By Attorney William Bronchick
“Real estate fever” . . . it’s hitting the Country again like a plague. Zillions of “newbies” are hitting the bandwagon, trying to make a profit where they lost in the last crash. I meet them all the time, and many are making big mistakes!
Mistake #1: Having aStock Market Mentality
Nine of ten new investors I meet say they are interested in real estate investing because they saw someone else make money from the rapid appreciation of the market over the last few years. But, buying real estate solely for short-term appreciation is often a big gamble! If you buy real estate to hold for 15 years or more, the chances are good that you will come out on top. If you buy a property and flip it in within a year, you probably are going to be fine, too. Despite the risk, many people can intelligently time the “boom” of a local market (or subdivision within a market) and make a profit. Be forewarned f you buy a rental property for the full market price with break even or negative cash flow, you’d better have a backup plan if the market doesn’t keep going up. Investing is a lot like surfing… if you don’t know how to ride the wave, you will drown!
So, should you refrain from investing if you think the market has peaked? No way! You can find bargain-priced properties in every real estate market, even the hottest market if you are willing to put in the time and effort to look for them. If you can find low-interest rate financing that will increase your cash flow so if values drop, you still are covered. You can plan short-term (six to 12 months) because real estate markets rise and fall slowly. And, if you keep a cash reserve for your business, you won’t sweat it when the market tanks, because you know that in the long run, real estate markets virtually always come back.
Mistake #2: Investing Blind
Real estate is one of the few investments in which risk is directly proportional to knowledge. True, it has a higher learning curve than investing in the stock market, but there’s no proof that having knowledge of the stock market reduces risk (just ask your mutual fund manager).
I read a comment on a real estate discussion group on the Internet. In response to an inquiry as to whether a particular seminar or training program was worth the money, someone answered, “Why waste your money on that stuff? Just use your money as a down payment and learn as you go.” This is probably the worst advice you could ever give a beginner. Money for real estate deals is easy to find if you can find good deals. But, you won’t know what a good deal is without having first invested in your education! As the old saying goes, “Invest in yourself first!”
The more knowledge of real estate investing techniques, financing, acquisition, negotiating and, of course, your local marketplace, the less risky your investments will be. A bargain real estate purchase will generally always be a safe investment; a bargain stock purchase isn’t – after all, who says the company you bought into will be in business next year?. Having a trusted advisor or mentor can be a big help and really put you on the path to success!
Mistake #3: Not Having Enough Cash Reserves
Ask anyone in the real estate business long-term (or any other business, for that matter) and they will tell you the two most important words for survival are: “cash flow.”
In order to stay in real estate long term, you need cash reserves. Buying real estate nothing down is easy; handling negative cash flow, repairs and other expenses in the meantime is the trick. In fact, if you can handle the bad times, real estate will always make you come out on top. Lack of cash reserves puts unnecessary pressure on you to do substandard repairs, accept less than qualified tenants and give into tenants’ demands for fear of vacancy.
When you have a sufficient cash reserve, you act rationally. You hold out for a higher sales price. You hold out for a qualified tenant. You leave properties vacant rather than rent to borderline candidates. You call a tenant’s bluff when they threaten to leave. You take care of necessary repairs and improvements on your properties. It’s a whole different ballgame than operating from a lack of cash.
Mistake #4: Being Greedy
Many investors get started flipping properties (also known as Wholesaling) to other investors, which is a good idea to generate cash reserves. However, you must be realistic about how much profit is in a deal. If there is a potential for a $20,000 profit in a rehab project, you can’t expect to make $10,000 flipping that property to a rehabber. A rehabber has a huge risk in embarking on such a project and wants a large enough profit to justify the risk.
For example, if a house needs $10,000 in repairs, the rehabber investor wants to make at least a $20,000 profit. If you find a deal with $20,000 in profit potential, how could you expect to get $10,000 for flipping the property if the rehab investor you flip it to is only going to make $10,000? You should be happy making $2,500 $3000 and moving on to the next deal. If you want to make more than that on such a deal, then you must find the right deal and negotiate a better bargain that has more profit potential.
Mistake #5: Treating Real Estate as a Hobby or Anything Other Than a Business
People are lured to real estate because of the quick buck that it promises. Don’t hold your breath, you won’t get rich quick. An “overnight sensation” usually takes about five years. More than ninety percent of the people who take a real estate seminar quit after three months.
Why the high fallout rate? Lack of action and unrealistic expectations. Real estate investing should be treated with the seriousness of a career. It takes months, even years for a business to cultivate customers and have a life of its own. You need to treat real estate like any other business. Give yourself at least six months to see if real estate works for you. It may even take a year before you buy your first property. Maybe in the second year, you will buy three or four properties. If you work hard at it and keep your eyes and ears open, you may even find your first deal in 30 days. Certainly, you will not make money by talking or thinking about it; you must go out and take action.