The 3 Biggest Mistakes New Real Estate Investors Make
My good friend Bill Biko and I've been through the heady days of the mid-2000's when property values seemed to increase $1,000 per hour and through the recession after 2007 where many investors gave up and handed over the keys to their properties.
I've known Bill for almost as long as I've been into Real Estate and have had many great conversations about "the business", so I'm very excited to share some of Bill's insights with you to help you avoid the mistakes others made.
So, shall we dive in?
Choosing the Wrong Property
One of the biggest mistakes I see from investors is getting caught with the wrong property. When property values are moving upwards and vacancies are low almost every property can be a winner as an investment.
"I understand the mindset when the market is hot. It's along the lines of how can you lose? Values are going up, rents are increasing and life is good, buying an investment property is a no-brainer. We get caught up in the emotions and just want to get in before me miss out."
The problem being, nothing lasts forever.
And that's where so many people got burned from 2007 to 2011. Their no-brainer investment was worth less than the mortgage on it leaving them under water. Underwater in this situation meaning just to sell the property, they have to pay money out of their own pocket just to get out from under the mortgage.
To add to the problem, rents which had previously only seemed to ever go up, now we're going the other way. This left many investors with the wrong properties who couldn't even cover the property with the incoming rent.
With vacancies on the rise, now tenants were in control and they could pick and choose where to go and how much to pay. This left many investors dipping into their own pockets to cover their monthly expenses and to try and weather the storm.
Talk about pressure!
So what could they have done and what's the lesson from this?
The most important lesson I have seen from this is that any investor's primary focus needs to be cash flow.
It's not a matter of breaking even, you need to have a significant gap between your rents and your expenses. Which is almost impossible to do on a single family home with only one source of tenant income.
In Calgary, you often need multiple income streams from a rental property to make sure you get enough cash flow. Whether it's a suited property, a duplex with two suites, a tri-plex or something larger, the extra rents from multiple units help you generate enough cash flow you can weather a downturn.
"Multiple units have helped some of the investors I who deal with to generate $600, $1,000 and even more per month in cash flow after all of their expenses. This gives them the breathing room necessary for the next downturn. And it's not a matter of if, it's when."
So before you choose an investment property, look at the numbers, make sure there will be enough cash flow that if the market does change, you have room to decrease rents and enough left to cover all your costs.
Focusing on this right from the start is almost enough to make sure you succeed! But it's not quite enough. Are you ready to hear about mistake number two?
They Don't Know The Rules
With anything in life, there are always certain rules in place that you need to know that can make tasks easier for you.
It's no different with investing in Real Estate.
There are specific rules and requirements you need to understand to get a mortgage on an investment property, there are certain rules and specifications for how suites and rental units need to be set up and there are laws and acts in place covering dealing with tenants.
As a Real Estate investor, the more of these you understand the better for you as the consequences can be devastating. Whether it's having an illegal suite shut down, getting fined for breaking residential tenancy laws or having legal action taken against you for fraudulent activity anyone could financially ruin a person.
Not knowing the rules isn't an excuse that goes over well with city officials or the courts.
Realistically though, you can't know all the rules, especially when you just start out. That's why you need other professionals to work with to assist you along the way.
Especially if it's your first property.
If you don't know the rules, your lawyer, your accountant, your mortgage broker and your REALTOR® need to assist you along the way and you need to take advantage of their experience and knowledge to help you.
But there's a catch and a lesson from this!
Not all professionals are created equal.
Some are much more experienced in certain areas than others and choosing poorly can affect your success. Not all family lawyers know the ins and outs of a Real Estate contract. Not all Certified Accountants are aware of the tax implications of doing renovations before versus after on an investment property and the list goes on.
Your bank or broker may have been awesome at getting you a mortgage for your home, but rental properties have different issues and my favourite, not all REALTOR® understand rental properties and what makes a good investment.
As you're looking for professionals to assist you in these areas you'll want people experienced in these areas and preferably who have their own investment properties as they will understand it much more than others who simply look in from the outside.
They Don't Treat It Like a Business
You need to treat your Real Estate investing like a business because it is a business! It's not a hobby, it's not a get rich quick scheme, it is a long-term wealth building strategy based on the business model of supply and demand.
Supply and demand specifically in the housing market.
The statistics around failure rates for new businesses are depressing, but that doesn't mean it can't be avoided.
As a business owner/investor, you need to plan accordingly. You need to understand your profits, your losses, your tax options and more. And if you plan these from the beginning it is so much easier.
"Several successful investors I know started by creating entire business plans laying out their goals and their strategy. This has allowed them to have a very clear idea of what they need to do and as they have grown it has even allowed them to move forward successfully."
So what does a business owner do versus a hobby landlord that can help make themselves more successful?
First off, they understand the decisions in the business need to be based on the numbers, not the emotions. Bill's personal lesson is based on understanding this concept after his first eviction.
"We felt bad for a couple with three young children and let our emotions overrule our business systems. Monetarily it wasn't huge, but it was around a $5,000 loss right at Christmas and I spent my entire Christmas break that year painting, repairing and cleaning a rental property rather than with my family.
I made a bad business decision that cost me money and precious family time and I haven't repeated that mistake in the last nine years! Hopefully, if you treat your investing like a business from the start, you can avoid a similar mistake."
Second, investors need to understand the market.
If rents are going up, they need to be aware and take the opportunity to increase rents when applicable. If rents are going down, they need to be aware and take action before they find tenants giving notice.
By following some of the local economics they can have a clearer idea of where the rental and Real Estate markets are going and plan accordingly. This helps with long-term exit plans if selling is on the horizon and with profitability.
Third, business owners tend to take action.
They understand they are in business to make money and they treat their property accordingly.
Which leads us to a bonus lesson for you. It ties in with treating your investment like a business and failure to do so can directly lead to another huge investor mistake!
It's All About The Systems
"You need to systemize your business! Having systems in place can make or break an investor."
It doesn't matter if you have one property or a dozen, having systems that walk you through your processes makes your life easier and helps you avoid costly mistakes.
It becomes even more important if you have a single property to make sure you have systems in place. Where an investor with a dozen properties may be putting new tenants in every six months, someone with a single property may do it once every two or three years.
Two years later, would you remember the steps you took to originally prepare the property for rental? Do you recall the screening steps you took to make sure you found the best possible tenant? When a tenant vacates, what steps do you need to take to ensure the utilities aren't shut off?
These should all be part of your system to make sure you know what to do (or what you've previously done) to make your property a success.
From buying to maintaining, to tenant processes, systems make your life easier.
Whether it is a simple checklist, or a complete breakdown of all the steps, having a procedure guide, operations manual or whatever you would like to call it can make a tenant transition, a renovation project or even a new purchase far less stressful the second time around.
So if you're just getting started, or if you've been doing this a while, take the time to document the steps you go through with many of your repetitive processes and over the long haul, you'll find life is much easier.
"Obviously I could never cover all the mistakes, all the issues and all the headaches a Real Estate investor could stumble through, but these three (...and a half) mistakes and the accompanying lessons can help you avoid them and can help make your investing experience easier and less stressful."
If you enjoyed this information and would like access to Bill's free landlord tips and articles visit him at http://www.TheEducatedLandlord.com