1303: The 12 Pitfalls of Investing
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Welcome to episode 3 of Season 13 of the Growing Empire Show. Today I'm going to share with you the 12 pitfalls of investing. So make sure you stay tuned.
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Welcome to Growing Empires. Hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
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So what are the 12 pitfalls? Well, the 12 pitfalls are my tips, essentially, on how to avoid making mistakes that could impact your real estate investing strategies. Many of these topics we talk about in the Empire Investment Club meet up and our club conversations. So if you haven't yet gotten the chance to become a subscriber of the Empire Investment Club, all you have to do is go to Jenniferdejesus.com and sign up. It is a free service to you. And we will continuously share extensive knowledge and tips to make the most out of your real estate investments. So let's jump into this 12 pitfalls of real estate investing.
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So pitfall number 1, skimping on the research. That research can be encompassing of a lot of different things. But you specifically want to be really critical and careful in your research regarding the location. Because after all, location, location, location is everything. Make sure that you are investing in areas that the location is generally decent, and would not have any potential challenges for resale. You want to make sure that you do some research on the local municipalities, the regulations that they require as far as the compliance with general building codes, and if they have any additional requirements from the municipal level that will impact your investment strategy. You're going to want to do research on the costs associated with holding business licenses, rental inspections, certificate of occupancies, and the different types of fees that could be implemented by those local municipalities or state related requirements. You're going to want to do research on the local district courts. The ones that impact the landlord tenant law, and the ones that are responsible for making sure that as a landlord, you're protected in the event that you have a tenant that does not do what the tenant is supposed to be doing. You want to make sure that you can swiftly and quickly get that tenant out of the building. So you want to make sure that you're in not only a landlord friendly state, but that you have a handle on what you can expect if you were ever in a position to take your tenant to court. You of course want to do due diligence on the property. You want to do due diligence on the utility costs. You want to do due diligence on the tenancy, the leases, the income, the expenses. You want to do research on the types of products that are out there for mortgage financing. You want to make sure that you avoid common mistakes like prepayment penalties, higher down payment interest only, adjustable or variable rate products. There are so many different types of competitive products out there for financing or leveraging your investment property. But you want to make sure that you know what makes the most sense and that you're not getting yourself into a position that financially will not be beneficial for your investment property. Your research needs to go on and on from there, you need to make sure you have a great team on your side. You need to do research, if you don't have those people, you need to get a great qualified property manager in the area, you need to have your financial advisors, you need to have your your legal team, you need to have the people that are going to allow you to borrow the money. You're going to need your insurance providers, and make sure that you have this entire team ready to work for you. And if you haven't done enough research or you don't already have them. Research is actually the way and networking is how you actually get these people on your team. So don't skimp on the research. There's so much you have to find out and know before you actually take the plunge into investing. Especially if you're going into an area that's a little bit unknown.
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The second pitfall is failing to make a plan and having an objective in mind. So for example, what are some of the things that need to be a part of your plan? Well, what's the minimum return on your cash that is acceptable to you before you decide that the deal is no good? How long do you plan to hold the property? How much can you afford to put into the renovations? And can you legitimately add managing a property and overseeing and on top of everything else that's on your plate? So these are just some of the common things that you need to incorporate into your plan. But you need to make sure that not only do you have the plan, that the asset that you're trying to acquire meets the objectives of that plan. So for example, your plan is a long term hold strategy. But this is not the type of property that you want to hold long term because you'd be fearful of maintenance or other circumstances surrounding that property, probably not the best investment to me. So make sure that you have a plan. And make sure that whatever your personal objectives are for your investment strategies, that the property aligns with those things.
05:36
The third pitfall is doing it yourself and cutting out all the professionals. I have said this, and I will continue to say this, the worst mistakes I've watched people make are failing to have the right team on their side. If you work a full time, nine to five job or whatever hours it may be, if you're working for corporate America, if you don't get home and you spend hours in the car, or your job is really time consuming. Maybe you are a self employed person. Any of the above means that you should not plan to manage the property yourself. So at a minimum, you need a property manager. Do not plan to do it yourself. Self managing is disastrous for people. I understand the concept of saving money. But the reality is, is that if you've hired the right property manager, not only will they make sure that they make the money that you would be spending on the management, they should be making far more in profit for you because they're good at what they do. As an investor unless you have significant experience in this topic, and you do not have any other employment that would allow you to focus on this, managing properties is a full time job. Even when you have the best tenants in place. It is a full time job. And for you really to make sure that not only can you manage the property, but you can build processes that allow you to capitalize on the cash flow of the property, you need somebody with experience in this realm. So don't do it yourself. Bring the professionals on. But it's not just about your property manager, you need a legal team to advise you, you need a CPA or an accounting firm to not only make sure that you're making the best financial decisions, but you're taking consideration into the tax strategies that you're going to implement into your plan. And you also want to make sure that you are utilizing all of the depreciation and tax benefits that are available to you when you own these investment strategies. You want to make sure that you have a well trusted advisor for insurance. Because in the event of emergency, you want to make sure that you are fully covered. And you want to make sure that you are far more protected by having that liability protection in addition. So if you're trying to do it yourself, because you're trying to save a buck, I'm here to tell you that it's going to cost you far more than a buck once you find out that you've made a mistake. So make sure that you have the professionals on your side
08:13
Pitfall number 4, overlooking the tenants needs. So what does the tenant need? Ultimately, the secret to long term cashflow is tenants in your property. So if everything that you do is based solely on your financial place in this property, you are likely going to make decisions that are going to impact your tenancy. And if, no tenant means no money. So what are some of the things that you need to be thinking about regarding the tenants is what every tenant wants. Put yourself in their shoes. tenants want safety, they want convenience, they want comfort, and they want to make sure that the landlord is maintaining the property in what would be generally considered as habitability standards. So look for ways to make your property safe look for ways to bring conveniences to your tenant like parking, laundry, things like that, and bring comfort to them making sure that their heating bills are not excessive in the wintertime because you failed to put a good heating system in or you fail to have windows that will protect them from the outside elements. Add those considerations to things that pertain to comfort. And if you can do these things, you will have long standing tenants. And again, tenant equals money. So we want to make sure that we're considering and we're not overlooking what the tenant needs.
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Number 5, as far as pitfalls for investing, poor financing, not doing enough research to know exactly what financing terms you should be looking for, or getting the wrong type of deal. That could definitely be a pitfall. Some of the things that I mentioned earlier that I'll say again, you want to avoid prepayment penalties. You want to avoid variable interest rates, or adjustable interest rates. You want to make sure that you are putting For a decent amount of money down 20, 25% is pretty typical for investment properties. And you want to make sure that the interest rates align with what the average are in the industry. And you want to also make sure that you don't have any kind of crazy or unrealistic expectations as far as when you might pay off the mortgage or, you know, when the building is going to start cash flowing. You need to make sure that whatever your debt service is going to be that the cash flow for the property is going to adequately cover that and then some. Otherwise, you're making poor financing decisions. So make sure that you get some advice in that corner if you are not well versed in that topic.
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The episode will continue in just a moment.
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As an investor, we know it's important to stay on top of market trends and real estate opportunities that add value to your portfolio. We also know that having a trusted source of reliable information to help you stay a step ahead of other investors is critical to your success. If you're interested in having these types of resources, as well as access to me and my team, I invite you to join the Empire Investment Club. A free service that gives you an easier way to make sense of today's and tomorrow's real estate opportunities. As a member of the Empire Investment Club, you'll get access to relevant resources and investment focused experiences such as live interactive webinars, market trend presentations, and investor socials designed to equip you with what you need to succeed. So whether you're an active investor, passive investor, a combination of both or just starting out, the club is where you'll get what you need to build a portfolio you love. To join, just head over to JenniferdeJesus.com, sign up, and we'll see you in the club, where everyone's on a journey to becoming a better investor.
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Number six is overpaying for the property. And I think it goes without saying to make a great investment you need to buy below value and need to be able to appreciate the property to increase not only the cash flow of the building, but to genuinely force the appreciation on the building. Make sure that you're not overpaying for the building, don't get so desperate in the actual acquisition stage that you forget that you need to make reasonable decisions regarding your investment deals.
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Number 7 under estimating expenses are not estimating the value adds correctly. Value Add is a really, really tricky subject and it's definitely something that's very difficult to project. So one of the ways that you can do that is make sure that you get a general consensus from your local contractors or property management company of what the average cost per square foot is for renovations. That'll help you accurately depict how you forecasts those value add improvements. You would generally want to assume that you're going to turn over every single unit and improve every single unit. That'll help you make a safe bet when it comes to estimating what those costs will be. You also want to have money set aside for those capital improvements. And those capital improvements can come at you all at once, or they can come at you and you should have control over them. It just really depends on the building. And there's not really a way to forecast going into it. So make sure that you're doing an analysis, you're using your due diligence period to identify those costly capital improvement areas like the roof, the heating system, the windows, etc, the outside exterior of the building. You're budgeting for the repair or replacement of those things, as well as anticipating the potential turnover of every unit. And that will help you and go a long way to making sure that you're not under estimating the expenses.
13:36
Number 8 is forgetting that real estate is local. There's a saying that says you always want to buy in your backyard. And the reality is is that your backyard may not be a feasible investment. But what I mean by understanding that real estate is local and buying in your backyard is, even if you don't physically live there, you need to know enough about it to feel like you live there. Meaning that you need to know everything about the tenancy poll about the condition of the building, the age of the buildings. Kind of the quirky things that happen based on the different areas and the amount of seasons that a building will get. So even if you don't live in that local area, you want to make sure that you know enough about all the areas that will impact the health of your building as a whole and make sure that you're making those wise real estate investment by having the knowledge first.
14:26
Number 9 is taking shortcuts on DD, your due diligence period never ever take shortcuts. It's easy to just take what's in the marketing flyer as a fact without verifying it. But the reality is most of it is fiction. For example, let's say that it states of the property is being offered at a six cap, and that it's in great physical condition without standing tenants. But in reality, the financial show that it's a 4.8 cap, which means it's overpriced. Furthermore, the property condition report indicates that the roof may only have a year left in useful life. After doing a rent collection report, you discover that some of the tenants are paying late or not at all. If you take the time to do all your due diligence, you will catch things like this and you'll be armed with the facts to negotiate a lower sale price prior to your due diligence period being up. So make sure that you do your due diligence so that you can protect yourself from making bad financial decisions.
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Number 10 is not hiring that property manager. We talked a little bit about cutting out the professionals in pitfall number 3. But again, I want to elaborate on the fact that hiring your property manager is critical to the success of your building, your financial success of the building, I'm not just talking about a property management company that's just going to be a task or an order taker. They're not there to just collect your rent, they're there to help you realize the potential profit and cash flow of your building. And nobody knows it better than the person that is in that marketplace. So if you want to know how to maximize the profitability of your investment, find an expert in that local area that knows how to create cashflow. And when it comes time to interview the professionals that you're going to have on your team, make sure you're asking the right questions. And one of those questions should always be, What are you going to do to make sure that I am successful and that I am profitable? How are you going to have an impact on my bottom line
16:25
Number 11 is counting on the income in the first year. Most investment properties, specifically value add properties, do not have positive cash flow in the first year. That is what's called the J curve. And you need to go down before you go up. Nobody ever sells you their best investment. So you should always consider that your first year is going to be a lot of you getting the building stabilized, which is going to cost money, and therefore not likely being a year that you can count on the income. So if you bought a building with the assumption that you're going to cashflow month, one or month two, you probably are making a bad deal. Because very few properties actually cashflow in the first year. Unless you had that slam dunk property. And that lucky strike, the reality is is that all properties are going to need some investment, some financial components, some financial investment to be able to turn themselves around and start to cashflow positively.
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And last but not least, my number 12 of 12 pitfalls of real estate investing is never, under any circumstances, sell out of fear or frustration. Unless of course you are in a financial crisis and you're forced to sell, you should never sell out of fear or frustration. Never be afraid of what the market is going to do next because all markets go in cycles. So if you take the time to ride it out long enough, it will always rebound. So never sell out of fear. And you never want to sell out of frustration. Frustration comes in many forms. Problems with tenants problems with building maintenance, but never sell out of fear or frustration. At a minimum, you want to take that frustration, turn it into something positive and then you can capitalize on your exit of that property of that asset. But the frustration that you feel will be very visible to that new investor and they will therefore pay less than your property is probably worth. So if you're at a point where you are so frustrated that you don't want to own the investment anymore. Make sure you take the time to turn it around first, and then sell it at a high, never sell at a low. That's it for today. I hope you got a lot out of our 12 pitfalls of real estate investing. And until next time, take care.
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For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio visit growingempires.com