Avoiding Potential Pitfalls & Setting Yourself up for Success in Real Estate Investment
Updated: Feb 15, 2021
As I am in the 7th going on 8th year of working in investment real estate I have seen a lot of things. There have been a lot of amazing things that I have personally been involved with to help someone accomplish their goals. I have seen people quit their day job to focus on real estate full time. I have seen people who had no retirement savings with new residual income from real estate investments. However, I have seen some people lose and I have seen some people lose big. Because of that I would like to highlight some key things that can be avoided when making Real Estate Investments.
The word Investment doesn't mean you will always make money. Investments and growth are not synonyms. investments mean a risk. A calculated risk. If it wasn't calculated then it would be called gambling.
Minimizing the risk of investment is calculating. There are things you can do to minimize your risk especially in Real Estate. In my experience I would like to point a few things that I have seen over and over.
1.) Emotional Buying - When I say Emotional Buying I don't mean buying properties in the neighborhoods that you are familiar with ( although I do not advise against it). What I mean is that I see a lot of people who buy a property and turn it in to their dream home even though they will never spend a night in it (well I have had some clients who did spend the night at the place because of vandalism but that is for another different blog). I have seen clients who want to buy something and turn it in to a magical place. I salute you. But the problem is that sometimes emotions come in and the suit doesn't match the body. This can go both ways. We can over do a property that doesn't fit the neighborhood or we can under do a property and it doesn't fit the scenery. The biggest thing is at the lower end of the pricing I tend to see people put in higher end appliances, carpet, etc. and then turn around to see higher end homes spend less! It's amazing how many times I have seen a million dollar listing with no fridge! And the homeowner says "if they can afford this house they can buy their own freaking fridge" and then I turn around and see my 300k listed home with a Viking fridge and the owner says "well it will be part of their mortgage so they got a good deal". Remember - this isn't supposed to be a cute product for you. Do the necessity to make it sell.
2.) Mind the Bell Curve - My background is Econometrics. So really it just means I play with numbers. Nothing more and nothing less. And when it comes to numbers there isn't anything better to compare numbers to than Baseball. Now I stink at baseball. I led my 7th grade team in most errors committed. I still led the team..... Just not something on the positive side. So when it comes to RE investing baseball is the perfect analogy for it. How many at bats can you have? Did you hit a homer? triple? double? single? or a walk? Definitely don't want a strike out. When it comes to fix and flip we want to make sure that the end product you have is at the height of the bell curve. Meaning you have the most customers lining up to bat. I was talking to a client today and he is working on a 4mm home with a pool. Beautiful design. But how many 4mm dollar buyers are out there that want a pool? Let alone how many people are looking to buy a 4mm dollar home? If the median purchase price is a certain dollar, I would try to have my flip at that price point where I can target the most buyers. which comes to my next point.
3.) Bunt and Run - again with the baseball analogy. I am sorry. We all know there is a shortage in housing. Absurd amount of rentals today and no new condos being built because of regulations. Homeownership is hard. But that doesn't mean that there isn't product to be purchase. AND matter of fact distress condos and Manufactured Homes can be bought very easily! Now there are Fannie Mae guidelines on both but they are very simple. 15% of the HOA dues (Home Owners Association) are required to be current for an FHA loan (at least 10%) and financing for MF homes need to be newer than 1976 and can't be moved more than once (twice for VA). THAT is EASY to get in the GAME!!!
As a house flip/ developer this should be your bread and butter right now.
4.) Location, Location, Location - No the BS that location to purchase is the holy grail - I AINT BUYING. I will buy in South Pierce first. I love South Pierce. Quite frankly - the food is better. I can buy a house at 120k, put 40k in and sell for 330k? All day long. Schools are better! Our kids teacher lives in the neighborhood! Can't beat that!