The Biggest Mistakes You Seen Being Made by First Timers

Real Estate Agent · Melbourne, FL · Member since 2015 · 23 posts · 18 votes

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 :)

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Steve RozenbergPro Member

Specialist · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes

10y

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.

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Jonathan Makovsky
Investor · Fairfield-New Haven-Hartford County, CT · Member since 2013 · 825 posts · 413 votes
10y
Agree with most of the above and will add:
Every market and situation is different, and just because an investment strategy works in one market and for one person, it may or may not work in another market or situation.
1 Reply
Max James
Investor · Cincinnati, OH · Member since 2015 · 229 posts · 50 votes
10y
Originally posted by @Account Closed:

Not having a sufficient cash reserve. And buying properties with less than 20% down.
Hey Jerry, as for the less than 20% down, do you say this to bring up the fact that you could be in this scenario:
-low money down, therefore higher monthly payments
-huge issue comes up, say this issue forces tenants to move to temporary housing
-now you have to cover the mortgage and have no rent coming in
The problem is that you were 'overleveraged' and since you brought only 5% down instead of 20% down, you are now in a terrible situation.
People always say do not over leverage yourself, but I feel that is a hugely loaded saying/advice due to the fact it can mean so many different things. Thanks!
2 Reply
Max James
Investor · Cincinnati, OH · Member since 2015 · 229 posts · 50 votes
10y
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..
Hey Jay, when you say "those of us who had substantial loan portfolios pre 07" what do you mean specifically?
I can't imagine the buy and hold portfolios were hit hard, or hit at all. Shouldn't in theory, the buy and holders almost benefit from a market crash due to the fact less people can get loans and will need to rent? I can see the crash hurting flippers and wholesalers, but not buy and holders.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@Max James I mean loan portfolios..
and many buy and holders got completely wiped out... as renters stopped paying rents. were do you think all the current inventory has come from at least half is from failed landlords don't kid yourself
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Randy E.
Rental Property Investor · Durham, NC · Member since 2014 · 1k+ posts · 1k+ votes
10y
Everything will take longer than you think.
The total repair/make ready costs will exceed your estimate.
Don't be Mr. Nice Guy.
4 Reply
Chad Hotovec
Real Estate Investor · Olathe, KS · Member since 2015 · 100 posts · 26 votes
10y
@Jonno Rushbrook This is an excellent question. I've found myself reading of some awesome success stories, and although they are valuable, I also think there's a lot to learn from the situations that don't end in success.
Asking around i hear more about the unsuccessful than the successful. Not going to stop me from reaching my goals! I just want to be a smart investor.
From what i could find, i have to reiterate the numbers analysis mentioned above. I think many people look at the jackpot at the end with out the risks involved.
Good luck.
1 Reply
Max James
Investor · Cincinnati, OH · Member since 2015 · 229 posts · 50 votes
10y
Originally posted by @Jay Hinrichs:

@Max James I mean loan portfolios..
and many buy and holders got completely wiped out... as renters stopped paying rents. were do you think all the current inventory has come from at least half is from failed landlords don't kid yourself
Sorry for the newb question, but I'm trying to understand exactly how a buy and hold investor can be crushed by a housing market crash if they initially bought the property correctly.
I don't think the housing market crash caused their tenants to stop paying rents, did it? Thanks!
0 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@Max James unemployment sky rocketed renters defaulted like homeowners this led to a huge melt down in values in most of the heavy rental areas .. along with the markets were rampant speculation was occurring ( think Vegas FLorida PHX and central CA.)
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
1 Reply
Daren H.
Real Estate Investor · Desoto, TX · Member since 2013 · 560 posts · 528 votes
10y
Paying other so called smart real estate investors thousands of dollars to make real estate investing easy and to get rich quick without any effort or your own money.
3 Reply
Cal C.
Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
10y
Originally posted by @Max James:

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..
Hey Jay, when you say "those of us who had substantial loan portfolios pre 07" what do you mean specifically?
I can't imagine the buy and hold portfolios were hit hard, or hit at all. Shouldn't in theory, the buy and holders almost benefit from a market crash due to the fact less people can get loans and will need to rent? I can see the crash hurting flippers and wholesalers, but not buy and holders.
I had several properties sit empty even after I lowered rent 30% or more. Lots of less capitalized buy and hold investors were wiped out. Not sure why drastic rent rate reduction is rarely mentioned here but it certainly happened.
0 Reply
Jeff Blackman
Nashville, TN · Member since 2015 · 5 posts · 1 vote
10y
Doing their due diligence on why someone is giving you a great deal! Great post for newbies like me!
1 Reply
David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
Investing too far from home, thinking it is easy to do passively from a distance and that the grass is greener on the other side of the fence, based solely on projected cash flow numbers.
Picking their team based strictly on price. Trusting the wrong people to have their back without verifying.
Paying retail price for a turn key property (with no value add component) just because the cash flow numbers seem to make sense and they think they will hold forever; limiting their exit strategies in the process.
Thinking that just because they can buy something that they should. Thinking only of the upside and not the downside risk; not understanding the dynamics of how to maximize the former or protect against the latter.
Being greedy when others are greedy and fearful when others are fearful, rather than the other way around.
Trying to blindly copy strategies that they heard worked for a friend of a friend of a friend in a different market a year ago without thinking through and understanding if, how, or why this strategy works (or not).
There's more, but these are the common ones that come to mind ... lord knows I've been guilty of more than a few :)
2 Reply
David Nolan
Professional Property Investor · Brisbane, Queensland · Member since 2015 · 165 posts · 160 votes
10y
Not understanding what drives the market. Consequently not knowing if they are buying in a high market that is about to have a downturn or missing a low priced market that is about to rise. Understanding market forces helps when it comes time to plan your exit strategy and when and how you will make money on any individual deal. These activities are done at the front end of a deal not at the back end. The old saying, "you make your money when you buy" is based on this fact, among other things. So understand your market and what drives it.
2 Reply
Mitchell Van Overloop
Nurse, Investor · Hudsonville, MI · Member since 2015 · 28 posts · 4 votes
10y
This is such a good thread!! Awesome info for new and experienced investors alike. Being a fairly new investor, you tend to think it will always work out and the rent will always be coming in. In turn, you end up not preparing yourself for when the economy tanks again and you end up being one of the negative statistics everyone hears about, but never think could happen to them. Thank you @Jay Hinrichs for your posts on how the market affected rental income.
0 Reply
Ronan M.Pro Member
Rental Property Investor · Chicago, IL · Member since 2015 · 352 posts · 281 votes
10y
Biggest Mistakes you seen being made by first timers - I didn't see these mistakes being made. I was the one making them. Back in 2009/10 if you could spit and hit the floor you could rent from me. Cost me about $15K over the course of a year and a half. Small money maybe for an established person but crushing for a newbie.
Fast forward to now and you could probably qualify for a trip to the International Space Station more easily than you will get a signed lease out of me.
5 Reply
Eddie T.
Rental Property Investor · NY · Member since 2013 · 844 posts · 350 votes
10y
Steve Rozenberg how many properties do you have now?
0 Reply
Steve RozenbergPro Member
Specialist · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
10y
@Eddie T.At Peak we had 35 SF homes and 2 apartment complexes. We have sold the complexes and the majority of the homes.
We currently have 5 homes and some of the properties we sold owner finance to investors with tenants already in place that my company manages and have sold notes to buyers.
My main focus is growing my property management business, we have grown from 0-500 doors in just over 3 years and have won numerous awards including Best Marketing in North America by Business Excellence...
(Plus my wife advised me that the next home I buy better be nice because if I walk in the door with another mortgage I will be living in it...) SO now I am focused on owning a business.
3 Reply
Federico Gutierrez
Realtor · Cleveland, OH · Member since 2015 · 2k+ posts · 857 votes
10y
First timers calling me the realtor and requesting the following

"I want to buy a property under market value, around $20000, I only want to do cosmetics"

Know the market prior to calling, its no longer 2008 :)
1 Reply
Larry Turowski
Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
10y
Originally posted by @Joe Villeneuve:

Rationalizing their analysis.
Not just first timers! I think many of us are susceptible to seeing through rose colored glasses when we become enamored with a property.
1 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
10y
Originally posted by @Larry Turowski:

Originally posted by @Joe Villeneuve:
Rationalizing their analysis.
Not just first timers! I think many of us are susceptible to seeing through rose colored glasses when we become enamored with a property.
What I see are, and like you said, "not just first timers", are veteran REI using every fancy "profit" term in the book, usually with future events they have no control over, to justify buying a deal that is currently bad with the hopes of it becoming a good one in the future.
I have a number of rules I follow, but this is a big one,
"NEVER, base the value of a deal, where the success of that deal is based on future events I have NO control over".
If history has shown us anything...
1 Reply
Franklin Romine
Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
10y
Listening to the wrong people
0 Reply
Eddie T.
Rental Property Investor · NY · Member since 2013 · 844 posts · 350 votes
10y
Originally posted by @Steve Rozenberg:

@Eddie T.At Peak we had 35 SF homes and 2 apartment complexes. We have sold the complexes and the majority of the homes.
We currently have 5 homes and some of the properties we sold owner finance to investors with tenants already in place that my company manages and have sold notes to buyers.
My main focus is growing my property management business, we have grown from 0-500 doors in just over 3 years and have won numerous awards including Best Marketing in North America by Business Excellence...
(Plus my wife advised me that the next home I buy better be nice because if I walk in the door with another mortgage I will be living in it...) SO now I am focused on owning a business.
Were you buying in houston? B class properties? What was your main problem not enough reserves?
0 Reply
Neda Navidnia
Property Manager · Houston, TX · Member since 2014 · 128 posts · 24 votes
10y
That's a great question.
- Don't put it on the market if it is in make ready condition, finish the job, make it look good, don't forget about the landscaping and then start advertising.
- Be careful about housing laws and protected classes.
- Don't let the expenses make you let unqualified people in.
- Screen prospects correctly.
good luck.
0 Reply
Account Closed
Hermitage, TN · Member since 2015 · 38 posts · 5 votes
10y
Originally posted by @Account Closed:

Not having a sufficient cash reserve. And buying properties with less than 20% down.
Just curious, what is the drawback of putting less than 20% down, assuming you can still qualify for the loan?
0 Reply
Max James
Investor · Cincinnati, OH · Member since 2015 · 229 posts · 50 votes
10y
Originally posted by @Account Closed:

Originally posted by @Account Closed:
Not having a sufficient cash reserve. And buying properties with less than 20% down.
Just curious, what is the drawback of putting less than 20% down, assuming you can still qualify for the loan?
I'm of the opinion there is absolutely nothing wrong with buying a super leveraged property as long as you bought it correctly. If you buy in the right area, project the right analysis, don't fudge your numbers and justify bad ones, you should be fine bringing as low as 3% down for a property.
I think the reason people say "low money down is a terrible idea" is because so many really extreme novice investors with zero clue about real estate fail when they bring less than 20% down. I believe these are the same people that would fail even if they brought 50% down. It's just much more noticeable when they bring 3% down to a bad deal because of this scenario:
A. dummy REI buys a negative cash flowing buy and hold rental property either because they had no clue how to run a buy and hold analysis or they thought it was OK to buy a negative cash flower due to the fact their exit strategy was going to be sell in 1-2 years. They noticed other homes EXACTLY like the one they bought increase by over 18% in value in one year, so they say, "heck, I'll buy this place even though I have to pay a measly $80/month towards the mortgage because the total gross rents don't fully cover it"
B. housing market crashes
C. dummy REI realizes that now after having a baby and buying a new car, they cannot afford to pay their primary residence mortgage along with another $80/month towards their rental properties mortgage. Not to mention that new furnace they had to buy since one of them went out in the property.
D. dummy REI feels they are better off selling the rental property at a huge loss because it's too much of a mental drain on them to own it.
E. smart REI buys at large discount
:)
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