7 Lessons I Wish I’d Known When I Started Investing in Real Estate

by | BiggerPockets.com

In the beginning, I was afraid. Later, I was greedy and reckless.

Neither worked out for me very well.

I spent my first few years in the real estate industry helping other investors get financing to renovate old homes. I was in my early 20s and wanted to get involved, but wasn’t quite “ready” emotionally.

Then I bought my first buy-and-hold deal, and it worked out pretty well. After that, I became a vacuum cleaner, sucking up every deal I could find.

I lost a boatload of money. Some of these bad deals still cost me to this day.

I wish I had a time machine, so I could go back and slap some sense into my younger self. Here are the seven lessons I’d use my time machine to teach myself. Learn from my mistakes, so you don’t have to suffer the results like I did!

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7 Lessons I Wish I’d Known When I Started Investing in Real Estate

1. Learn how to forecast cash flow accurately.

The first lesson of cash flow is that it’s a long-term average, not what happens in a “typical” month.

Cash flow works like this: For nine months, you’ll be sitting pretty, banking the (hopefully wide) margin between your rent and your mortgage. Then you’ll be slapped with a $3,000 furnace repair.

Or your tenants will decide to stop paying. Or they’ll sue you because the neighbor’s dog looked at them funny. Or whatever.

Novice landlords say to themselves, “What bad luck! Oh well, this was a freak one-time expense, next year will be better!” Which is, of course, bull$%#t.

By contrast, experienced landlords say to themselves, “Good thing I budgeted for these expenses in my cash flow calculations.”

You need to include repairs, maintenance, CapEx, vacancy rate, property management fees, accounting costs, administrative costs, property taxes, insurance, HOA fees (if applicable), and maybe even your shrink’s bill.

Sound like it’s difficult to find deals that will still cash flow properly after all those expenses? It is! Finding good deals is work—they’re not just strewn all over the MLS.

But if you learn to forecast these expenses accurately and you only invest in properties that still cash flow well, you are virtually guaranteed to make money. If you get cash flow forecasting wrong, prepare to lose money. The good news is that it’s not hard to get right, once you know what questions to ask.



Related: 4 Lessons We Learned as Our Property Management Company Grew

2. House hacking is an ideal way to get started.

What’s better than living for free? Not much.

If you aren’t deeply familiar with house hacking, read this case study about an ordinary guy with no real estate experience who house hacked and now lives for free. It’s rich in detail and will show you exactly how you can do the same thing.

When your neighboring renters pay your mortgage and other housing expenses for you, you can throw your savings into hyperdrive. For most people, their highest expense is housing. Remove that, and suddenly they can devote all the money they would have spent on rent or a mortgage toward savings and investment.

Lower expenses, higher savings rate: This is the formula for reaching financial independence very, very quickly. The really ambitious set a goal of living on half their income and investing the rest!

3. The perfect deal is a myth; look for a good deal.

New investors sometimes wind themselves up looking for the “perfect” deal. It doesn’t exist.

In personal development circles, there’s an adage that “perfect is the enemy of progress.” It’s true: If you refuse to act until conditions are “perfect,” you’ll never act. No, today’s housing markets are not as advantageous to buyers as housing markets six years ago. Get over it. That market is gone, and this is the market available to you now.

This is not to say you should buy indiscriminately. Quite the opposite—set targets for ROI and for cash flow, and commit to yourself that you will not buy any properties that don’t meet those standards.

Choose a few neighborhoods to target with care, and then focus on finding good deals within those neighborhoods. Don’t be afraid to negotiate hard to drop a property’s price to meet your standards.

Most importantly, keep at it. There are good deals out there, finding them is just a matter of tenacity.

4. After purchasing, properties’ ROI comes from strong management.

You can score a great deal on a property and then still lose a boatload of money on it. How? Bad property management.

When you buy a property, you’ve forecasted its cash flow, but those forecasts are purely theoretical. They exist only on paper.

In the real world, you’ll earn either higher or lower returns than these forecasts, based on how well the properties are managed.

How well do you screen out bad tenants? How well do you retain good tenants? Does your preventative maintenance extend the lifespans of your mechanical systems? How well do you add value to remain competitive with other nearby properties?

Your returns on rental properties will be based on two things: whether you bought a good deal initially and whether you manage the property effectively. Success depends on doing both right.

The best acquisition in the world will lose money if you lease to a deadbeat who doesn’t pay the rent and then fights you in rent court. Invest time and effort in tenant screening and tenant retention when you’re first starting out—these are the backbone of good property management.

5. Focus on the fundamentals (and forget the rest!).

I can’t tell you how often I see questions from new investors asking about S-corps versus LLCs, or about 1031 exchanges, or some other distraction far over their head.

When you’re a multimillionaire, you can worry about protecting your assets with legal entities or trusts or Harry Potter’s invisibility cloak. When you’re starting out, focus on accruing assets that are actually worth protecting.

And don’t get me started on all the armchair economists who go on about trying to time the market. If housing experts and real economists with actual PhDs behind their names can’t accurately predict market timing, you can’t.

Forget all that nonsense.

In the beginning, there are only two things new investors should focus on: finding good deals and managing them effectively. If that sounds oversimplified, it’s because both of those tasks involve plenty of sub-skills to master.

Related: 10 Invaluable Lessons I Learned From My Very First Tenant Eviction

Learn how to accurately forecast cash flow. Identify good target neighborhoods for rental investments. Find a good real estate agent who specializes in working with investors in those neighborhoods or even a team of agents. Pursue off-market deals. Network with wholesalers, turnkey providers, local banks’ REO managers.

Screen the living heck out of your rental applicants. Manage your properties proactively. Develop trust and respect with your renters.

In other words, focus on the fundamentals: finding good deals and managing them well.

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6. Leave the slums to the slumlords.

I’ve known people to make money in super low-end real estate. But it’s a complex and challenging niche, and it’s not for new investors—or most experienced investors, for that matter.

The numbers are tempting. They look great on paper: a $30,000 house that rents for $1,200; what could go wrong!?

A lot.

Many of my rentals are in bad neighborhoods. I’ve regretted those investments for over a decade. I could tell you horror stories about “professional tenants,” recurring break-ins, junkies using my vacant properties as crack houses, and local lowlifes breaking apart my air conditioning condensers to steal the copper—yes, even after I installed giant steel cages over them.

Or I could try to demonstrate how landlords in these neighborhoods are always in the wrong, in the eyes of the ever-indignant public. Out of one corner of activists’ mouths, they decry that there’s not enough affordable housing, then out of the other they yell “slumlord!” and scream for ever-stricter regulations against the landlords who actually provide that affordable housing.

Very low-end housing is a losing proposition economically and politically. Here’s a simple rule for new investors: Don’t invest in neighborhoods where you wouldn’t want to live, if you earned $40,000/year.

7. You do need a cash reserve, but it doesn’t need to be a fortune.

Landlords need to keep a cash reserve. For that matter, all responsible adults need a cash reserve.

What happens when that $3,000 furnace bill comes along? What happens when your tenant loses their job and stops paying rent? Or for that matter, when you lose your job?

Many personal finance experts recommend keeping an emergency fund of six months’ worth of expenses in cash. But for the average American, that’s somewhere around $20,000.

That amount is ridiculous to keep in cash. It’s wasteful; cash loses 1-4%/year to inflation.

You should strive for a few thousand dollars in a cash reserve for emergencies. And landlords should keep an account where all those CapEx, repairs, vacancy rate, and other expenses we talked about earlier can pile up for when they’re needed.

But keeping more than a few thousand dollars in cash is poor financial management. Instead, keep a few credit cards with no balance, and keep a few conservative, stable investments that you can liquidate quickly if needed. Money market accounts are a boring and low-yield example, but there are also mutual funds that are conservative enough to fit the bill.

In other words, don’t feel like you can’t invest in rental properties just because you don’t have a huge emergency fund.

Fear and Greed

Finance types love to drone on about how all investing decisions are based either on fear or greed. And in my early career, I was a good example of that theory. I waited for years before investing, and then when I did invest, it was too hastily and hungrily.

Investing doesn’t have to be driven by fear or greed. Ideally, it’s driven by method, by lucid analysis and planning. But never, ever invest based on emotion.

Before even thinking about buying a rental property, learn how to calculate and forecast cash flow properly. Search methodically for neighborhoods that fit your investing criteria. Avoid neighborhoods that are too low-end and dodgy.

Consider house hacking.

Focus your energy on learning how to evaluate properties accurately and learning the fundamentals of good property management. None of it is “hard”; the former is about basic strategy and execution, and the latter is about best practices.

It doesn’t take a million-dollar inheritance, a 145 IQ, or a PhD to succeed at real estate investing. It actually takes something that’s both easier to come by and rarer: discipline.

Save yourself the losses, headaches, and occasional misery I’ve been through, and learn these lessons the easy way!

What lessons have you learned the hard way?

Don’t be shy; we’ve all made mistakes!

About Author

Brian Davis

Brian is a rental investor with 15 income properties, who provides free video training to help everyday people start earning passive income at SnapLandlord.com. He's also the co-founder of SparkRental.com, which provides free services & education for landlords. His rental management is almost completely automated by now, allowing him to travel the world (his current home base: Abu Dhabi).

50 Comments

  1. Nathan Richmond

    Very, very good article. I wanted to pick out a few of the lessons that I liked most, but they are all so good and true. I am small, with only 4 income properties, but so far I find myself trying to practice all of these. I am house hacking in one of my duplexes and it is working out great. Trying to save up for the next property!

  2. Ken H.

    Very true… I made so many mistakes I’m actually in the process of selling 1 of my rentals and starting over with just the 1 decent rental I have left. I’m also going to house hack a primary home soon and since I lost big money I have to do a 401k hardship withdrawal for the down payment as I literally have no cash and have already exhausted a 401k loan option. I use an Enrolled Agent to do my tax returns and I was able to recoup maybe a 1/3 of my losses through write offs and deductions.

    • Brian Davis

      I’m sorry to hear that Ken. But it sounds like you’ve learned from what went wrong last time around, and have a solid plan for moving forward. I’ve made so many mistakes in my real estate investments that I can’t count them anymore, so I feel your pain!

  3. Anthony Robles

    Very insightful and to th point.
    Iam stuck on the infamous “analysis paralysis “, but this article is just what the doctor ordered.

    I have been planning to begin my journey with low income properties, buying cash and building a credible investment portfolio . I want to have instant equity and CF to allow me to scale up.

    Iam rethinking it now.

    Your information was very helpful
    Thank you

    God Bless
    Anthony
    Florida

  4. Michael Zack

    Great article Brian! I love the idea of house hacking and will be moving into my first duplex next week (although we won’t quite be living for free). As a new investor, these are great tips to help me get started and work towards bigger and better things for the future. Thanks for taking the time to write these awesome articles.

  5. Justin Smith

    Really well written article Brian. Well done. I bought my third investment property a few months ago and am learning a few of these lessons you’ve written about and am really taking them to heart. Long story short my next investment will follow a new game plan and I’ll be thinking about your 40K per month neighborhood idea. I thought I’d find tenants much like me. I make 40K and yet I want to save it all! And will live in a C- neighborhood to make that happen. In a month of marketing a vacancy however I haven’t found that person, just a lot of people who are struggling to make ends meet and have made too many mistakes in the past for me to gamble on.

    • Brian Davis

      Thanks Justin, and congratulations on buying your third property! Most people live hand to mouth, unfortunately. While you may not find someone exactly like you, don’t give in to the temptation to sign a lease with just anyone. Bad tenants cost a fortune.

  6. Julie Nicholasi

    Brian,
    Thank YOU! This article is so succinct & on point. All the most important info in a concise format. My grandfather came from Italy & without speaking English, he managed to buy & hold 4 rental properties. I should be able to do this too. I signed up my Co for free e book offer but I can’t find a link. Any ideas?

    • Brian Davis

      Thanks Julie, glad to hear you got something out of it! As for the ebook, you’ll have to ask someone at BiggerPockets – I am not an employee. You might try Allison Leung or Mindy Jensen. But I’m not above taking this opportunity to invite you to check out the free mini-course on my own site while you’re perusing free educational content 😉

  7. Kerryanne Henry

    This is great advice for a newbie investor like myself. I especially like that you touch on the LLC and the S corp piece. It is tempting to get caught up in the stratosphere and lose sight of the basics. I also like the emphasis on management, because most conversations focus on making sure you have good cash flow, but it is an often understated point- the two (cash flow and management) go hand in hand. Thank you for this article!

  8. Andi Honer

    “Perfect is the enemy of progress”. I love this. I’m just starting out and have no properties to my name, but this statement is something I can relate to. I can’t let perfection sideline me. Thanks for the article and sharing your mistakes with us so that we may learn from them.

  9. James Yang

    Great article! It is better to be conservative on the operating expenses to help with the unexpected. And yes, I agree with not worrying about LLC’s until later. Just get an umbrella coverage. Save and reinvest the cashflow!

  10. André Anderson

    Great post! Thank you for sharing your insights, Brian. I couldn’t agree more with what you’ve outlined. I’ve seen many an investor make decisions on emotion. For some reason, housing is a very emotional subject for most people. Cheers to being a world traveler!

    • Brian Davis

      Thanks Andre, and it’s so true about people letting emotion enter their decision-making when it comes to real estate. So important to make rational, calculated decisions, especially when dealing with assets worth hundreds of thousands of dollars!

  11. Thank you for taking the time to share your knowledge and experience. This article is invaluable to an inexperienced person like me. I haven’t started investing yet, but I am filling my head (and notebook) with all the information I can get. This is one of the best articles I have read. Thanks for getting down to the basics and demystifying things.

    I especially appreciate your advice to invest based on method, lucid analysis and planning. That makes it all seem so much more achievable.

  12. eric pinter

    Overall this is pretty good. I only disagree with one point: amount of cash on hand. The recommended 6 month emergency fund should be completely separate from your real estate investing. That is for personal expenses only. My advice is to keep $5,000 cash on hand for EACH UNIT. So if you have 10 units, you should have an account with $50k just sitting there. There generally isn’t any one uninsured thing that can break that will cost you much more than $5k to fix out of pocket.
    Your point about losing out on inflation is kind of bunk because the amount is so low, you’re better off with the cash on hand. If you just can’t stand to see it in a bank account, put it in an interest bearing savings account. But DO NOT put that money into any type of account that could LOSE money, including a money market account. Yes, money market accounts CAN lose money (see 2008). The interest you’ll lose out on is irrelevant, and the improvement in sleep you’ll gain is priceless.

  13. Jerry W.

    Great article Brian. Since you asked, I think my biggest mistake has been in getting desperate and putting the wrong tenant into a property. It has always been better to leave a property empty, even for months, than to put the wrong tenant in. The next biggest problem is not being careful enough on managing. It is hard to keep up with the books and everything, and sometimes my book keeper did not catch a tenant not paying. Then you try to work it out. Sometimes it has worked and I get paid, but usually they just get deeper in debt.
    The last problem I have struggled with is undone projects. I am fairly good about finding deals, but the fix up and renovation are problematic, as I usually end up doing it myself. I have struggled with finding reliable reasonably priced workers and usually default to doing it in my spare time. When you have a full time job and over 30 units that is a bad combination.
    Thanks again for the article.

    • Brian Davis

      Thanks Amanda, and you’re not alone. Plenty of new investors fall into that trap, it’s just a matter of breaking that cycle of paralysis! Please don’t hesitate to reach out over PM or Facebook if there’s anything I can do to help.

  14. John Murray

    The best way to make money in real estate for me to do all my own work (I’m journey level). Use BRRR and the 2 of 5 rule as well as 1031. This will maximize profit and lower your passive income tax liability. This strategy require an in depth knowledge of building codes and local economic trends as well as flexibility in your living arrangement. Becoming a millionaire is all about hard work and passion for what you do. Once momentum has been obtained the money just keeps coming, like some told me “you make it look easy”. It is not that easy.

  15. Erik Orozco

    Awesome article Brian! All lessons listed are essential, but some resonate with me especially as a rookie investor. I’m currently shopping around for a good investor friendly realtor to help me buy my 1st rental property I can “house hack.”
    Lesson #7 was excellent. I had been told by several people I need 6 months cash reserve before I even think about purchasing a multi unit property. Listening to that advice it would have set me back at least another year before I jumped into investing. Instead I will be putting a couple thousand aside and purchasing my 1st property this year.

  16. Orita Issartel

    Absolutely a great article!! It definitely helped me visualize where to go next with my investments!!
    I’m not great with numbers but know that it is very important to learn how to analyze deeply a property. I just started the 90 day challenge to analyze a property a day. Thanks for stressing on the importance of knowing cash flow, ROI and everything that goes with analyzing a property. I’m taking the time to learn!!!

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