In spite of what you may have read in a book, read on a facebook forum or watched on TV, not everyone enjoys instant success in buy and hold Real Estate. Real estate isn’t an easy industry to navigate. And unless you are well prepared and, in some cases, exercise some patience, you will have a difficult time seeing immediate results.
As a Property Manager, we’ve sadly seen some investors not make it.
A majority of the failed investments we see come from people who become discouraged easily and who aren’t well prepared. Or, in many cases, don’t have proper expectations. We’ve watched investors give up after less than a year due to vacancies lasting longer than expected, or from unexpected expenses coming up shortly after they’ve purchased the home. Although vacancies and expenses are a part of owning an investment, they can cause people to become worried and have high levels of anxiety when they aren’t ready to begin their career in investing. Even though real estate can be an amazing investment for so many, it can also be the biggest headache for others.
So, how do you avoid repeating the mistakes that so many other first time investors have made?
From personal experience with investors and from doing some of our own research, we have come up with five main reasons why first time real estate investors don’t make it.
1. LACK OF EDUCATION
Becoming a successful investor requires education and continued learning. Education isn’t a one-time thing. Smart investors are continually educating themselves about real estate investing.
Buying house after house isn’t going to create success. In fact, it’s going to create a lot of issues down the road.
When investing, there’s a lot to consider such as location, pricing, expenses, property type, and legal matters.
Several beginner investors will try an investment strategy for a short amount of time, and once an issue arises, or they don’t see profits right away, they quit. Many believe that if you purchase a few homes and rent them out, then you’ll be set for life, but unfortunately, investing in real estate isn’t a get-rich-quick scheme.
As we’ve preached many times, real estate is a long term investment that will take time to develop into a career that can fully support you. Oftentimes, investors take years to build a portfolio that is big enough to afford their lifestyles.
When you’re an investor, it’s important to continue to educate yourself as well even if you’ve been in the industry for several years.
The housing market and regulations are constantly changing, so it’s important to stay on top of everything to avoid issues from happening.
2. BECOME EASILY DISCOURAGED
Time and time again, we see investors who are upset with their investments.
Lately, we have been seeing investors become frustrated with the return they are seeing from their property. Typically, when you first start renting out our property, you will only see between $100-$200 of profit each month and some investors will be lucky to break even each month.
However, when it comes to rental properties, there’s more than just cash flow to consider. Owning rental real estate provides you with at lease five different profit centers that can provide you with more returns in the future. Those profit centers are cash flow, tax savings, Principal pay down/equity building, Home price appreciation and inflation hedging.
Several investors begin to give up before they start to see success, which is why it’s important to remember that real estate is a long-term business that takes time and patience.
Another factor that plays a role in discouraging investors is what we call a lack of “Investing in their investment.”
Once you own a property, it is your responsibility to make repairs an even upgrades as needed. If amenities and various items throughout the home are ignored, you will have a difficult time finding and keeping Residents. It's like the old saying it takes money to make money.
After so many months of having a vacant home, it can become detrimental to your overall investment and could negatively impact your view on being an investor.
3. DON’T TREAT INVESTMENTS LIKE A BUSINESS
Investing in real estate is something that needs to be taken seriously. It’s not something that you can leave on auto-pilot.
When you become an investor, you also become a business owner. This means you need to be consistent and well-informed on the operations going on within your business.
Although you can self-manage properties on your own, it can be difficult to understand all of the moving parts that go into an investment. Instead of asking for advice or outsourcing different parts of a business, investor sometimes think they can handle all operations on their own which can lead to complications.
Part of owning a business means you have the right people working with you to ensure repairs, Residents, and other operations of your investment(s) are taken care of correctly.
Successful investors will have a team in place that is dependable and organized when it comes to their properties. We recommend hiring a Professional Property Management Company. Professional Property Management Companies not only deal with the late night calls, unpaid rents but we are trained and up to date on all federal, state and local laws, that as a self managing landlord you may not be aware of all the changes when they happen, which could cost you more.
4. AREN’T PREPARED FOR DIFFICULT CONVERSATIONS
Not everyone is comfortable with confrontation. However, in real estate, it’s important to have the ability to handle difficult conversations or have someone on your team who is.
Whether the conversation is between you and your Resident(s) or you and your partner, you will need to have confidence in your approach to resolving issues.
Being liked by everyone involved in your investment isn’t always going to be achieved, and it’s important to be a landlord and not a friend when it comes to your Residents.
Setting up clear and concise agreements that are signed by a Resident before they move in will help to lessen any tension in the future, but it’s also important to stick to the lease agreement and not waiver on various rules you have set.
Even after the agreement is signed, there can still be complications with a Resident. For example, they could be late on paying rent, and it could become a recurring issue that needs to be addressed.
Evictions are never an easy discussion, but they do happen. Being prepared to have difficult conversations like that is going to be necessary as a rental property owner.
5. INCORRECTLY ANALYZE PROPERTIES
More risk, more reward. Right?
In some cases, yes, more risk can lead to more reward, but sometimes the amount of risk an investor takes on is too much for them to handle.
Analyzing a property is about more than just numbers on a spreadsheet.
When a property is purchased at a low price, it doesn’t mean the cost you will incur is going to be low as well. Some properties need additional TLC in order to become rentable and profitable.
Other things to consider are the type of property you are investing in. If you don’t want a fixer-upper, then a grade A or B property is going to be best. Another thing to think about is also location. Taking a look at the crime rate, schools, and amenities in the area will also improve your chances for success.
After the initial purchase, it’s necessary to continue analyzing the property for needed repairs in order to keep costs low and Residents content with their living situations.
If things go unnoticed within a home, it can cost an investor a lot of money to fix and even increase vacancy times depending on the severity of the damage.
HOW DO YOU PREVENT FAILURE?
In order to avoid failure when you become an investor, it’s important to understand the mistakes others have made.
Start by educating yourself. Join webinars and workshops. Get involved in investor groups. Listen to the advice of others who have had success in the industry.
Education is going to be key to seeing success. It is the starting point that prevents you from making mistakes throughout your investment process such as choosing a property that won’t fit your goals.
Understanding that you won’t get rich quick and that your return on investments will grow over time will also help you from becoming discouraged early on in your new business.
Getting into rental real estate isn’t always going to be easy but creating a solid foundation of people you can rely on and setting up organized processes will help you find success.
Remember to also set boundaries and be prepared to have difficult conversations with people involved in your investment.
As amazing as real estate can be for your future and for your investing goals, it will require a lot of work, so make sure you are prepared and continue to have a student mentality when it comes to learning about the industry.
