4 Lies Real Estate Investors Tell ThemselvesOct 04, 2021
I've never met anyone who purposely went into a bad real estate deal yet from time to time I shake my head when I hear the horror stories.
Depending on who I'm talking to I'll dig in and learn about what happened. Often I find myself speaking with a liar.
Unfortunately - the person they lied to was themselves and it cost dearly. In this blog post, I'll discuss 4 common lies real-estate investors tell themselves.
"The neighborhood isn't that bad..."
You find a property for less than 1/2 of what a comparable one would sell for 2 blocks down and you start to justify it to yourself... You know that it's cheaper because it's near a bad part of town but it's just so CHEAP... I've been at this for a while and have caught myself saying "the neighborhood isn't that bad" more than on one occasion. Be very aware of where you're buying. For starters, one side of the street might be the end of one zip code and the start of another. Parents want their kids to have access to good schools and if you're buying in an area with a poorly rated school system you will miss out on a large group of potential investors.
"Renovations won't cost THAT much."
You've tied up the property and started your due diligence. You have a few contractors through the property and they give you their quotes. They find issues that need to get addressed that blow your initial budget. You've already spent a lot of time on the deal, have investors lined up and can smell the closing papers... "there's no way the reno's will cost THAT much" you say as you think about things you can cut out of the budget.
This is a dangerous game, especially if you're working with contractors who really know their stuff and quote you right. Deferred liabilities can't be deferred forever and just because you didn't factor in that $25,000 renovation (or the vendor wont let you deduct it from the price) doesn't mean it doesn't exist. Sooner or later those chickens will come to roost.
"Those expenses are way to high."
Depending on the type of property you buy - your operating expenses will range between 25-45% of the income of the property. There is no getting around this and I can't tell you how many proforma's I've seen where the expense columns are razor thin. You can't avoid certain operating expenses anymore than you can defy gravity but in the heat of the negotiation (to make a deal work) - many real estate investors can be found trying to convince themselves that expenses can be lower than they are.
"Those rents are way to low."
Real estate investors often overestimate how much / how quickly they can increase rents. They also underestimate the amount of work they need to do to get those rents. New cabinets and fresh paint doesn't always automatically equal an extra $300 a month in rent. I've seen it far too many times - you find a deal and assume that the rents are far, far below market and overlook WHY the rents are where they are. If it really was that easy (presumably) the landlord would have already done it... It's rare that a seller just doesn't know what they're sitting on.
Writing this blog reminded me of a whole ton of other lies that RE investors tell themselves. Let me know what lies you've heard (or told yourself) over the years.
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