As an active investor and willing presenter at local real estate investment clubs, I am often asked about what common mistakes new investors make. Regrettably, I am rarely asked how to avoid the mistakes. The list of mistakes new investors can make is unfortunately rather long. In this post I am going to focus on three mistakes I find as prevalent, annoying and altogether avoidable.
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
Three Avoidable Mistakes New Real Estate Investors Make
New Investor Mistake #1: The “Shooting Star” Syndrome
I am sure you have seen this investor if you have been in this business for more than 6 months. Their passion burns bright. They are buying every book and education program insight. They are active contributors on BiggerPockets Forums and other real estate sites.
Then, without warning, their passion is gone — the books go unread, the programs unwrapped and you never see them post another comment. It is this rush of passion combined with the sudden disappearance of interest that has caused me to call these investors the “Shooting Stars”.
If you see yourself, a family member or friend acting in this manner, ask yourself or them what you/they have learned and what you/they want to accomplish with the business. If you can step in while the passion is still burning and get them to stay focused, you might be able to keep them in the game. I have found a two-step process that works best.
First, I ask the “Shooting Star” to clearly outline why they think real estate is the answer and what they expect to get out of the business.
You will likely get high-level non measurable answers. Such as, being successful in real estate can give me freedom, allow me to quit my job or make me rich. None of these answers are good enough. I need them to think about how much money they want to make a month or year. I want them to talk about why they want freedom or the ability to quit their job. I want them to think about why they are in this business and what they expect from the business.
Second, get them to set goals in 90-day intervals. Set a one-year goal and then break it down into small intervals, so we can show and measurable progress. If you can create achievable short term goals, you will continue making progress instead of giving up before you even began.
What are your 90-day goals and how do you track them?
Please don’t be a “shooting star”. This is a great business it just takes time to get the momentum going.
New Investor Mistake #2: Angry Math Teachers
The most common “Angry Math Teacher” is “analysis by paralysis”. When you spend more time analyzing a deal than looking at the property, you have a problem. I am sorry, but a deal is a deal and no amount of analyzing is going to make a deal look worse or better.
If you are constantly tweaking a few numbers to make the deal work, it isn’t a good deal. Move on to the next one. A marginal deal is not a deal.
Another “Angry Math Teacher” is “Excel Kong Fu”. This is the investor who can manipulate a spreadsheet and make it calculate 10-year Performa’s, depreciation scales, rental rate escalations, and so on, before they even start on their first deal. All of that stuff is great, but instead of spending hours building endless excel sheets please go out and look at more properties.
Remember, a Deal is a Deal and a fancy Excel workbook won’t help a bad deal look better.
The good news is that both of these issues are actually easy to fix. It starts with getting a baseline understanding of your market, and is followed by creating your criteria to what a deal is.
Once you have your criteria, start executing offers on properties that match your criteria and ignore the ones that don’t. Don’t let the “Angry Math Teachers” waste your time or worse yet, cause you to buy a marginal deal.
New Investor Mistake #3: Karma
The final mistake is “Karma” — more importantly what it takes to get Karma to work for you.
I run into new investors all the time who have all the energy in the world, they are just looking for that one break. They know to their core that all they need to be successful is one lucky break and they will do the rest.
I am sure this strategy has worked for a lucky few but I wouldn’t count on it. Instead of hoping positive energy will equal success and that one big break, I suggest you focus on creating value.
There are lots of new investors with no money. However if you have time, passion and energy you can be successful, but it will take work and commitment.
Those with no money need to focus on their market; they must understand value, and be able to spot tremendous deals and solve seller problems. If the new investor can spend their energy in this fashion, they will attract well-funded investors that are long on capital and short on time.
Karma will smile on the investor who does that and the deal flow will start. Once you are known as an expert in a market segment and can spot or create deals, you will have Karma on your side.
Let me be clear – Karma is a great partner to have as a new investor; the harder you work, the better your chance of seeing Karma pay you back.
So get to work, learn your market, meet new people and you will eventually have Karma working for you.