Posted 7 months ago

Pitfalls for new investors? Investing in deals they don't understand!

Investing In Deals You Don’t Fully Understand Real estate is not like other investments. Take stocks, for example. If you buy stocks the worst that can happen is you lose the money you invested, right? However, what’s the worst case scenario with buying real estate the traditional way? You could not only lose all the money you put into the deal, but you can also sustain additional losses if you borrowed money and not to mention the long term damage to your credit. Plus, real estate requires ongoing management on your part. Problems you may never have expected pop up and decisions have to be made. Therefore, a bad real estate investment can cost you more than just your original investment. You can go into additional debt if the losses exceed what you put into the deal when you factor in debt costs, management costs, materials and labor and the time you put into trying to make the deal work! Keep in mind, I am not trying to discourage you but you have to know real life real estate is much different than reality shows! What then is the biggest mistake you can make as a new investor? Investing in a deal you don't fully understand! If you don’t know what’s the worst that can happen if a deal goes south, you don’t fully understand a deal. Examples of not understanding what you are getting into include: • Buying rental properties that are barely cash flow positive then having a bad tenant live for free for several months. • Rehab projects that end up half done because a contractor walked out on them, or a building inspector required work be ripped down and done over. I have firsthand experience with both of these examples. Other investors have certainly learned other valuable lessons the hard way. Here's how you as a new real estate investor can avoid getting involved in deals you don't fully understand: # 1: Know how to value real estate yourself so that you aren’t relying on real estate agents, appraisers, or anyone else as your eyes and ears as to the value of the property. Certainly they can help to confirm your assessment, but you HAVE to know exactly how real estate is valued so that you know if you are getting a good deal or not independent of anyone else. # 2: One of the biggest places where investors have problems is in getting quality rehab work done economically. Get 3 bids from highly recommended, great reviewed contractors, and then for the one you hire, only pay them as work is completed. Put everything in writing. Build in financial penalties if they don’t complete the work on time. Stick to the written agreement, even when the contractor makes up tons of stories on why things didn’t work out as planned when the agreement was first written. If the contractor doesn’t follow the agreement, fire them and hire one of the other three you had originally interviewed. Or, better yet, skip dealing with contractors altogether and just flip the property to another investor because oftentimes a quick nickel beats a slow dime. # 3: If you are going to put your own cash, credit, or both into a deal, always pay for title insurance. That way, if the deed is done fraudulently, your title insurance will cover it (ideally they would have caught it before it ever closed.) # 4: Don't bite off more than you can chew. Educate yourself. Find a mentor willing to teach you in person, by phone or any other means. Investing in real estate can be done wisely. Only get involved in deals you fully understand. Know your exit strategy from any deal. In fact have a mitigation plan for that strategy as well! Always have a clear understanding of what the worst possible outcome is from a deal and then whether that is an outcome you can handle. And continue to educate yourself. It will be well worth your time in the long run. Let’s all learn from each other! Please share examples of real estate deals where you may have made a mistake. Comment below. We can all gain from hearing real estate war stories because there are always great lessons in them. Let’s hear some stories of what NOT to do when investing in real estate!


Comments (1)

  1. Thank you for your post.