agents to help them find their next home run investment. However, despite the promise of lucrative returns, many wannabe real estate investors find themselves tucking tail and running for the hills before the end of their first flip.

If you polled a room of your friends or strangers, 80-90% of them would express interest in investing in real estate. However, most never will outside of their own home purchase. For the few that do decide to try their hand in the real estate market, the lucky few will find success while the majority become the one and done real estate investor. Why, you ask? Well, ...

Real Estate Agents

When the novice makes the decision to invest in real estate they typically head over to their local real estate agent to help them find their home rum property. The investor is excited about their home run returns, while the real estate agents is seeing $$$ from their potential commission.

The problem is that most real estate agent are retail focused and lack the ability to think like an investor. Their moral code tells them that they need to protect the value of the home for the seller while trying to help you find a deal as the buyer. Many real estate agents I've come across are not comfortable making the types of low-ball offers I need to make to preserve my own ROI on a property. Often times, the real estate agent sees the value of the home based of the area the home is in without considering the true cost it takes to actually get that fixer upper to command those prices.

Many will also state how hot the market is, which is true. However, a home that needs work is a home that needs work. No matter how hot the market, you aren't going to get top dollar for a home that needs $40K + in renovation costs. And if you do, the buyer is a new end user or a novice investor.

Overestimating The After Repair Value

I purposely use a conservative after repair value (ARV) when considering a potential deal. I am also incredibly meticulous when searching for comparable properties to determine the after repair value. This is another area that leads new investors to dig themselves into a hole.

When determining a realistic after repair value for a home you need to compare like with like. You have to look at properties that have actually sold in the last 6-9 months. Properties that have a similar square footage. Properties that are with in a certain distance of the property you are considering. Often times a real estate agent will suggest an after repair value based on homes that are listed for sale or aren't really similar to your property which will drastically affect your margins. Can you see your ROI shrinking? 

As a real estate investor you have to be diligent. Trust, but verify. 

Underestimate Costs

Another leading cause of the one and done real estate investor is a gross underestimation of costs and experience necessary for home run returns. People mess up the numbers for a lot of reasons, some stated above. However, at the end of the day it is your money, which makes it your responsibility to do your homework and accurately estimate your costs. I don't just mean your rehab costs. Cost includes that money you will have to spend holding the property while you repair it, and the costs associated with selling the property when you go to list it. When you don't consider these costs associated with a real estate deal your profits quickly begin to fly away, and you quickly start hoping for a base hit.

Lack Consistency

Of all of the reasons, this one I think is the biggest cause of the one and done investor. Many people want to invest in real estate, but when they encounter a snag in the process they are quick to tuck tail and shy away from their investing goals. 

Success in anything takes consistent effort. There is no such thing as an over night success. You have to take consistent, daily and weekly actions to reach your goals. It may not seem like those daily and weekly tasks will add up in the moment, but if you're consistent in your actions and are looking for ways to improve you should see those actions lead to results. 

Lack Mentors

Many wannabe real estate investors lack mentors, or don't see the value in having a mentor. People are quick to ask to for successful "a quick tip" to get them started, but don't consider the fact that real estate investing, like anything else, is a business that requires work. In your given profession, you've probably had to dedicate a lot of time and energy to reach the success you've had. If you think that real estate investing, or anything new for that matter, will require any less effort you are sorely mistaken. 

Just like in your current profession, you've probably had mentors along the way. Seek out mentors, study. Become a sponge ready to absorb all the information you can. Also, a mentor doesn't have to be a single person. You can find mentors through Bigger Pockets, books, podcast, blog posts, etc. Attend your local real estate investor meetings. Ask what you can do for people. People will be far more likely to help you on your journey if you're willing and eager to help them on their own journey. 

Kevin and I are new to real estate investing and hoping that we don't fall into this category of real estate investor. The one and done -- the naïve novice. With that said, most people try, fail and run. Industry doesn't matter. They see the opportunity as the easy path to riches, but fail to truly understand the work required to be successful. 

Whether you find yourself in similar shoes, or are just curious about our journey, we hope you check back in with us. Accountability partners help!