The 3 Dumbest Mistakes Buy & Hold Real Estate Investors Make

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There is no doubt that even the professional long-term real estate investors are prone to the occasional slip up, so don’t feel down if you make some mistakes. After all, it is all a part of the learning process. However, do keep in mind that it is definitely an error if you consistently repeat these mistakes and fail to learn from them.

It may just very well be that you haven’t actually made any mistakes so far (which you should), but nevertheless, in order to give you that extra heads up, here are a few of the stupidest slips you could possibly make as a buy and hold investor.

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

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Overpaying

There is definitely a lot of emphasis whizzing around the world of real estate investing on always having to get the best deals if you are a flipper or a wholesaler — and fair enough. In order to be a successful flipper or wholesaler, you will definitely need to be able to get great deals to earn that quick profit.

landlording-mistakes

However, even if you are a long-term investor, this definitely does not mean that you should pay more than you should — after all, having a sky high mortgage equates to a payment that is far too high, resulting in some serious danger surrounding your cash flow. Hence, as a buy and hold investor, definitely do take the time to learn the best ways to buy low and snag the top deals. By simply trying to imitate the clever tactics of a flipper or wholesaler, you might just find yourself creating some great immediate equity on your investment!

Over-Appreciating Appreciation

One of the biggest mistakes that investors make is purchasing rental properties with very minimal (or even negative) cash flow simply based on their unsubstantiated hopes that these properties will appreciate in value. This, however, is an extremely risky move, as the market can fluctuate rather quickly, and it is impossible to always accurately predict. So it is strongly encouraged that you never purchase a property with your only profit potential being appreciation.

Related: The Top 3 Real Estate Investing Mistakes I’ve Made (& What I Learned)

Pro Tip: In fact, sometimes the best thing to do is to purchase a property below market value or improve a property to add value. In addition to this, it is a good idea to purchase a property that already has a positive cash flow, as this will allow you to bring in income as soon as you rent out the house. So, since you are investing for cash flow, don’t worry about home values; if the home value goes down, it doesn’t really matter because you are making money from the cash flow and not the selling of the property. Remember, real estate investing is a long-term play.

assigning-contracts

Not Treating Landlording as a Business

This might come as a surprise to many, but landlording is actually a business. In order to keep your assets performing, it is best to maintain property upkeep, tenant relations, and finances. So while the majority think that landlording is an easy-going game of handshake agreements, emotion-based choices and loose regulations, remember that if you want to make it in the long run, you have got to be assertive!

Investors: Surely there are more stupid mistakes out there — which ones do you see made all the time?

Leave your comments below!

About Author

Sterling White started in the real estate industry at a early age back in 2009. The company he co-founded Holdfolio is a real estate crowdfunding platform based in the Indianapolis market. Before founding Holdfolio Sterling and partner Jacob Blackett were involved in the purchasing and selling of 100+ single family homes nationwide. In his free-time he trains for a World Record

38 Comments

  1. Russell M.

    Treating Real Estate Investing as “Passive Income”

    Regardless of whether you actively manage your properties, or have a management company, you still need to be involved and aware of what is happening. The old adage that no one cares as much about your money as you do, applies equally to your property. Don’t expect to purchase a property, set it, and forget it.

    Paying attention day in, day out to what is going on, from tenants, to maintenance, to bills being paid, etc. will not only allow you to address issues more quickly when they arise, but also to get a rhythm for property management and working with the different aspects of the business. The less you treat it passively, the more control you have over your profits, and the more experience you will gain as you move down your real estate path.

  2. Andrew Syrios

    Paying too much is a big risk for buy and hold investors, especially since there’s no feedback mechanism. A flipper knows very quickly if they made a mistake, but buy and hold investors can rationalize mistakes because they don’t have to sell (and can always disagree with any appraisal). There is a dangerous tendency to get lazy with buy and hold that such investors need to be very careful about.

  3. Billy Smith

    Yes overpaying is a huge issue on buy and hold ,if I follow my rules: 1 location ,2 buying a house close by ,3 avoiding major foundation work ,checking the sewer. I can deal with most issues after that just matter of the right price for what needs to be done, 4 priced right.

  4. Joseph Ziemba

    I have found a duplex that can barely cash flow. The market around me is pretty inflated so this actually seems like a pretty good deal. And I plan on moving into one side which is what makes the deal a winner. Saving 200$ a month on rent is basically another form of cash flow.

    This is also my first buy. I’ve been watching the market for about 8 months now and this is the first one where my conservative numbers don’t come out red.

    Any advice is always appreciated! Thanks for reading

  5. Donald Cooley

    Great article Sterling, thanks for sharing. We just recently purchased our first buy and hold, we’ve since rented it within 3 weeks forcing is to develop some systems. I find so much of the information on here to be helpful. We are making a strong effort to create a professional atmosphere with our tenant especially with using many of the forms available on BP. I appreciate many of the articles that are posted offering great advice in how to proceed to the next step or even next level. Thanks again for the info.

  6. I thought about the same thing yesterday as an investor friend of mine wanted to show me his boat.

    We drove out to a place he has on the gulf here in central Florida. As we got there he told about the house with it’s dock and deep sea gulf access. According to him, he overpaid for it back in 2007 and it wasn’t until now he started seeing a chance of making some money on it.

    He then showed me another very similar house down the street that he had bought 2 years later. For 35 000.. A bargain! His logic was that if he thought the first house was a decent buy for 100 000, he didn’t let the poor market make him belive differently about the second one.

    As a result, he has two houses on the gulf for an average of $67 500. Prices in the neighbourhood today is north of $100 000 making his deals pretty good.

    Not sure why, but the fact that we should focus on how we average in total hit me pretty hard on the drive back. By staying away from over extending ourselves, thus keeping from bankruptcy, averaging good profits through appreciation shouldn’t be that hard. Time is money 🙂

  7. Jessie N.

    My dilemma is that I am looking for an owner-occupied duplex, but the ones in the area that’s suitable for us to live are just not producing enough cashflows (the mortgage is a lot higher etc). The cheaper ones make so much more sense, but I don’t want to live in those areas. I feel that I am over-paying for owner-occupied duplex, yes I can save on rent, but what happens after I move out? It will probably just break-even with very little cashflow.

      • Jessie N.

        Thanks for replying Sterling! always enjoyed your articles, very helpful for a newbie like me.
        It’s no negative cashflow, but just very little, I did deal analysis at BP, only less than $100 positive cashflow, the rent definitely doesn’t meet the 2% rule, actually only 0.95%. I can get the same rent with a duplex that’s almost 50~60k less, but the area is not as decent. Should I make compromise due to owner-occupancy?

        • Sterling White

          Jessie I would just keep digging until you find a deal that feels right. From the context you have given me it feels as if you are a little unsure about both the deals you are looking at. You will know when the deal is right!

          Hope that helps

  8. Preach! I know some buy and hold investors who didn’t care in the slightest about the crash (beyond the temporary impact it had on their net worth), because their properties cash flowed the same in 2008 as they did in 2005 and as they do now. They weathered the storm and came out unscathed because the bought right, financed right, and were investing for the long term.

  9. sherwood sohmers

    Good comments from all. I just need to clarify two things. Today appreciation is very low, so counting on it or not does not make a difference in your purchase since this can not be a prime benefit anymore.
    Second point is that real estate investing is long term. That is true, but each buy needs to be evaluated on its own. Therefore, you need to be willing to let go several years after you purchase a property, even at a loss, if it is not performing. Hopefully you will end up with some cash that you can re-invest.

    • Sterling White

      Great question Yatznira. Overleveraged is when a investor’s asset(rental property) is carrying too much debt(loan), and is unable to pay interest payments from loans. Overleveraged investors are unable to pay their expenses because of over excessive costs.”.

      Investor X puts 1M down on apartment worth 4M and has monthly payments of $14,322.45 for the 3M loan. At purchase the apartment brings monthly income of $20,000.45 thus leaving room to pay off the monthly loan. If a economic downturn happens and the rents are cut in half leading to apartment bringing in $10,000 then the loan will not be covered due to debt over-exceeding the income asset is bringing in.

      That was a very simplistic breakdown. Hope that helps.

  10. William Yeh

    Great post!

    On a more nuanced note, not studying the rental market thoroughly enough can also impact long term financial performance. To explain, I’ll share a story.

    I help put together a portfolio of a dozen SFR rentals and have several more in my personal portfolio, all in the area I grew up in. In putting these buy and hold investments together, we did all the typical pro forma analysis and purchased those homes that fit our model (in our case it was purchasing homes that performed at a 5.5% net cap or better).

    What we observed over time is that with the bull market of 2013, each property was subject to the micro climates of each neighborhood, both in terms of property appreciation and, more importantly, in terms of rental increases. One of our homes happened to be in the most desirable part of town and in an HOA with a max rental ratio limit and had rents go up from $1795 in 2010 to $2195 today. Then we have homes that have barely budged from their initial rental rates because they were impacted parts of town. Mind you all of our homes had the same starting point in terms of the pro forma.

    Long story short, do more than just your basic pro forma. Having an intimate understanding of ALL of the factors which will affect your investment’s performance can and will pay dividends. Obviously that’s easier to do when the property is under your nose vs. out of state.

    Hope that helps someone and happy investing!

  11. charles johnson

    This was a great post, actually all of the comments are great as well. I really want to thank everyone for being so involved in this community. I am new to investing and I am about to close on my first deal (fingers crossed) a buy and hold. The asking price was 120k and I got an accepted offer at 100k. I couldn’t find comps because it was the only triplex in the area so I went off cashflow to determine if it was a good deal for me or not. How in the future can I get comps if there aren’t any similar structure in the immediate area. Also I know there are people who will fund flips but are there any funders that wont charge a large amount of money for buy and holds?

  12. charles johnson

    Pro

    charles johnson on April 10, 2016 12:31 pm

    This was a great post, actually all of the comments are great as well. I really want to thank everyone for being so involved in this community. I am new to investing and I am about to close on my first deal (fingers crossed) a buy and hold. The asking price was 120k and I got an accepted offer at 100k. I couldn’t find comps because it was the only triplex in the area so I went off cashflow to determine if it was a good deal for me or not. How in the future can I get comps if there aren’t any similar structure in the immediate area. Also I know there are people who will fund flips but are there any funders that wont charge a large amount of money for buy and holds?

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