The Biggest Mistakes You Seen Being Made by First Timers

76 Replies

Hey guys, absolutely love this site and everyone on it. I'm just about to jump into the Buy & Hold side of REI and just wondering if anyone has any classic mistakes that they would see a first timer like me make consistently.

*Insert a quote about learning from the mistakes of others etc etc.

Would really appreciate the heads up so I can make a smart move into Buy & Hold investing.

Cheers :)

Getting too emotional and excited about their first deal before being educated - 'rationalizing' it as @Joe Villeneuve points out. Couple that with not realizing there is risk in OPM / over-leveraging and we could have a problem, Houston!  

Never factoring in for problems with maintenance or vacancy issues, buying too many homes in too short of a period without letting any problems work themselves out before buying more. (20 homes in a year and a half, then another 15 over the next 2 years)

I was undercapitalized on my acquisitions and thought that buying more properties and letting the cashflow from the other rentals offset any cash infusions I might need.

Lastly trying to have a cheap business model (Cheap vendors, cheap properties, cheap everything) not the best way to operate because all I attracted were other cheap minded people only interested in taking my money and not having a common goal.

I had a "previous life" as a landlord which didn't go so well.  Most of my mistakes were "classic" stuff you'll read about here on BP.

1) Never assume RENT - PITI = PROFITS. I can't say I trust the 50% "rule", but the fact that so many people regard it as a good starting point should tell you something.

2) Don't be a Nice Guy. I'm not saying you need to be unfriendly, but think of yourself (and conduct yourself) like a good Parent or Schoolteacher or Platoon Leader and NOT as a friend. A lot of tenants, even the "good" people, can make little mistakes that could torpedo your success. A good REI or PM is a good disciplinarian.

3) Related to  #2 : Always factor in the cost of having a property manager.  If you find being strong and parental isn't your thing, you better be ready to hand off the reins to someone who is.

4) Don't buy a "fun" project if you aren't an expert.  You might find out that that century-old carriage house in the back yard was built using 17 different kinds of asbestos.  Asbestos : one of the most amazing materials ever for so many, many practical uses...

5) Have a secure W2 job and a pile of reserves.  Stuff happens.

It is a neat topic Jonno and just a few I have seen or even fallen prey to...

1. Over remodeling .. Learn fair rental condition in your area/market.. Aim for it , not hgtv show room condition (which may not boost the rent and will quickly get some wear and tear as a rental).. 

2. Choose a solid building in the right area. Vague, I know. But even the Jedi landlord can't fix a bad neighborhood or inconvenient location, and a defective building will be a drain on time and money....

3. Get the right processes in place ( for tenant selection, onboarding, maintenance, etc) before you start (yes, refine them along the way, but don't start searching for an application or lease on the way to meet your first potential tenant!)....

Many more... So read a lot on BP and elsewhere and best of luck... 

Thinking you can get a renovation done in three months, and taking 3 yrs instead.  Early on, I thought everything could be done so fast. Now I know better and plan for much longer duration's.

Another is thinking that prospective tenants can have the same vision as I do.  I used to show occupied units and units that had not been freshened up with painted touchup, cleaning, etc.  Most of my prospective tenants can't see thru the minor issues. 

@Steve Rozenberg   VERY good post.

I was on the receiving end of undercapitalized investors.. and Like most of us HML who had substantial loan portfolios pre 07 we came to understand that those with no or little skin in the game are bad risks regardless of their FICO score. Its one reason you see HML now require skin... at lest until they get to know you very well.

The other thing I see for buy and hold investors is dramatically under estimating operating costs.

And the one I like the best and the one I have fallen for to many times to count and that is believing and trusting in what tenants tell you  at least with C and low B grade tenants..

Buying a CHEAP property in a BAD area. The numbers look awesome on paper but BAD areas tend to attract tenants from HELL. There's no amount of return on investment that can justify risking your life to make money.

I am very open about my worst investment mistake - a mistake newbies and experienced investors alike should avoid and you can listen to it in my podcast - http://biggerpockets.com/show65

Originally posted by @Jay Hinrichs :

@Steve Rozenberg   VERY good post.

I was on the receiving end of undercapitalized investors.. and Like most of us HML who had substantial loan portfolios pre 07 we came to understand that those with no or little skin in the game are bad risks regardless of their FICO score. Its one reason you see HML now require skin... at lest until they get to know you very well.

The other thing I see for buy and hold investors is dramatically under estimating operating costs.

And the one I like the best and the one I have fallen for to many times to count and that is believing and trusting in what tenants tell you  at least with C and low B grade tenants..

Absolutely. I get requests for money all the time from new investors with no money and no experience. My general requirement is that the property is already owned by borrower free and clear. I can then lend 60% or so of the value and feel reasonably safe. I have done loans at 50% LTV and still had to initiate foreclosure (that surprised me). Thanks for the post Jay...always enjoy hearing the voice of experience!

I see first timers decide an area is a good place to invest in without doing their home work. You can't pick a home just because of the price, there is a lot more that goes into it.

Ignoring that nagging voice in the back of your mind that somethings not right but going through with it anyways and convincing yourself that it's just typical self doubt and everything will be fine. This applies to marriage as well. 

Don't max out 0% credit cards to do the rehab (or buy a house) if you plan on using your credit to cash out within a month or 2.  I did that.  I had 780+ credit, never missed a payment,  and doing this hammered me below 740.  I paid cards down to 20-30% and scores went back up.   Better off opening 3 or 4 cards and using all of them with 20-30% of the limit than maxing one or 2 out...

This was a quick lesson in how credit bureaus judge you,  even if you have never been late.   I don't think they know the cards are on promotion 0% either!