The 5 Most Common Reasons Investors Lose Money In Real Estate
By Paul Esajian on June 1, 2018
As the disclaimer at the end of most infomercials say “you can and sometimes do lose money” investing in real estate. The chances of this happening to an experienced, diligent investor is rare, but it does happen. 99% of the time this is directly caused by your actions. You are either too anxious in finding a deal or too lazy in discovering everything about it. There are very rare occasions when something will completely catch you off guard. If you stay patient and put the work in, regardless of the outcome, you will minimize your chance of taking a loss. Here are the five most common reasons investors lose money (and how to avoid them).
- Easily persuaded. Everybody seems to have an angle or an opinion on the real estate business. It is not uncommon to talk to five different people and hear five different ways of investing. Some of these may produce a return under the right circumstances, but most of them are unfounded. If you are willing to invest your hard-earned money you should have the power of your convictions behind you. Every day there could be a real estate agent, wholesaler or fellow investor trying to pitch you on a property or a deal. Some of these pitches can sound appealing depending on the presentation. There may even be a circumstance that requires your action within a short window. Regardless of the situation or the timeframe you need to follow the same set of diligence and guidelines on every deal. Never let yourself be sold by someone or blindly follow someone else’s numbers.
- Desperation. In a perfect world you would have a constant supply of new leads and deals to work on. If one deal wasn’t quite what you wanted you would simply move on to the next one. In real live you may only have a few new deals to work on every week. At some point if you haven’t worked on a deal in a while you will get bored, anxious and even a little desperate. Your buying criteria will slip, and you will entertain deals deep down you know you should not. As difficult may be, you need to stay disciplined regardless of when your last deal was. What typically happens when you expand your criteria is you take on deals with warts that lead to bigger problems. You end up compensating for the deficiency and try to make the numbers work. You know the profit margins are slim, but you decide to take on the project anyway, hoping that everything breaks right. There is nothing wrong with closing a deal with reduced profits, but you never want your margin for error to be razor slim. You are better off sitting back and waiting for a better deal to come your way.
- Lazy. The real estate investing business can get very repetitive at times. However, the process often determines your results. You may go through ten properties without making an offer. On those ten you will have spent hours researching the property, the seller and the market without anything to show for it. The reality of real estate is that all it takes is one oversight to change everything. The next deal that comes your way you may not want to spend the time, or possibly money, to do the proper diligence. You may take the sellers word on the acreage or not question the rents received. If any of the information turns out to be inaccurate or downright wrong, you have nobody to blame but yourself. There is no recourse if you find something out after the closing. Every new deal must be treated with the same regardless of where it comes from or your relationship with the seller. A real estate investment is too big not to put the same amount of diligence in on every deal.
- No second opinion. Every real estate investor should have someone they can bounce deals off. This can be a mentor, partner, friend or spouse. There are plenty of times when a deal sounds great on the surface but the more you think about it the less attractive it becomes. Without someone to bounce a deal off the more likely you will take on deals you know you shouldn’t. Always find someone who is willing to give you the honest truth, however difficult it can be. You don’t want people around you who constantly tell you how good things or are afraid to give their opinion. You may not want to hear the truth, but it can help keep you away from a bad deal or a bad situation.
- Greedy. Not every real estate deal is going to be a home run. There is nothing wrong with taking a few singles on your way to hitting a home run. Many investors are swayed based on what they see on TV. They want deals that deliver strong profits every time. With strong profits often comes risk. If you are not willing to deal with the potential risk, you shouldn’t get involved in these types of deals. Investing in real estate is not gambling. You should learn to take what you can get and move on to the next deal. When you start shooting for the moon on every deal eventually it catches up with you.
Regardless of how many deals you close a year you should learn to be satisfied with a small profit and move on. Hitting a home run is nice, but it is the exception rather than the rule. Never put all your eggs in one basket and always make a profit. A small profit is better than a big loss.