1304: The Worst Investment Mistakes You Can Make
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00:01
Welcome to Episode 4 of season 13 of the Growing Empire Show. Today we're going to talk about the worst investment mistakes you can make. So 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 to be able to fall into the category of the worst investment mistakes you could ever make, they got to be some pretty bad mistakes. So without hesitation, I'm going to jump right in today to talk about some of these mistakes and how to avoid them. So one of the worst investment mistakes you can make is buying an investment property that does not make income, doesn't make cash flow. In theory, people do buy for appreciation, and I get that. But appreciation is a projection, it's an assumption. And the reality is, is that nobody can tell you what the market is going to do, and how long it's going to take to do it. And appreciation is affected by many things. It's affected by the economy. It’s affected by the other properties that are local to you, when surrounding your property. There's economic and demographic impacts to appreciation, as well as a multitude of other factors. So you never want to buy an investment strictly for the appreciation capacity, unless there's a financial reason to do so. You want to make sure that those investments make income. Because if they're not making income, essentially, they're not profitable. And an investment that's not profitable is also not sellable. So unless your plan is to hold on to the property for eternity, you're gonna want to make sure that your property is making some income, maybe that cash flow does not have to be your only resource as far as monthly cash flow, but you want to make sure that you're not buying strictly for appreciation, and your buying based on the income that a property has or the potential that it has.
02:12
The next investment mistake is buying properties that are too luxurious. What does that mean? Well, everybody wants to have the nicest property. Everybody wants to have the luxury housing or the premium housing, and to get the best quality tenants. But the reality is those properties come with an exceptional amount of risk. And that risk is based on, mainly on, economic factors. So let's, for example, say that we're going to classify properties as A, B, and C. A being luxury premium properties, B class being general suburban type of properties, and then C class being inner city, metropolitan type investments. But let's say that something like COVID, or a recession happens, how are those properties affected? Well, the reality is, is that everybody is forced, in those circumstances, to live life in a more conservative fashion. So you can assume that, when the economy is changing drastically, and people are losing their jobs, they're going to be forced to move out of their current living environments. So those people that could generally afford the A class properties may not be able to afford the A class properties anymore, and may be forced to move to a B class, your B class moves to your C class. And guess what doesn't have tenants, your A class properties. So you want to make sure that you avoid being too luxurious in properties. Plus, the reality is, there's no further up than the ceiling. So you want to make sure that you're not buying properties that are the top echelon of rents in the area, because there's nowhere to go but down from there. What I'm trying to eloquently explain is that luxurious properties, although they're beautiful to have, and they certainly will not have the typical maintenance concerns that other properties will have. The reality is that the risk far outweighs the reward when it comes to the volatility of your property in major economic changes that you do not control.
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You want to make sure you don't make the investment mistake of buying real estate investments that you can't afford. So how do you know if you can afford it? Well, where's the money coming from? If you have $100,000 saved up, and that is all of your life savings. You do not have $100,000 to spend because you still need reserves, you still need cashflow, and you need to protect yourself financially and personally from changes in your financial situation. So if you have $100,000 to spend, you're not spending $100,000 wisely on investments. Maybe you spend 75,000 Maybe spend $50,000. And only you and your financial advisor can figure out what metric works for you and your situation. But you never want to spend all the money that you have. You have to always be prepared for the rainy days, as they say,.You got to be prepared for fallout, you got to be prepared for changes in your financial picture, your personal health, you got to be prepared for family changes. And in addition to your personal changes that could happen, you need to be prepared for the what ifs on a property. What if there's a fire on the building? What if I am no longer collecting rent, so you never want to take all of your money and invest that and if you are forced to do that, because that's the only way that you can buy an investment property, you are not ready to buy the investment property because you cannot afford it.
05:52
Next investment mistake, that definitely ranks up there as one of the worst investment mistakes you can make, is buying a property that has a negative cashflow, or will end up having a negative cashflow, because you bought the wrong deal. Some of the ways that you can avoid doing so is make sure that you do your due diligence to make sure that you are verifying all of the income and expenses to the building. Make sure you've done enough due diligence to verify the legitimacy and that you're not just taking the creative marketing flyer or the sellers word for it. Nobody ever sells you their best investment. So make sure that you protect yourself and make good sound financial decisions. Ultimately, negative cash flow properties mean that you're going to pull money out of your pocket. And that is never a good situation. The savvy real estate investors know how to use other people's money to create portfolio growth as well as to buy properties. So you never want to dip into your savings. Sure, the very first property that you buy, you're going to have to come up with your own money. Unless you've got investors that are going in with you and sharing the expense. The reality is your first property is definitely going to cost you some money. And you always want to have those cash reserves. But from that moment on, those properties should not only yield their own cash flow, positive cash flow, but they should allow you the flexibility to pull out equity to invest in future purchases. So do not buy a property that is close to a negative cash flow, that has a negative cashflow, or has the potential for negative cash flow. And the only way that you make sure that you do that is do your due diligence. And make sure that you know exactly what type of asset you are acquiring. And that due diligence is not just your income and expenses, but it's also the condition and prevention of those potentially expensive maintenance needs on the building that were undisclosed or potentially not visible at the time of your purchasing the property.
07:58
The next thing you want to avoid is investing in vacation type properties or Air B&Bs, student housing and different types of unique investment strategies. Specifically if you're buying them in areas that they do not make sense. So if you're buying an Air B&B or you're buying a property that you intend to Air B&B, but the area and the location does not make sense for an Air B&B, it's going to be a bad decision. If you're buying student housing in an area where students do not commute, and they walk to campus, and you're so far from campus, that it would make sense for them to walk, that's not going to be a good student housing property. In other types of vacation and unique investment strategies, you want to make sure that you are doing enough due diligence on the area to make sure that the strategy that you're anticipating conforms with the local area and that it makes sense. Additionally, you want to avoid real estate developments. Unless your expertise and skill is in real estate developments real estate development does not make sense. It is far too risky of a proposition. And the reality is is that turnkey real estate will be one of the best things you've ever done for yourself financially. So make sure that you do not get into strategies where you have zero expertise, or you do not have those advisors on your side. But real estate development as a whole is a very risky proposition and probably something that you should avoid unless you are a sophisticated real estate developer or have substantial experience as such.
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The episode will continue in just a moment.
09:41
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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And last, but not least, and definitely certainly not least, is one of the worst investment mistakes you can make is assuming that real estate provides a get rich, quick option. I'm here to tell you that get rich quick is not an option. Yes, there are different types of strategies where you can double up on your money or create an abundance of cash quickly. One of those would be wholesaling a property. And wholesaling a property is when you essentially go direct to seller, you grab a deal, maybe you do some improvements, maybe you don't, and then you wholesale it or sell it to another party prior to you actually taking ownership of the property. So you're like the facilitator, you're like the liaison in between. So if you're the type of person that is really good at finding and locating deals, you might want to consider wholesaling and wholesaling will allow you to get a generous amount of cash flow going quickly. But it's not a get rich quick. Unless this is your full time job, wholesaling is not going to ever provide enough consistent cash flow for you to live off of. But it does allow you to maybe get started in real estate investing, if your expertise is in finding deals. But ultimately, a wholesaler needs to be able to find the deals, that's what makes it work. And then you're taking that property, you're making a deal. And prior to the closing of that deal, you're putting it under contract prior to the closing of the deal, you are then selling it off to somebody else. So you never actually usually take title to the property in the wholesale deal.
12:22
Another way to make an abundance of cash quickly is to flip a property. And depending on the type of deal that you initially make, because every good deal starts from the very beginning, if you make a good deal, and you make good decisions, you could potentially flip a property and you know, sometimes the short is a month or two. Up to usually six months to a year is what is generally seen on average. And if you've got the whole process worked out, you definitely can make significant cash on those flips. Our investment fund, the Empire Capital Fund, actually just did a very successful flip. And this is the outlook on the successful flip that we just completed on behalf of the investors in the Empire Capital Fund. We bought a property in Bethlehem, we purchased it for 132,500. The rehab, as well as the carrying cost were $26,000. So all in, we were at $158,503. We sold that property for $250,885. We walked away with a profit of $92,000. That entire flip from the time of acquisition to the time of consummation of the sale on the backside was four months. And our return on investment for our investors was 58%. That is a very successful flip. And there was a significant amount of profit that was made in that. Now if I were to take that $92,000 and spend it, I definitely was not in a position to get rich. However, if I took that $92,000 And I decided to reinvest that into another flip, you can see how cashflow will build considerably over time. But the reality is, is that it's not get rich quick, just this one flip took us four months. And many flips are similar. Because you got to consider the time that it takes to acquire the property, the time that it takes to rehab the property and then the time that it takes to sell the property and those things cannot be done overnight. In addition to that, no matter how good the marketing strategy is, there is no one investment that is ever going to get you rich.
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Making consistent good decisions and making consistent profitable decisions about your investments will yield you the best results. But real estate is not a one trick pony. It takes a lot of time. It takes a lot of diligence. It takes a lot of education and a lot of expertise and it certainly takes a team of professional to be successful. So if you set out on a venture to flip a property or wholesale a property because somebody told you that they made a ton of money in real estate, the reality is they’re selling you a story that's not actually true. They may have made a lot of money in real estate, but I guarantee you it wasn't done overnight. So take the time to make the good decisions by doing your analysis doing your due diligence, and making sound financial decisions. I hope you got a lot of today's show 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