Want to Lose All Your Money & Cry Yourself to Sleep? Make These 4 Newbie Mistakes!

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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!

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1.) “I Can Do It All Myself! I’m Superman!”

As a real estate investor, you wear a LOT of hats. giphy

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.

However…

The problem is newbies tend to stay in that state for FAR too long.

Like, years.

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!”

200-2I just know this is going to be a great investment property!”

Related: 4 Toxic Habits That Sabotage Even the Most Promising New Investors

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.)200-3

And I’m not just talking about rentals, either.

Whether you are doing flips, wholesale deals, landlording, or whatever — you need to manage what gets done to make sure it gets done correctly.

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.

Related: 3 Common Misconceptions About Real Estate Investing Newbies Believe

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? 200-4

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.

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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.

 

About Author

Brandon Turner

Brandon Turner (G+ | Twitter) spends a lot of time on BiggerPockets.com. Like... seriously... a lot. Oh, and he is also an active real estate investor, entrepreneur, traveler, third-person speaker, husband, and author of "The Book on Investing in Real Estate with No (and Low) Money Down", and "The Book on Rental Property Investing" which you should probably read if you want to do more deals.

40 Comments

  1. Christian Bors

    A common mistake for newbies is estimating rehab time (especially if you are doing the work). My first brrrr I thought would take me 3 months. Wrong! It took me 7 months. I had a tenant move out which needed to completed be remodeled. Estimated it would take 2 weeks. Wrong, it took me 4! Double your rehab estimate if you are a newbie. So much better to over estimate then under.

  2. Mike McKinzie

    Here is another one. Make sure the expert who is mentoring you is a true expert. Early in my career, I had an agent talk me into a house for $120,000 swearing it would sell for $150,000. Three years later I sold it for $80,000. But revenge is nice, I retired five years ago and that agent, who is 14 years older than me is still hawking over priced properties!!!!

  3. Andrew Syrios

    Very good list! I would add trusting a pro forma and buying out-of-state without doing really, really thorough due diligence up front (or believing that just because properties are much cheaper than where you’re from that that must mean they are a good deal).

  4. Roberto Escapita Jr

    I fear the “what if it doesn’t work out?”
    I recently found my potential mentor here locally, in which, he’ll guide me, show me the ropes as long as I do my part and more for the team! It’s scary but exciting, so I said to him ” I’m all in! I’ll do whatever it takes to contribute!” He replied, “that’s what I like to hear.”
    Exciting, isn’t it? Great article by the way! You motivate me so much Brandon! You’re going to be one of those guys on my list that changed my life for ever that I’ll be indebted to.

  5. Alan Mackenthun

    I’ll 2nd #4. I’ve got 12 doors. 8 townhomes and 1 4-plex. The townhomes were built between 1994 and 2007. The 1968 4-plex requires more maintenance way more maintenance than all of the other properties put together. Early on I bought one house at about 1/3 the cost of my townhouses. It was in a not so good part of town and was built in the early 1900’s. It took forever to get it rehabbed and every project took longer than expected because nothing was square and construction techniques from 100 years ago just don’t cut it in the 21st century. I couldn’t find decent tenants and they didn’t last long when I did. If you’re buying cheap properties make sure to bump up your maintenance budget (I’d say times 4) and expect higher vacancies (Maybe 12% vs 4%). I get higher rents with much less maintenance and vacancies in my townhouses.

    I’d also add one thought. Investing out of state. I haven’t learned this 1st hand, but I’ve seen a number of other people invest out of state and get taken. It’s just a high risk proposition.

  6. Great , fun read. As a “Prudent Number Cruncher”, I particularly enjoyed your comments about math in point #2. One suggestion for the “Math” portion – document your assumptions used to determine your numbers and date it. Monitor and evaluate the difference at the end of the project. Update assumptions for next project. Repeat.
    This process helps you remember what you were thinking at the time, explain it to others, and learn from the process over time.
    All the best!

  7. David Lopez

    Very true to all of your points. DO THE MATH, and never ever buy on intuition. As a newer full time investor in the FL market you need to know the numbers because the home prices here are so up and down from one street to the next research is key and necessary to avoid losing your shirt.

    If I can offer one good tip is you need to become an expert at every aspect of your project. This does not mean you need to do the work but inspect often and read as much about the materials, installation, and effects of weather, material makeup, and everything else you can get your hands on. Cheap is not always better. This goes for home prices and materials also.

    Know what people like in the market and what is acceptable. Maybe you don’t like tile floors but they sell in the market you are currently working in. If something does not seem right open your mouth because fixing it when the project is done will cost you a ton of grief and probably money. I learned this with a recent floor installation I had completed. While I know floating floors inherently make some noise depending on flatness and underlayment the 3000 sq/ft I was having installed sounded a little louder than normal. My gut said say something but I was pressed to finish and all of their other work was perfect and it looked great overall. That noise is now the biggest negative comment when people walk through. I will never install this type of floor again without figuring a glue down process, even though it increases the price by 20-30% for materials, because that few grand would have possibly not only saved me money in the long run,. it would have probably gotten me a quick offer above my estimated ARV. So now $2500 for staging later and some minor repairs I am hoping to still meet my goal but am sure I lost added profits because of lost buyers early on.

    Good luck to all and if you have any other questions I have many more stories or experiences that may help on your project. Feel free to reach out.

    Regards,
    Dave

    • Loved your story Dave, I wish I could talk with most people doing jobs like this. I was an apprentice plummer, an apprentice electrician, a journeyman carpenter. I never had the time for TV (never even had one in the house) always studying and learning new skills. I am an expert in every skill in house construction, floors, drywall, plumbing, wiring, roofing, framing, HW floor laying, painting and have an investment in tools of about 250k. One of the things that is hard for me is trying to convince clients to do it right the first time, I like to tell clients I’m the laziest guy on earth I like to do it right the first time because I’m too lazy to do it twice.

  8. Jeff Moore

    Good article. I am definitely guilty of looking at the broad numbers when evaluating properties. That was a great line about the napkin not being able to soak up the mess they are about to make. I am in the middle of a reno on a duplex right now. This is the first time I’m hiring someone to replace some windows and doors instead of doing it my self. I am feeling smarter already and my back is thanking me as well.

    • Scott Wang

      You mean you miss out on some deals? This reminds me, I used to work with someone involved in stock market investing. He would frequently say “I would rather be out of a trade wishing I was in, than in a trade wishing I was out.”

      In other words, I’d rather miss a deal I wish I took, rather than wishing I didn’t get into a bad deal.

  9. Working on my management skills at the moment. Definitely a weaker area for me, but I learn something new every day it seems. Didn’t realize Bigger Pockets had a book covering this topic. Will definitely have to add it to my list.

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