How to Avoid the 7 Biggest Rookie Mistakes that Real Estate Investors Make

real estate investing Aug 08, 2022

I bought my first property in my early 20s. And 15 years later, when I look back at that, there are only about a hundred things that I probably should have done differently when I bought that first piece of real estate.

Now, I wanted to put this out there for those of you, out there who are buying their first or second rental property. And I've tried to distill the hundreds of things that I probably could have done better into 7 common mistakes that I see new real estate investors making and how to possibly avoid them.

#1. Personally identifying with the property

What do I mean? Well, I know when I walked into that first rental property that I bought, I immediately thought to myself, oh, you know what? I don't know if I like those appliances, the colors are off. I was looking at all the cosmetic things from my bias in terms of what I would want if I lived there.

For example, I love corner units, so I wanted to live in a quarter unit. I didn't want an interior unit. I wanted sun during certain times. And those are my personal preferences and my biases. You have to be able to distinguish the difference between what you want as a discerning potential buyer for your own home and what your average customer is looking for and what they're willing to pay for. See, stainless steel appliances are great, but are they gonna get you an extra hundred, two hundred dollars a month rent? Probably not.

#2. Only investing in your backyard.

So my first property, I bought it I think within 15 or 20 miles of where I grew up. Why did I do that? Because I knew the area. I knew what was going on. It was familiar to me. It was comfortable
but when you think about only investing in your backyard, you're missing out on everything going on out there.

There's so much more in the world than just your backyard. Just specifically from a risk perspective If you only invest in your backyard, you're exposing yourself to the same kind of risks
that you already have in other parts of your life. For example, if you invest in your backyard, chances are your work and business are in your backyard 

So putting all of that focus into one neighborhood or one city or one economy puts you at risk of whatever it is that's happening in that area. Case in point, people that are living in neighborhoods that are primarily oil and gas based. It's been a tough couple of years for oil and gas. So imagine if you lost your job, imagine if your house has gone down in value and your business isn't doing well.

If you had all of that invested it in one area then you're struggling a lot more than you would be if you had a little bit of diversity in your portfolio.

#3. Working with people that aren't investors themselves.

I look back and I think to myself the worst advice I ever got from people in real estate was from people that weren't investing in real estate. They were typically just salespeople, they were advisors,
and they weren't invested in the types of things that I was trying to do. There's nothing wrong with working with salespeople. They're fantastic. They can get you deals. They can get you financing.
But it's really important to think about who you're taking advice from.

Early on, I thought that everybody had my best interest in mind. And I would take advice from people that were just trying to sell me something
rather than listen to the people that were doing the same thing I was.

#4. Relying on the seller or the realtor too much.

Again, realtors and sellers can be a wealth of information, but you can't rely on what they tell you for the sole purpose of you making a decision. I remember when I bought that first property the realtor told me, oh, don't worry The rent's gonna be $22,000-24,000, and the calculator there and he's running the math and sitting there nodding my head, And he goes, so your mortgage is gonna be about $14,000
and he's putting the property taxes and the insurance and kinda giving me an idea.

And he's like you should be able to cash for x dollars per month. Well, okay, sounds good. I thought I was working with somebody that had verified the things that they were telling me to be true.
And it all kind of sounded reasonable and logical, so, you know, we bought the property. Well, fast forward, we closed the property, mortgage ended up being a couple of hundred dollars more.
And the rents, instead of being the twenty-two hundred or whatever they thought they would be, ended up being fifteen or sixteen hundred dollars a month.

So my partner and I early twenties were subsidizing this property by hundreds of dollars per month. And again, I don't blame anybody. But the fact is it was my responsibility to verify those numbers and I didn't do it.

So make sure that whatever information you get from a seller or a realtor, you can verify it to make sure you're comfortable that it makes sense.

#5. Not sticking to the numbers.

So another thing that people have done and I see time and time again is you fall in love with a concept,v you fall in love with an idea, and then it becomes more expensive or you get bit up and you start to then go back to your pro format and you start to justify things to yourself like,

Well, you know what? I thought I was gonna rent the unit for $800 or $12,000. Yeah. We can probably get $14,000 - $15,000 And you know you're lying to yourself, and you're not sticking with what the market is. And you start telling yourself things like the rents will catch up, things will get there, or that you can probably get a better rate on the mortgage.

So if you don't stick to the numbers that you originally went in with and you start to push yourself, be aware because that is a very common mistake that real estate investors make and inevitably end up paying too much for what they know is overpriced.

#6. Underestimating the importance of property management.

I can't tell you how many times my partners and I have picked up properties that have been beaten up, ignored, massive state of disrepair. And just two years, three years before that, those properties were doing incredibly well.

Well, don't be that landlord that let a property slide so bad. There are plenty of people out there that think that investing in real estate is just a function of there's a building or an apartment building or a condo or whatever it is. I'll throw some money at it. I'll go on Google, find a property manager, hire them, and it'll be fine.

Those are the most likely properties to end up in the hands of people like myself who know what they're doing because inevitably if you think about a property manager,
if you don't properly vet them, you're going to get somebody who's only interested in making sure that they get paid their fees.

It doesn't matter if there are damages or deferred maintenance, maybe they don't properly price up repairs. So you're paying more for things that shouldn't be paying.

Property management is the reason why professional real estate investors get incredible deals on properties that were owned by rookies that didn't prioritize the upkeep of the property.

#7. Not treating your real estate like a business. 

It all ties back into the property management and doing the numbers and making sure you've got your due diligence tied to some of the things I mentioned earlier. Real estate is one of those things that because it's real, you can see it on the street, on the beach, on the ocean, wherever it is, it's such a tangible asset that most people forget, especially new investors forget that it is a business.

It's something that you need to manage and be on top of those things. So everything from your reporting to your systems, to your processes. And even if you're sitting there and you're saying to yourself, whoa, I'm just buying a condo or I'm just buying a duplex like relax,  I don't need to, you know, make this complicated.

It's not complicated. There's a system that you need to fall. You have revenue. You have expenses. If you're accounting, You have your processes. How are you keeping your property manager accountable?

These are all things that you have to consider because if you're not on top of your business? Even if you have other people managing it for you. Who will be?

So if you're one of those people that's about to jump into the world of real estate investing, I want you to be aware of these seven mistakes so that hopefully, you can avoid them. Of course, there are always other things that could go wrong, but if you're armed with this knowledge, then you at least have a fighting chance.

And before we finish up here, I just want to remind you that if you need more help or guidance than what's available in this post or on our website, please join our M1 Inner Circle where we offer due diligence calls and other resources to help get your investment business off the ground. 

Marcin Drozdz

The information contained herein is for general guidance on matters of interest only. This information contained herein is not intended to provide you with any advice on financial planning, investment, insurance, legal, accounting, tax or similar matters and should not be relied upon for such purposes. M1 Real Capital Inc, Marcin Drozdz is not a financial, legal or tax adviser. You should assess whether you require such advisers and additional information and, where appropriate, seek independent professional advice. You understand this to be an expression of opinions and not professional advice. You are solely responsible for any actions you take with the content and hold M1 Real Capital Inc, Marcin Drozdz or any of his affiliates harmless in any event or claim.

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