3 Reasons So Many Real Estate Investors Fail

by | BiggerPockets.com

They started investing in real estate 30 years ago, with so much hope for their future. A rental house here, a duplex there, and soon they had a rental portfolio that would make anyone proud. They actively managed their properties and worked to make sure they were operating at peak efficiency. Then, several years ago, the husband and wife both retired from their day jobs and eased into retirement—funded by their rental income and social security.

This year, they are filing bankruptcy and losing a majority of their properties to foreclosure.

Sadly, this is not a made-up example; this is the story of one of my friends’ parents, and they are not alone. In fact, 95% of the units I’ve purchased have been foreclosures that belonged to landlords who failed and lost their properties to the bank. Most of these people, I would guess, will never again be active in real estate investing. They worked hard for years to build a financial future for themselves, only to see it come tragically crashing down around them, dashing any hopes for lasting wealth creation.

This begs the question: why?

If real estate is as good an investment as we all (on BiggerPockets) make it out to be, why do so many real estate investors fail?Perhaps more importantly, how do you avoid this possibility in your own life?

This question that has been swimming around in my mind for some time now. Each week on the BiggerPockets Podcast, I ask our guest, “What is it that sets successful investors apart from those who fail?” The answers are as diverse as the personalities of the guests with whom we’ve spoken. So what is it?

I’m intrigued by this idea and scared that I may end up the same way.

After all, as Mark Cuban famously said, “Everyone’s a genius in a bull market.” Is that what real estate is? Do some people simply get lucky, while others don’t? Let’s look at some of the possible reasons rental property investors go broke and explore the things you can do to protect yourself.

1. Too Much Risk?

First, let’s talk about the elephant in the room: risk. Risk is inherent in every investment there is. After all, you know the phrase “more risk, more reward.”

However, there is obviously a tipping point at which the risk becomes too great, as my friend’s parents discovered. Perhaps it’s overleveraging properties by obtaining too many “low-down” deals that weren’t deals after all, or maybe it’s trying to buy too many, properties too fast. Maybe it’s constant refinancing of the properties, pulling out all the equity and investing it in more and more deals. Whatever the reason for the bankruptcy, the risk clearly became too great, and these investors lost.

real-estate-risk

Related: What Sets Apart Successful Real Estate Investors From Those Who Fail, Quit, or Never Get Started?

As rock ‘n’ roller Nick Cave sang, “If you’re gonna dine with them cannibals, sooner or later, darling, you’re gonna get eaten.”

So how might someone prevent this? Avoid risk altogether? Invest only in 100% safe deals?

Of course not. Risk is required for entrepreneurs, but learning to navigate that risk will define your success. Like a team of white-water rafters braving the wild waves, you can’t always see what the future holds, where the rocks hide just below the surface, or when the next waterfall will appear. However, by having the right people
in the boat with you, keeping an eye out for potential dangers, working to avoid potential problem areas, and wearing the proper life jacket, you can avoid a premature “death.”

I caution anyone reading this chapter, including me, to think of risk as a dangerous but powerful tool—and to never forget that this tool cuts both ways.

2. Not Enough Education?

Far too many people jump into buying real estate before understanding what they are doing. They simply decide that real estate is the right path for them and start purchasing properties. There is a big difference between being busy and being effective, and this is the case with a lot of real estate investors; they believe that because they are buying properties, they are going to succeed. Never mind that they bought the wrong property in the wrong area with the wrong financing.

The solution to this problem is proper education.

I’m not talking about the “get rich quick,” late-night television kind of education. I’m talking about taking the time needed to build an educational foundation that can support your investing future. The mission of BiggerPockets is to help individuals build this foundation through a variety of methods, including our forums, podcast, blog, and this very book you are reading.

Furthermore, I encourage you to continue learning through library books, meetups, and other low-cost resources. You don’t need to spend tens of thousands of dollars for an education. Information has been democratized, so you simply need to reach out and grab it. No one can do it for you!

3. Not Enough Analysis?

When I first began investing in real estate, I thought I knew what I was doing, but I made some big mistakes, because I didn’t do a careful enough analysis. Had I continued on that path, I would have been in the same boat as my friend’s parents.

You see, so many people buy properties without doing the right math. As I often say, “Without the right math going into an investment, you’ll never get the right profit coming out of it.”

The future is impossible to know, but with solid analysis, it’s much easier to predict. We’ll talk a lot more about analysis throughout this book, and I would encourage you to look at these sections with the reverence the topic deserves. Bad math makes for bad investments!

investing-is-easy

Are You Working On Your Business or In Your Business?

Is real estate your investment or your hobby?

I believe one of the greatest reasons investors fail is that they don’t treat their business like a business.

  • They never develop systems to help them as they grow.
  • They treat their tenants like friends.
  • They don’t create clear policies for finding good tenants.
  • They simply approach investing like a church picnic, and it shows.

If you want to avoid failing, treat your rental property business the same way a CEO would look at any other business, because that is what it is. Monitor your business’s health, hire the right people to do the right jobs, and continually find ways to improve your bottom line to create a long-lasting business.

Related: Newbies Beware: Failing to Adjust to Market Tides Could Leave You High & Dry (or Underwater)

So Why Do They Fail?

A real estate investor may fail for a variety of reasons. However, in my limited time on this planet, I’ve seen the four mistakes I just listed played out time and time again in the lives of those who ultimately failed in their investments. It breaks my heart to see someone so excited about what real estate could do only to lose it all in a foreclosure or bankruptcy.

Don’t be that person.

If you want to avoid losing all the hard work you are putting in (or all the hard work you are about to put in), pay attention to the following four points:

  • Understand that risk is a powerful but dangerous tool, so tread cautiously.
  • Build a solid educational foundation for yourself before getting in too deep.
  • Don’t skimp on the math. Always understand the numbers for any property you buy.
  • Work on your business, not in it. Treat your investments like a business—which they are.

How do you mitigate your risk of failure in real estate?

Let me know with a comment!

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.

23 Comments

  1. Guillermo Hernandez

    Great advise Sir,you said it all.i had a property,rented it out to a bunch of friends,foreclosed in the realestate downturn.My finances were good but I decided to quit when the value went down under half the purchase price.So yeah education,due dillagence,Analyzing,Cash flow is key

  2. Adam Trotter

    One thing I am glad to have learned early on is that people with take advantage of you. It’s even worse if they think a business relationship is a friendship. I.E. Tenant/Landlord. Be careful to present yourself professionally and guard your business relationships carefully. Your bottom line depends on it.

  3. karen rittenhouse

    Focus. Everyone is so busy tweeting and texting that their mental focus is only 140 characters long.

    This is a tough business. It takes money, time and focus. Many refuse to give it the time it takes to make their knowledge and their investments grow, and they’re easily distracted. The next thing that comes along sounds faster and easier so they jump ship to try that.

    Lack of focus is what I’ve seen over the years as the number one reason investors don’t make it. Stop looking around for shiny objects.

    Squirrel!!!

  4. John Murray

    I have been successful in RI. Knowledge, skill and hard work are the keys. I like hard manual labor and thrive on all things physical. This has been my key to success, it is a long way to the top if you want to rock and roll. The 10,000 hour rule applies, this is when the individual becomes a rock star. The individual can analyze and crunch all the math. Without practical skill failure is a pretty sure bet.

  5. Jeffrey Wannberg

    I believe a lot has to do with that analysis part. I personally think many beginning to invest don’t understand how to do it properly and more importantly to consistently keep doing it. There is more too it than just cash flow at the beginning. I look at actual appreciation, vacancy rates, employment, etc… to get a picture of how the economy as a whole is going around the rental.

    Just yesterday I was reviewing my local county and saw the vacancy rate shoot up over 3% in the quarter, went from 3% to 6% in a heartbeat . Surprised me in how much inventory is coming online. Bottom line there are leading and lagging indicators for investing in real estate. This isn’t a set it and forgot it investment.

  6. Chris Field

    In the case of your parents friends I’m going to assume they were older say 50 to 60’s so the fact that they retired with mortgages on their properties says it all they were over-leveraged.

    If you’re in your 50s or 60s and looking to retire with big mortgages on your properties you’re doing it wrong.

    Most mom-and-pop landlords fail because they run it like a hobby not the business that it is.

  7. Joe Scaparra

    WHOA!!! This got my attention; “Then, several years ago, the husband and wife both retired from their day jobs and eased into retirement—funded by their rental income and social security.

    This year, they are filing bankruptcy and losing a majority of their properties to foreclosure.”

    What the hell, they were successful for 30 years and at the end it fell apart. Doesn’t make sense to me! How could they be so wise for 30 years only to lose it. The downfall had to be something personal not related to their real estate holdings.
    My assumptions and conclusion: 1. Due to 30 years of experience culminating in building a successful portfolio of investment real estate, one would surmise they were competent, and wise. 2. They had a plan to use their rentals and social security for retirement income. My conclusion, it was not the real estate that got them in trouble, they either got in financial stress from something other than their real estate holdings or they were scammed.
    This quote from the story “They actively managed their properties and worked to make sure they were operating at peak efficiency. ” cannot be true if in fact during their retirement they lost their properties simply to foreclosure. It doesn’t add up? But makes for a good story.
    I love how you read stories that were living longer and in retirement you will need at least $250,000 just for health care . And how people are not saving enough in their 401k and could easily run out of money.

    Yet, I’m 62 and my plan is exactly like the couple represented in this story. I plan on never running out of money no matter how long I live, simply because of my paid for in full real estate portfolio. Unless I get sued or scammed I cannot phantom a way to lose my income producing properties especially because of my experience, competence, and running my real estate with peak efficiency just like the story says.
    Good points on how people can fail…agreed. However, the couple in this story wasn’t depicted as making any of those mistakes, yet the lost it all. Makes for a good story eh.

    • Chris Shepard

      Joe I agree, this doesn’t sound like a plausible story.

      For me I would like to think the only explanation for the story is a misunderstanding of cash flow and financing.

      But there are a few possible scenarios that I think could happen:

      1. Bad timing on refinancing properties. I can see if they refinanced their properties 2007 and 2008, then rents went down, and they had no other source of income other than social security. Though, it is hard to see this happening with someone investing with 30 year fixed mortgages focusing on maximum cash flow and having their tenants pay down their mortgages.

      2. A situation where someone is under-insured and be faced with a large loss. Which will then eat all their cash flow.

      3. Serious health issues which are not covered by insurance.

      4. The investor’s city or area losing population and thus rents go down.

      What other situations do you guys think could have caused these seemingly great property owners and managers who operated their properties at peak efficiency lose it all?

  8. Nathan G.

    I would love to hear specifically what this couple did wrong to lose everything after 30 years. A decent investor should have all their properties paid off in full far earlier than 30 years and then living large on the cash-flow. Can you tell us went wrong?

  9. Bart H.

    Here are my reasons on why many fail at RE Investing:

    3. Under capitalized. They don’t have enough capital to weather the issues that pop up. You need money and if your cash flow is not up to par, you are going to go under.

    2. Education. You must get educated in the area you are comfortable investing in.

    1. Passion. Many get into real estate for the money, and rightly so, but would they analyze properties, cashflow, etc. for free? In other words, before any money is made, do they go and look at properties, visualize how they can fix up a property, bring value, and so forth at no cost but their time? If none of this is happening, its highly probable that they will not last long in real estate. This is where you find burnt out landlords. With all the issues owning investment property, passionate investors still love real estate investing, they never consider getting out the game or quitting.

    Those were my three reasons.

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