10 Lethal Mistakes to Avoid on Your First Real Estate Investment

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Your first investment will be a learning process.

  • While you’ll definitely make a few mistakes along the way, there are a few common pitfalls that can be avoided if you educate yourself beforehand.
  • From financing errors to underestimating repair costs, newbies are at risk to lose serious cash if they’re not careful.
  • Still, a real world education is invaluable, and this guide will help steer you down the best path possible to your very first real estate investment.

You may have heard that your first real estate investment is the most difficult one. It’s true.

Your first deal is difficult because you don’t know enough. How could you?

Yet you still need to move forward and get started. If you wait until you’re 100 percent ready, you’ll never make progress.

But even though your first deal won’t be perfect, you still don’t want it to be so bad that it will knock you out of the game.

So, this article will help you avoid the 10 most lethal mistakes on your first real estate investment. Use this like a checklist to ensure that you avoid the worst case scenarios.

When you prevent the worst from happening, you will gain confidence so that you can buy your first deal, move forward, and begin your real world education.

Here are the 10 lethal mistakes to avoid.

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10 Lethal Mistakes to Avoid on Your First Real Estate Investment

Mistake #1: Bad Financing

Bad financing can be one of the most lethal mistakes possible. I have personally seen more real estate investors lose money or go out of business from bad financing than from any other mistake.

What is bad financing? For me, it includes a combination of the following:

  1. High interest rate
  2. Adjustable interest rate
  3. High monthly payment
  4. Balloon payment
  5. Personal recourse

Most residential bank mortgages at least save you from the first four mistakes because the interest rates are low, fixed for 30 years, with amortizing payments, and there are no balloons. But they almost always require personal recourse, meaning you personally guarantee the loan with your other assets and future earnings. This is probably a reasonable trade-off.

Many commercial, portfolio, hard money, and private lenders, however, do not meet any of these criteria. And that could be a problem, especially on your first deal.

If you borrow at 12 percent interest with a large monthly payment, a balloon due in one to three years, and full personal recourse for the loan, you are likely taking too much risk.

buy-and-hold-mistakes

Why? Because the property will likely have negative cash flow with the high interest rate. A balloon note means you will have to refinance or sell in a very short period of time. As many learned in the 2008 credit crisis, trying to refinance when credit dries up is very difficult even with perfect credit and good income. And personal recourse means that if anything goes bad and your lender loses money, they could chase you around and take your other assets in order to collect.

I have always used a lot of private and seller financing for my real estate deals, and I keep this list of financing mistakes in mind. For example, I might trade off a little higher interest rate and a larger down payment in exchange for a longer loan term and no personal recourse.  

Related: The Biggest Mistake I Made as a New Investor (& How You Can Avoid It)

The beauty of private financing is that everything is negotiable. But no matter what type of financing you use, be sure to negotiate hard and avoid the worst mistakes.

Mistake #2: Bad Location

Real estate value always begins with location. The people and businesses who will rent or buy from you begin with location, and then they evaluate other criteria like the lot and the house.

Because it’s so important, you should study the best and the worst locations in your area before buying. There are investors who make money in bad locations, but it’s a challenging game that beginners should probably avoid.

I bought a lower-priced single family house once at a below market price with excellent seller financing terms. But the location was awful. I could not consistently attract good tenants because the neighbors were not pleasant (or safe) to live around.

On the other hand, I have bought properties in good locations that I made mistakes on, like paying a little too high of a price. The good location helped to bail me out of some of those mistakes.

everyday-mistakes

Mistake #3: Misjudging Resale or Rent Value

I would argue that our number one job as investors is to understand how our end customers (renters and buyers) make buying decisions and then to translate that to a value. If we can’t determine the full value potential, we will have a hard time making a confident purchase offer that earns us a profit.

This job is important. But it’s not easy. It’s a skill that you must commit to learn and then continue to refine every day for the rest of your investment career.

On your first deal, it’s likely you are not yet an expert on value, so there are a few things you can do to help yourself:

  • Reduce your target market to a relatively small, manageable area.
  • Study all of the transactions in your market daily using tools like the MLS, Zillow, or your local tax assessor. For me, this is like the daily weight training of real estate that keeps me fit and competitive.
  • Hire professionals for assistance. For resale value find a very competent real estate agent and/or appraiser. For rental values find property managers with multiple units in your area.
  • Take courses on valuation at your local Associate of Realtors or other continuing education school.

Mistake #4: Underestimating Repair Costs

It is inevitable that you will underestimate repair costs at some point. But you want to avoid enormous cost overruns that could cause you to run out of cash or face other problems.

To avoid large mistakes, learn a good repair estimating system.  I use the one taught by J Scott in BiggerPockets’ own The Book on Estimating Rehab Costs.

Also be sure to get help from other more knowledgeable investors or contractors. Don’t be afraid to pay these people for their time and knowledge.

You can meet these people by:

Mistake #5: Running Out of Cash

Your investment properties are like your race car. Cash is like your car’s fuel. When out of fuel, even the most powerful race car in the world sits still. If you run out of cash, even the best investment property will hurt your wealth building.

So you want to avoid running low or running out of cash.

This usually happens for a couple of reasons:

  1. Underestimating repair costs (see mistake #3 above)
  2. Underestimating future capital expenses on a rental property

Capital expenses are big ticket items like a roof or a heating-air system replacement. If these costs hit you unexpectedly, it can become a big problem.

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

Brandon Turner wrote a really good article about estimating capital expenses and budgeting for them on your rental properties.

invest-condo

Mistake #6: Letting Emotions Drive Your Decisions

This is a huge mistake for newbies. And it’s understandable. I mean it IS an exciting chase to look for your first deal.

But you have to balance your enthusiasm with cold, hard, and objective analysis.

I love enthusiasm. It’s critical as an entrepreneur because it helps you push ahead through the many obstacles you will face.

But I have also learned to never make big financial decisions with emotion alone. I use a process of analysis that filters each of my deals. I also run every deal by someone else, which typically means my business partner but sometimes includes other mentors and advisers.

My process begins with basic criteria, including general locations, neighborhoods, housing types, construction quality, etc. This helps me to filter down the enormous number of properties out there.

Then I use a deal analysis process to analyze the numbers. Here is my basic go or no-go system for a deal.

I also like to calculate key metrics like the cap rate (or return on asset), the cash on cash return, the discount from full value, and the internal rate of return.

My favorite book to teach you the cold, hard analysis of real estate is What Every Real Estate Investor Needs to Know About Cash Flow by Frank Gallinelli.

Mistake #7: Choosing the Wrong Real Estate Strategy

Fellow investor and BP writer Erion Shehaj introduced us to the dreaded Shiny Strategy Syndrome and showed why it’s detrimental to your financial future.  

Real estate investing has MANY strategies. And as wonderful as BiggerPockets is, it’s easy to get overwhelmed or waste time chasing the wrong strategy.

Here’s a tip: You won’t find a perfect strategy. But you can find one that pretty well suits your unique strengths, your short-term needs, and your long-term goals.

So, instead of borrowing the perfect strategy for someone else, think hard about what you really want and which real estate strategy will get you there.

To get you started in this process, I wrote:  Investors: DON’T Begin by Wholesaling. Take One of These 7 Paths Instead.

Mistake #8: Choosing Bad Contractors

My business partner and I bought our very first fix-flip deal in December of 2003. We proceeded to go through three different painters, two different heating and air companies, and two different carpet installers before we got the house looking decent.

These were expensive mistakes. We were lucky to even make a small profit on that first deal!

Finding contractors who will do good work, finish up on time, clean-up after themselves, and charge reasonable prices is harder than finding buried treasure on a beach. Yet the people who do work on your fix-flip or rental deal will make or break its success.

J Scott does a great job discussing this issue in The Book on Flipping Houses. He discusses the different types of contractors, when to use each, and how to manage the relationship well.

buy-home-investment-property

Mistake #9: Not Using Your Due Diligence Period

Some experienced investors make offers with fast closings, in as-is condition, and with no due diligence period. This may help them get a lower price, but for your first deal this is probably not the best route to go.

Instead, include a short but reasonable due diligence period that allows you to get out of the purchase contract if you find a problem.

Here are a few of the important things I usually do during due diligence:

  • Obtain a very good professional third party property inspection
  • Repair estimates (see mistake #3 above)
  • Evaluate zoning and local ordinances (for example, the college town where I invest has a law that you can’t rent to more than two students in a residential zoning district)
  • Get a professional third party opinion of value and rental comps

Basically, you want to double check all of the key assumptions you used to make your offer. If you find that you made a bad assumption, you may need to renegotiate or walk from the deal.

Related: The Rookie Landlording Mistake Most New Investors Make

Some of your best deals may be the ones you don’t do.

Mistake #10: Not Learning From Your Mistakes

You have just read 9 mistakes to avoid, and I could probably tell you another 20. But no matter what you learn, you will still make mistakes. I guarantee it.

This is called “The School of Hard Knocks.” Go ahead and listen to Annie sing “It’s a Hard Knock Life” and join the club.

But the biggest mistake you can make is not learning from this School of Hard Knocks.

In our first year of business, my partner and I agreed that we didn’t know everything. We knew we would screw up many times. But we decided to call each mistake a seminar, and then write down the lesson.

We have attended thousands of these real world seminars since then, and our education continues today.

Go ahead and decide to create your own personal School of Hard Knocks. It’s an invaluable education.

Conclusion

Real estate is an entrepreneurial venture. We entrepreneurs shoot for the stars, but we also take risks that could turn out badly.

This can be a difficult pill to swallow on your first deal.

But risk doesn’t have to be a bad word. I see it as a barrier to entry. It means that the less committed, pretender-investors don’t bother. They drop out when it gets too tough.

The successful real estate entrepreneurs aren’t perfect. They have scars to prove all of their past mistakes. But they learn to avoid the fatal mistakes that would knock them out of the game.  And they learn to always keep moving forward.

Forward movement. That’s what entrepreneurship is all about.

I hope the lessons of these 10 fatal mistakes help you to continue moving forward at whatever step of the entrepreneurial journey you find yourself.

What did you think of the 10 fatal mistakes to avoid? Are there others that I missed? What challenges are you facing as a new investor?

I’d love to hear your thoughts and comments below.  

About Author

Chad Carson is a full time real estate entrepreneur. He also writes at coachcarson.com, where he shares ideas for how to win with real estate and money so that you can live a better life. For practical advice each week — join his free newsletter.

47 Comments

  1. Zachary Sargent

    This is a great article and I feel that #1 is the most valuable along with #5. Choosing the proper financing is daunting for someone new to this game. However, I will never learn if I don’t get involved and take some risks. Here’s to a bright future for everyone.

    • Chad Carson

      Hey Zachary, I totally agree you have to take some risks set some point. You can rarely get a first deal that is perfect and avoids all of these mistakes. But if you can know the worst ones going in, at least you will have your eyes wide open. Thanks for commenting.

  2. Douglas Skipworth

    Chad, this is a great, thorough list! We usually say the three deadly sins to avoid in real estate investing are (1) overpaying, (2) over-leveraging, and (3) mismanaging. I like the way you expounded on those ideas and added a lot more for us to think about. Thanks so much. We’ll definitely share this article with our clients!

    • Chad Carson

      Douglas, I agree with those 3 deadly sins. One of the mistakes I mentioned was letting emotions control decisions, and I have found that is what often leads to over paying. Bad information or education is a culprit as well. Thanks for sharing!

  3. I have to think back 25-years to my first real estate deal to appreciate the information in this article. It seems adhering to mistake #6 (Letting Emotions Drive Your Decisions) will help guide you through the process. I worked the numbers and due diligence on the most basic level back then, which yielded a decent cash flow and a $15K profit after two years of ownership. Keeping your emotions in check will allow you to slowly and methodically analyze each aspect of a deal.

    Good Article!

    • Chad Carson

      Thanks Randy. Great to hear your perspective after 25 years. Yeah, that one about keeping emotions in check is huge. I consider myself fairly logical with my investment approach, but I could still write a long article with mistakes I’ve made NOT adhering to my own advice on that one. It’s an uphill battle against human tendicies, but it seems the greatest investors, like Warren Buffett, also do the best job of keeping those emotions in check.

  4. Shaquetta Chittams

    This is a great article and very inspiring. My husband and I are working on our 1st property and we’ve made a mistake. If I hadn’t studied up on BP over the last few months I would have beat myself up for making the wrong decision but we’ve learned and we’re moving on. Thanks for the list and the encouragement!

    • Chad Carson

      Shaquetta,
      Congrats on your first deal! It’s awesome that you’re taking action. You’re getting the most useful education – the school of hard knocks;) I’ve been there many times. For some reason, like maybe my head is too thick, but I learn the best when it burns a little bit. Best of luck!

  5. Chris Harjes

    That is all great advice! As a newbie who has made every last one of those mistakes other than the first, I can really take it to heart! Underestimating repair costs and suffering from terrible contractors have been my major downfalls. Working that out as I write- the next five deals will be better for sure!

  6. Joyce Spindler

    Great article. I just finished my first deal: a 4 unit property in Reading, PA. I think I have avoided many of the pitfalls in this article, but I have found that there are some small gotcha’s as learnings along with more unknowns that will more than likely be revealed over time. I completely agree that you have to assume that mistakes will be made along the way (hopefully not catastrophic). The financing advice is really good and I have been trying to maneuver around some of the exact recommendations you mention. I will continue to keep this in mind as I move forward to deal 2, 3 and 4.

  7. Ben Wendt

    This was a great post. I was recently working with a hard money lender and this article came to mind, so I asked him the questions that you mention as being pitfalls in the bad financing portion. It made me feel much better knowing some good questions to ask in order to make sure I’m moving forward with the best chances for success. Thanks!

  8. Stacey Johnson

    I’d Add another item to the list of mistakes:

    NOT ADEQUATELY ASSESSING “YOUR TIME” NEEDED TO COMPLETE THE DEAL/MANAGE PROJECT.

    Time, like money, is finite and we can only humanly do a certain amount of work in a given day/week/month. For most new investors quitting their “day job” isn’t an option. Thus, chosen deals/projects are interwoven with the other “40 hours” for several years until the capital and/or revenue stream can support your life or family’s life. Being honest and realistic in regard to disposable time is paramount to not burning out and staying in the game. Many successful investors add a percentage on to their calculated expenses to cover the unknown and unexpected costs that always tend to arise. This should also be done with time – your time. For example there is a huge difference between wisely buying an income producing rental property with proven renters and little turn-over. Managing this might take a few hours each week, and a bit more when a unit turns-over. This is totally different than buying a fixer-upper rental unit that needs renovation and new tenants to achieve desired return. I have found in these cases that a hybrid of hired professionals and yourself is the most efficient road to completion- when you stick to what you can do best and let others do what is not in your wheel house.

    Be honest with how much time you have to give to a project/deal, what skills you can best leverage, and lastly…….how much time your family is willing to NOT see you.

    Happy empire building!!!!!

    Stacey

    • I appreciate your comments regarding time management, Stacy. Particularly when it comes to “new investors.” However, it is more effective, in my opinion, to talk about time management through a goal-oriented lens. Time management represents a sequence of choices and decisions, and it’s those choices and decisions that you managed, not the time.

      My real estate investing career started 25-years ago in a small Florida beach community. It was, at the time, an unfortunate reality that this community offered no post-college career opportunities. It was an unusual town considering the mean income was $38,000 while the mean housing price was north of $400,000. This was comprised primarily of short-term vacation rentals and second homes. These numbers confirmed my decision that real estate was the vehicle to get me back to this community on my terms, which was to live a lifestyle commensurate with the people that owned those second homes. This goal guided every career decision from that point forward, particularly how I spent my time.

      My career required me to live in a big city roughly six hours from this beach community. I also had to travel nationally five days a week over the next 25-years, which left little time on the weekends to search for real estate opportunities. My strong desire to one day live in this beach community made me focus on how my time would be spent accomplishing this goal. I used time in my hotel room late at night to study the mechanics of real estate investing. I also contacted my network – in this beach community – during downtimes while traveling (e.g., airports, etc..). I scheduled viable business meetings in, near or around this beach community when real estate and sales opportunities presented themselves. The end result was owning two vacation condominiums and two rental properties within the first six years of moving. It doesn’t sound like much, but it was a good start in getting me home.

      I’m currently living 100 percent on passive income generated through commercial and residential real estate investing; all, by the way, in this beach community. If the goal and desire is strong enough, then good time management will follow.

      Gary Keller wrote a book called The One Thing that may help in managing time relative to one’s goals. I love the quote, “Things that matter most should never be at the mercy of things that matter least.” If you want it bad enough, you will find the time.

    • Chad Carson

      Stacey,
      I agree that underestimating time investment is a big mistake. Many newbies don’t realize how much time and energy it really takes to get the ball rolling. Then they get frustrated and give up too early.

      With that said, particularly on the first deal I am not sure efficiency is the top priority. Within reason, stumbling around and bumping Into things is part of the learning process. Later once you learn more, you can really hone your time efficiency.

      Thanks for sharing your expertise.

    • Chad Carson

      Yeah, like the trulia.com tools to look at neighborhood crime. It is not a perfect representation, but it is a good place to start.

      I like also just viewing areas in the evening or Saturdays. That tells you a lot about the character of a place.

  9. Caleb Friberg

    Great article Chad! A lot of these points really hit home. My first rental, I overpaid & I didn’t do an extensive research on rent rates but like #2 on location, I bought in an amazing location and that’s the ONLY thing that saved me. Lesson learned and not much else to do but push forward. Thanks for the article Chad, keep ’em comin.

    • Chad Carson

      Hi Sheika,
      A good closing attorney or title company is a key expert on your team. Their primary responsibility is to research the title before you ever give a non-refundable down payment. Most standard Realtor contracts include contingencies for a good title before closing.

      So in short, don’t give a down payment unless you receive certification and title insurance saying the title is good. Are there any specific issues you’ve run into?

  10. Fay Chen

    Victim of Mistake #4: Underestimating Repair Costs. I learned from someone who did flips, got a good contractor, read a lot of blogs. but still underestimated by $20K the first time. So I adjusted my numbers and even added 20% to my estimate. I thought I got a good handle on things the second time, but still underestimated by $5000. Just as I thought I learned from my mistakes and included the hidden costs, some other new hidden costs shows up! The danger lies in the unknown unknowns. It sucks for us newbies who have to uncover those through experience.

    • Chad Carson

      Hey Fay, thank you for sharing your story. I’m sorry you had to experience that, but I think it’s really important for others to hear what you had to go through. And you’re not alone! I’ve been there, done that too – even when I should know better!

      Estimating remodel costs is not an easy business. Even some professional contractors like new construction because of all the unknowns that pop up with renovations. But sticking to simpler houses and simpler projects with costs you can know reasonably well helps some.

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