You know that I love you, right?
Maybe not the “I want to have your baby” kind of love, but the “I’m about to yell at you, and I’m doing it because I care” kind of love.
Don’t you feel special?
Now, as the title suggests, this post is geared toward newbies.
But what’s a newbie?
I would define “newbie” as anyone who doesn’t feel like they “know it all” in real estate yet.
Yes, that means you. And me. And of course, Ben Leybovich. (But not Brian Burke, ’cause that guy really does know it all.)
So, really, this post is for anyone who is trying to build their real estate empire.
That means you! So keep reading.
These are the four mistakes newbies can’t seem to help making — but not if I have anything to say about it!
How I Bought, Rehabbed, Rented, Refinanced, and Repeated for 14 Rental Properties
This is the dream right? Going from zero to 10+ rental properties, providing stable cash flow and long-term wealth for you and your family, and building a scalable business model to boot! Learn how this investor did just that, in this exclusive story featured on BiggerPockets!
1.) “I Can Do It All Myself! I’m Superman!”
As a real estate investor, you wear a LOT of hats.
One day you are a home inspector. The next day a master negotiator. The next a marketing wizard. Then a manager. Sometimes a plumber.
And that’s not a bad thing, necessarily. When you first start, you don’t have a lot of cash to use to hire other people, and you need to use what you have.
The problem is newbies tend to stay in that state for FAR too long.
If you are trying to build a real estate business, begin thinking NOW about the systems you can outsource. Can you hire someone to clean toilets while you look for deals? Can you hire someone to answer phone calls and pay them on a per-deal basis? Can you buy such great deals that the cash flow covers management?
(And yes, Ben, you can buy properties that cash flow enough to cover management! You just gotta look harder! 😉 )
2.) “Math?? Who Needs Math!? I Have Intuition!”
“I just know this is going to be a great investment property!”
No, you don’t.
Not unless you’ve run the numbers — and run them correctly.
Newbies tend to do far too much “napkin math” that will never soak up the mess they are about to make. They look at broad numbers, like “total income” and “the mortgage payment,” and assume anything else is profit.
The truth is:
There are a lot of potential expenses you should be aware of when analyzing a real estate deal.
For more on this, read “How to Accurately Estimate Expenses on a Rental Property in 3 Easy Steps.”
3.) “Sure… It’s OK… I Like Being Stepped On!”
Management is a MAJOR part of the real estate investing game. (So much that we wrote an entire book on it.)
And I’m not just talking about rentals, either.
Let’s specifically look at rental property investing. Newbie landlords are notorious for being far too soft on their tenants.
“Sure, it’s okay to have that 90 pound dog, despite the no-pet policy. I am a dog person, too!”
“I understand, just pay me what you can, when you can.”
“Oh, OK. No problem. I know you had a lease, but how can you pass up a deal like that?”
For all you newbs out there who are tempted to say these things to your tenants, let me tell you three words that will completely change your landlording forever:
Firm but fair.
Don’t be a jerk, but have rules and stick by them. When rent is due on the first of the month, charge a late fee if it’s not in. If you have a no-pet policy, make them get rid of the dog.
I know it feels like you are the bad guy, but trust me: If you give a mouse a cookie, he’s going to ask for a glass of milk. In other words, if you let your tenant ignore your rules, they will walk all over you. Soon you’ll have to evict them, and then everyone loses.
The same applies for employees, contractors, vendors, etc.
Don’t be a softie. Manage firm but fair.
4.) “I Love Buying Cheap Properties!”
Do you know the difference between price and cost?
Don’t feel bad.
Most people don’t.
Price is the amount you pay for an item, i.e. “The price of those shoes is $20.”
But the cost is much different. The cost is the long-term amount you’ll pay for something.
And I’m not just talking monetary.
For example, the price of a cheap pair of shoes might be $20 from Costco.
But the cost? Well, those shoes are going to last me six months, max. Then, I’ll need to get another $20 pair. And then another. And the pain in my foot from running in cheap shoes that’s going to just get worse over time.
Clearly, the cost of those cheap shoes was much higher than the price.
The same applies to real estate. Price and cost are very different. A property might have a low price, but the long-term cost of owning that property might be much higher.
Most of my early properties had a low price, but an extremely high cost. And again, I’m not just talking monetary. Some of those cheap deals take more management time, cause more headaches, and raise my stress level FAR higher than properties that I’ve purchased with a higher price.
I’m not telling you to go buy expensive properties.
I’m simply warning newbies to understand that just because a property is cheap doesn’t mean it’s a good deal. The cost might be far higher than you want to pay.
OK, I’m done yelling at newbies!
Let’s get out of here.
But first, now it’s your turn. What mistakes do YOU fear making in your investing business? Or what mistakes do you see other people making?
Take a minute and leave me a comment answering one of those questions.