What Do People Get Wrong Most Often
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
What Do People Get Wrong Most Often
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Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
6yBiggest thing I see is Assuming the rent minus the PITI equals cashflow
60 Replies
- 6yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Spend their seed money instead of use it. When you spend it, it's gone forever, and you need to replace it...usually (see always) at a cost. When you use it, it comes back to you...with "friends" (profit and/or cash flow). Then, you just spend the "friends"...and the "new friends" you get every time you reuse your seed money. Your seed money becomes a pez dispenser of free money. I like my money's friends. They can come by anytime...I'll put them to work for me (don't tell them).
Friends are someone else's money that they are letting you spend/use.
- 6yBjorn AhlbladPro MemberInvestor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
@Joe Splitrock What I see most often is marginal or wrong underwriting resulting in financial stress.
- Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes6y
Originally posted by @Joe Splitrock:
Some questions that get posted in the forums have no "right" answer, but rather just different approaches. In other cases there is a clear right and wrong answer. In those cases where there is a clear right answer, what do you see people get "wrong" most often?
Going out with no REI education.
Now that many of the key "gurus" have been put out of business by the FTC, there's almost no excuse to pursue real education ... and it *IS* out there!
BP is great for anecdotal tales of people's experiences, but it's not organized as an educational resource. While there is a Search facility of sorts, there's no way to find, for example, information on beginning wholesaling, estate planning / asset protection, etc. You have to Search for potentially relevant posts, and then slog through the search results to find posts which may or may not apply to you.
Don't get me wrong ... BP is a GREAT resource.
Still, it needs to be "married" with a source of education (I'm partial to Renatus, myself) so folks can have access to true experts who donate their time away from their own profitable businesses to keep students apprised of changes in policies, legislation, etc. at both the local and national levels, while at the same time having those educational resources organized into profession-specific areas like fix-and-flip, buy-and-hold, short term rentals (a.k.a. "AirBnB"), etc.
My $0.02 ...
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
@David Dachtera I agree with what you are saying. People confuse information for education. I love the BP forums, but really it is just a collection of discussions. There is two problems with that:
1. It contains inaccurate information, sometimes reinforced by several people. The underlying qualifications of the people offering input varies greatly. In other words it is hard to verify you are getting advice from a credible source.
2. It is not teaching the entire subject matter. You can dig into specific topics, but you don't know what you don't know. Education is a collection of topics. You are taught what you need to know, not what you THINK you need to know.
Of course not all education is created equal and BP does have educational materials like the webinars and books. As far as your comments on the search feature, I am convinced nobody even used that. If they did, we wouldn't see the same questions over and over. I am even surprised how many people ask questions that could have been answered in one minute with a Google search. People need to be more resourceful and not rely on others so much.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
Originally posted by @Bjorn Ahlblad:
@Joe Splitrock What I see most often is marginal or wrong underwriting resulting in financial stress.
There is definitely lots of misleading advice in this area. Do you have any more specific examples of what you have read in the forums as bad information?
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
Originally posted by @Joe Villeneuve:
Spend their seed money instead of use it. When you spend it, it's gone forever, and you need to replace it...usually (see always) at a cost. When you use it, it comes back to you...with "friends" (profit and/or cash flow). Then, you just spend the "friends"...and the "new friends" you get every time you reuse your seed money. Your seed money becomes a pez dispenser of free money. I like my money's friends. They can come by anytime...I'll put them to work for me (don't tell them).
Friends are someone else's money that they are letting you spend/use.
Understanding leverage in general is a hard concept for people grasp.
I read a recent post where someone wanted to pay off a rental property, so they could increase cash flow. Then they wanted to use the cash flow to save up for a down payment on the next property. The loan was 3.5%, so they would be paying off low interest debt, just to take on higher interest debt. My logical question was why not just save money for a down payment or take equity out of your other property to get the down payment? You can then acquire the next property sooner.
- Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes6y
Originally posted by @Joe Splitrock:
Originally posted by @Bjorn Ahlblad:
@Joe Splitrock What I see most often is marginal or wrong underwriting resulting in financial stress.
There is definitely lots of misleading advice in this area. Do you have any more specific examples of what you have read in the forums as bad information?
Believing that "No Money Down" means "No Money Needed". All creative transactions have costs, marketing, closing, title, insurance, recording, taxes, equity payout, carrying, mortgage payments, oftentimes repairs, etc but creative financing requires knowledge, hard work and yes, money. I spend a good $10,000 or more on a creative financing deal.
Another one is "The best way to get into real estate for someone with no money and no experience is wholesaling". Many (Not All of course) of the wholesalers are practicing Agency and they don't know it. Few if any get a Title report so there is no knowing what they've got. They over inflate the value (ARV) to make the deal "work" and they tie up the property without disclosing to the seller what they are doing. It's being dishonest to the seller and to the buyer.
- Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes6y
A couple more are assuming you will get rich doing Fix & Flips. According to the National Association of Realtors the average Flip makes $64,000 Gross and when you subtract costs nets $15,000 and takes on average 6 months from finding the property, fixing it up, putting it on the market to collecting the check. People need to be a lot more picky on the Flips they choose to do.
And of course people that put down 20% on a rental and "clear" $150 a month and think that they've done a good thing. The first vacancy, blown water heater, roof, or other normal event blows their "profit" for a long time to come. All that with grumpy tenants and toilets too. Yumm. What a life ;-)
- 6yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Joe Splitrock:
Originally posted by @Joe Villeneuve:
Spend their seed money instead of use it. When you spend it, it's gone forever, and you need to replace it...usually (see always) at a cost. When you use it, it comes back to you...with "friends" (profit and/or cash flow). Then, you just spend the "friends"...and the "new friends" you get every time you reuse your seed money. Your seed money becomes a pez dispenser of free money. I like my money's friends. They can come by anytime...I'll put them to work for me (don't tell them).
Friends are someone else's money that they are letting you spend/use.
Understanding leverage in general is a hard concept for people grasp.
I read a recent post where someone wanted to pay off a rental property, so they could increase cash flow. Then they wanted to use the cash flow to save up for a down payment on the next property. The loan was 3.5%, so they would be paying off low interest debt, just to take on higher interest debt. My logical question was why not just save money for a down payment or take equity out of your other property to get the down payment? You can then acquire the next property sooner.
...and, once they used their own cash (instead of the tenant's), they just increased their cost in one lump sum...just to get a little drizzle return. Then, when they got enough drizzle back, they spent it again for another drizzle. Repeating this means they never catch up...and they are always negative.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes6y
The biggest mistake I see people make is what I call thinking 2 dimensionally instead of 4 dimenstionally.
2 dimensionally = Focused on here and now, how asset is and performs at this exact moment in time
4 dimensionally = Focused on how the asset performs over time.
District Invest Group546 Reviews - Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
Originally posted by @Dennis M.:
Biggest thing I see is Assuming the rent minus the PITI equals cashflow
That is a good one! I see the same thing all the time. People are just happy when rent covers their mortgage. It is hard for people to understand that vacancy, repairs, CAPEX and management are real expenses that need to be accrued for.
Of course people try to explain why they think they don't need to worry about these things:
I manage myself so there is no management expense...
The property was rehabbed so there is nothing to break...
I never have vacancy...
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
Originally posted by @Account Closed:
A couple more are assuming you will get rich doing Fix & Flips. According to the National Association of Realtors the average Flip makes $64,000 Gross and when you subtract costs nets $15,000 and takes on average 6 months from finding the property, fixing it up, putting it on the market to collecting the check. People need to be a lot more picky on the Flips they choose to do.
And of course people that put down 20% on a rental and "clear" $150 a month and think that they've done a good thing. The first vacancy, blown water heater, roof, or other normal event blows their "profit" for a long time to come. All that with grumpy tenants and toilets too. Yumm. What a life ;-)
I think the television shows don't help by making flips seem so glamorous. They always over-improve and go over budget, then magically they are able to sell it for more than they originally thought. In real life when you go over budget, it usually doesn't work out that way. Like you said people also forget carrying costs which can eat up profit quickly. Even when you do make a profit, people forget the IRS wants their cut too.
Also some people don't realize the flip shows are scripted and the flipper only steps on camera to swing the hammer once or puts up the last tile. They don't actually do any work. Basing your business plan off a fictional television show is not a great starting point.
- Real Estate Agent · Memphis, TN · Member since 2019 · 261 posts · 253 votes6y
Waiting for the 'perfect deal' that they have in their head; that they've written down on paper and dreamed about finding, money in pocket and ready to spend as soon as it pops up. In the meantime, they'll pass on a dozen deals that will work well over time, moving on to be picked up gladly by more experienced investors who, as @Russell Brazil said, are thinking 4-dimensionally and with the future beyond the foreseeable in mind.
Soap-boxing a bit here, but new investors reading the best of the best success stories have in their mind that they are failing at investing if they're not getting that dream deal and it's keeping them from reaching their full potential, at least in a timely manner.
tl;dr: No one starts with their ideal portfolio.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
Originally posted by @Randall Weatherall:
Waiting for the 'perfect deal' that they have in their head; that they've written down on paper and dreamed about finding, money in pocket and ready to spend as soon as it pops up. In the meantime, they'll pass on a dozen deals that will work well over time, moving on to be picked up gladly by more experienced investors who, as @Russell Brazil said, are thinking 4-dimensionally and with the future beyond the foreseeable in mind.
Soap-boxing a bit here, but new investors reading the best of the best success stories have in their mind that they are failing at investing if they're not getting that dream deal and it's keeping them from reaching their full potential, at least in a timely manner.
tl;dr: No one starts with their ideal portfolio.
I agree. How many investors never even get started because they can't find the perfect deal? You are far better off doing an average deal, than no deal at all. As long as you are buying in a good location, it generally works out over time. Real estate is long game and paying +/- $5,000 on a deal really doesn't matter much in the long run.
- Investor · Tempe, AZ · Member since 2018 · 1k+ posts · 731 votes6y
Great topic @Joe Splitrock!!
Mine mostly deal with CapRates:
- Experts that mistake Caps for ROI
- People bragging about their high Caps...goes back to the above.
- People focusing on ROI when they should primarily focus on IRR for repositions/developments
Somebody showed me their investor deck and it showed CapRates going UP over the 5 years! I immediately questioned it. Sadly, taking a week course does not make you an expert. They were doing a large MF deal too with outside investors. While I do feel bad for potential investors if the deal goes bad, it is also their responsibility to perform their due diligence on the promoters.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
Originally posted by @Kenny Dahill:
Great topic @Joe Splitrock!!
Mine mostly deal with CapRates:
- Experts that mistake Caps for ROI
- People bragging about their high Caps...goes back to the above.
- People focusing on ROI when they should primarily focus on IRR for repositions/developments
Somebody showed me their investor deck and it showed CapRates going UP over the 5 years! I immediately questioned it. Sadly, taking a week course does not make you an expert. They were doing a large MF deal too with outside investors. While I do feel bad for potential investors if the deal goes bad, it is also their responsibility to perform their due diligence on the promoters.
You make great points. CAP rate is vastly misunderstood and people forget it is only one of many measures in real estate. Part of the issue is many real estate investors lack business or financial education. When you get into calculating IRR, it is a little more complex.
I love when I look at MLS listings and a realtor says "Great CAP rate!" only to find out they didn't include expenses in the number or it is a vacant property in a bad neighborhood. If you need to tell someone that something is great, maybe it is not so great.
- Rental Property Investor · Greensboro, NC · Member since 2019 · 99 posts · 63 votes6y
@Joe Splitrock - Finally, a valuable trending topic for new and inexperienced investors (like me) to read. Thank you for starting it. I think that this helps understand where the pitfalls of Real Estate Investing are and how to avoid them. It also prompts a few questions:
@David Dachtera - What comes first, (major) education or my first few properties? Obviously, I don't watch one episode of Fixer Upper and decide I'm going to flip houses or listen to one BiggerPockets episode and decide that I'm going to get a syndication going, but it begs the question; Should I be getting a professional education before I buy my first property, or should I get my feet wet with a few properties and then say "Hey, this is something I'm serious about it, so I better get some serious education"? Formal education is not stressed by those most visible in the BiggerPockets culture.
@Russell Brazil - What contributed most to you learning how to think 4 Dimensionally instead of 2 Dimensionally? Was it something that you were familiar with before you started your real estate investing career? Was it a resource that helped you understand the concept? Did you figure it out after your 1st, 10th, or 100th deal?
I guess all my questions could all be summed up by this: Should a new and inexperienced investor who has done some self-education just get started and they will understand what they need to know along the way, or should they be doing major, profession preparation before taking steps into the real estate world?
Thanks in advance for your responses!
- 6yDaniel SmythPro MemberRental Property Investor · Rockford, IL · Member since 2019 · 471 posts · 342 votes
@Mike M.
Almost with you here.
Just getting started myself, I will end up doing wholesale deals.
Buying legal representation, because another set of eyes can help in the deal. And the closing of the deal.
In my contracts, with be language that requires clean title before closing. I would next try to find a way to get the title search done before I make my deal. This means my costs will be higher than someone just finding a property. Thus, I would expect a good price on my sale of the purchase contract.
Working on the plan, but safe and sure, is money well used every time, unless you have that money to loose.
Anyone, am I going the right direction?
Thanks.
- Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes6y
For rentals - the "its my property so its my choice" mindset when it comes to legal matters. IE "I won't rent to someone with kids because they'll destroy my newly remodeled unit," or, "If you want to move in to your new property, just give the tenant notice they have to move by months end, their lease was with the seller not with you," and the ever frequent, "Tenant didn't pay his rent so I changed the locks and/or turned off the water".
And in general - folks in the above group pinching pennies to not pay a professional to handle what they clearly cannot do themselves, either due to lack of ability or knowledge. That goes for accounting, contracting, PM, etc.
- Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes6y
What do I think people get wrong?
Money, money management
How?
They think that they need an LLC to protect their assets, when they have no assets...
They think that they are spending 'other people's money (such as the rent they paid) to make a payment on a house. Nope, rent is due on the first, due to ME, MY rent, its no longer their money...MINE on the first! And I should manage it as MY money, not a freebie, not a gift, but something that is mine.
They want to use a HML on an asset they want to fix and keep, and hope to refi...but with a HML for at least 6 months, and no experience of fix/rehab they likely will not come out ok, but hear it as a way to get in the game.
They want to enter into a wholesale contract with no money to perform, another using other people's money thing.
They want to manage a syndication, because they did real good in the real estate boom and now are real estate geniuses, kind of like selling ice cream in the Summer. They did good. So now they can make money off of other people's money. And likely will loose all the people's money in the bust, again like selling ice cream in January in Maine. But people do not understand the real estate money cycles.
- Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes6y
A scary amount of people have no idea how to accurately assess how much they are making/losing on a property. They fail to take into account opportunity cost of the money they used for the down payment, principal reduction, appreciation, capital improvements, etc. Instead it is "I cash flow +/- $100 a month, therefore, I make/lose $100 month."
- Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes6y
To me success in real estate requires some combination of time, experience, money and network. A lot of people I find starting out try to do so with only time. I run into so many people looking to start out by wholesaling with no experience, not network, and no money because it's a dream that's been sold to them. Needless to say most aren't around in 6 months time.
- San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes6y
Regarding new landlords, not learning the landlord-tenant laws for their jurisdiction, not screening tenants really well.
- Rental Property Investor · Houston TX / Tacoma WA. · Member since 2019 · 166 posts · 89 votes6y
@Joe Splitrock
After repair value (ARV), Rehab cost, average rental income for a buy and hold unit, expenses of a rental unit such as CapeX management and vacancy.
Another thing everyone thinks they are right but not really, is timing the Market crash.
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