SS194: Real Estate Investment Traps to Avoid

ss194-real-estate-investment-traps-to-avoid

Real estate investing can be highly rewarding, but it also comes with pitfalls that can significantly impact your returns and financial security. In this episode, Charles discusses some common real estate investment traps to avoid.

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Talking Points:

  • Since purchasing my first multifamily property in 2006, I have made many mistakes as a real estate investor, each time learning something new, figuring out what the underlying mistake was, and then correcting my investment strategy for future properties. So, here are some common real estate investment traps to avoid:
    • Lack of Market Knowledge: Investing in a property without thoroughly knowing the market, the specific neighborhood, and the property’s location is a huge mistake that can’t be corrected since you can’t move your property.
      • It is imperative to conduct in-depth market and neighborhood analysis before purchasing a property. Real estate is hyperlocal, and property only a couple hundred feet away can perform completely differently from one that is better positioned. Especially if that property is on a different street, on the other side of a busy street, across train tracks, or in a body of water. You need to drive the neighborhoods and review the property and neighborhood during the day and night.
    • Underestimating Your Renovation Budget: Estimating an accurate repair and renovation budget is very difficult; even for professionals. Just get multiple bids on a project, and you will start seeing them all over the board.
      • I am a huge proponent of getting multiple bids, and I stress that all new investors should walk a property with a contractor before submitting an offer. I always offer to pay contractors if I do not own the property already. They are more willing to come out and spend time with you and provide you with a detailed estimate that you can now use for your negotiations.
    • Not Performing Thorough Due Diligence: This goes hand in hand with the last point; however, don’t hesitate to hire multiple inspectors and contractors to review your property during your inspection period.
      • I would try to get them all there on the same day. Your property inspector, HVAC person, a roofer, and possibly a plumber. If it is a major renovation, maybe get the contractor you plan to use for the renovation to meet you as well. It will cost you a few hundred dollars more than just getting a property inspector, but this method will give you the most accurate inspection report.
    • Incorrect Capitalization: Capitalization refers to how you pay for your property purchase, usually a mix of debt and equity. When you incorrectly capitalize a property, it can be a disaster. Usually, this happens when an investor overleverages a property, but it can also be when an investor uses the wrong type of debt to finance their property.
      • In our multifamily LinkedIn group, a member posted that they wanted to purchase a long-term rental and were going to use a 20% down mortgage from their bank, and for the 20% of equity, they were asking if they should pull that money from a 0% credit card. What happens in 12 months when that 0% interest card turns into a 25% or 30% interest card? If you were flipping a home, maybe a 0% for 12 months might work (I have flipped homes before using my credit card), but it is very risky. Always ensure the debt you are getting for your deal matches your business plan and possibly another exit strategy if the market changes during your hold period.
    • Overestimating Returns: One thing that drives me crazy is when investors don’t factor in all their expenses and costs in a deal. For example, the property rents for $2,000; my mortgage payment is $1,500, so I will make $500 monthly. Nothing could be further from the truth.
      • First, make sure the rent comparables you are using are actually accurate. Is the property close by, of the same age, same amenities, or unit sizes? The same type of street, is it busier or quieter? You want to see that everything is the same except that the comparable property has been renovated and is renting for a higher rent. This is what you can base your numbers on. Maybe even be a little under that in your underwriting.
      • Next is to complete a full underwriting. Actually, get insurance quotes, calculate the new property taxes, and include all expenses, including maintenance, utilities, lawn care, vacancy, etc. Doing this will give you a very accurate overview of the subject property.
    • Inadequate Tenant Screening: Don’t rush tenant screening. Renting to unreliable tenants is a disaster ready to happen. You can get everything else in this episode right, but your investment is doomed if you cannot properly screen tenants.
      • You need tenants to do 3 things: pay the rent on time, respect the property, and respect their neighbors. You must create and stick to your tenant criteria to find tenants that will fulfill these requirements. When you deviate from your tenant criteria because you want the unit rented right now, that is a fundamental mistake you will be paying for, both with money and headaches.
    • Overlooking Property Management: This goes hand in hand with the last point, but new investors will normally overlook the property management portion of rental property investing; however, the property manager (even if that is you) is the most important person in the whole equation. The property manager will make or break any property or investor.
      • If you are self-managing the property, make sure you are prepared to handle your tenants, follow up with any requests, and handle your end of the bargain. You cannot expect someone to fulfill their end of the lease agreement and pay rent on time if you are slow to address their issues.
      • If you are hiring a third-party manager, get referrals from other local landlords with similar properties. Talk to them, review the properties they manage, and fully understand their fee schedule and business practices.
    • Not Having a Sufficient Reserve Fund: You need to have a reserve fund when you are purchasing any property. If you have staying power in real estate, you can withstand most problems. How do you create staying power?
      • Don’t overleverage your properties, and have a solid reserve fund. Building true wealth in real estate takes time. As you own a rental property, your rents will rise, your debt payments will stay the same, and your mortgage principal amount will decrease. In other words, every month you own your property, you build equity, lower your leverage, collect cash flow, and build wealth. The size of your reserve fund will depend on the age and condition of the property, but starting out with a reserve fund and adding to it every month is a great way to protect yourself and your investment.

Ready to take control of your real estate investments? Which trap surprised you the most? Please drop a comment below, and let’s discuss how to safeguard your financial future in real estate. Don’t forget to subscribe for more insights and strategies to excel in the world of real estate investing. Let’s turn knowledge into action together!

Transcript:

Charles:
Are you risking your hard earned money with these common real estate investment mistakes? Find out now.

Charles:
In this episode, I’ll reveal eight traps that every real estate investor needs to know. Number eight will shock you.

Charles:
Welcome to Strategy Saturday! I’M Charles Carillo, and today, we’re diving into the one most crucial aspects of real estate investing, avoiding the traps that can spell disaster for your investments, whether you’re a seasoned investor or just starting out, understanding these pitfalls is essential for long-term success.

Charles:
Since purchasing my first multifamily property in 2006, I have made many mistakes as a real estate investor each time learning something new, figuring out what the underlying mistake was, and then correcting my investment strategy for future properties. So here are some common real estate investment traps to avoid. Number one is lack of market knowledge. So investing in a property without thoroughly knowing the market, the specific neighborhood, and the property’s location is a huge mistake that can’t be corrected since you can’t move your property.

Charles:
So it’s imperative to conduct in-depth market and neighborhood analysis before purchasing a property. Real estate is hyper-local and a property only a couple hundred feet away can perform completely different from one that’s better positioned, especially if that property is on a different street on the other side of a busy street across train tracks or across from a body of water. Now you need to drive the neighborhood and review the property in the neighborhood during the day and at night. Number two is underestimating your renovation budget. So estimating an accurate repair and renovation budget is very difficult, even for professionals. Just get multiple bids on the project and you’ll start seeing them all over the board. Now I’m a huge proponent of getting multiple bids, and I stress that all new investors should walk a property with a contractor before submitting an offer, and I always offer to pay contractors if I do not own the property already.

Charles:
Now, they are more willing to come out and spend time with you and provide you with a detailed estimate that you can now use for your negotiations with the seller. Number three is not performing thorough due diligence. Okay, now this goes hand in hand with the last point. However, don’t hesitate to hire multiple inspectors and contractors to review your property during your inspection period. Now, I would try to get them there all in the same day and your property inspector, HVAC person at roofer and possibly a plumber. And if it’s a major renovation, maybe get the contractor you plan to use for the renovation to meet you as well. It’ll cost you a few hundred dollars more than just getting a property inspector, but this method will give you the most accurate inspection report. Number four is incorrect capitalization. So capitalization refers to how you pay for the property purchase, usually a mix of debt and equity.

Charles:
And when you incorrectly capitalize a property, it can be a disaster. Usually this happens when an investor over leverages their property, but it can also be when an investor uses the wrong type of debt to finance their property. In our multi-family LinkedIn group, a member posted that they wanted to purchase a long-term rental and we’re going to use a 20% down mortgage from their bank. And for the 20% of equity, they were asking if they should pull that money from a 0% credit card. But what happens in 12 months when that 0% interest on the credit card turns into 25% or a 30% interest card? If you’re flipping a home, maybe 0% for 12 months might work. I flipped homes before using my credit card, but it is very risky and always ensure the debt you are getting for your deal matches your business plan and possibly another exit strategy if the market changes during the whole period.

Charles:
Number five is overestimating returns. And one thing that drives me crazy is when investors don’t factor in all their expenses and costs in the deal. For example, the property rents for $2,000. Their mortgage payment is 1500, so they say they’re gonna make $500 per month and nothing could be further from the truth. First, make sure the rent comparables you are using are actually accurate. Is the property close by of the same age, same amenities or unit sizes and the same type of street? Is it busier or required? You wanna see that everything is same except that the comparable property has been renovated and is renting for a higher rent. Now, this is what you can base your numbers on, maybe even be a little under that in your underwriting just in case. Next is to complete a full underwriting. You know, actually get insurance quotes.

Charles:
Calculate the new property taxes, which can be a little tricky, but if you contact your local government, they can assist you with it. Don’t tell ’em the property you’re buying though and include all expenses including maintenance, utilities, lawn care vacancy, et cetera. Doing this will give you an accurate overview of the subject property and what your actual fees will most likely be. Number six is inadequate tenant screening. So don’t rush the tenant screening process. Renting to unreliable tenants is a disaster ready to happen, and you can get everything else in this episode right, but your investment is doomed if you cannot properly screen your tenants. Now you need tenants to do three things, pay the rent on time, respect the property, and respect their neighbors, and you must create and stick to your tenant criteria to find tenants that will fulfill these requirements when you deviate from your tenant criteria because you want to rent the unit right away.

Charles:
You don’t wanna have to pay another month of the mortgage without having that extra income. This is a fundamental mistake. You’ll be paying for both with money and with headaches, and you might also lose some of your good tenants along with it. Number seven is overlooking property management. Now, this goes hand in hand with the last point, but new investors will normally overlook the property management portion of rental property investing. However, the property manager, even if that is you, is the most important person in the whole equation. The property manager will make or break any property or investor. Now, if you’re self-managing the property, make sure you are prepared to handle your tenants. Follow up with any requests and handle your end of the bargain, which means fixing stuff when it breaks, you cannot expect someone to fulfill their end of the leasing agreement and pay rent on time if you’re slow to address their issues.

Charles:
Now, if you’re hiring a third party manager, get referrals from other local landlords with similar properties. Talk to them, review the properties they currently manage and fully understand their fee schedule and business practices. Number eight is not having a sufficient reserve fund, and you need to have a reserve fund when you are purchasing any property. If you have a staying power in real estate, you can withstand most problems. And how do you create staying problem? And it’s number one is don’t over leverage your properties and have a solid reserve fund. Building true wealth in real estate takes time, and as you own rental property, your rents will rise. Your debt payments will most likely stay the same. If you’ve got fixed rate debt and your mortgage principal amount will decrease. In other words, every month you own your property, you build equity, you lower your leverage, you collect cash flow, and you build wealth.

Charles:
Now, the size of your reserve fund will depend on the age and condition of the property, but starting out with a reserve fund and adding to it monthly is a great way to protect yourself and your investment. Ready to take control of your real estate investments, which trap surprised you the most. Please drop a comment below and let’s discuss how to safeguard your financial future in real estate. And don’t forget to subscribe for more insights and strategies to excel in the world of real estate investing. Let’s turn knowledge into action together.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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