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The 3 Biggest Mistakes New Real Estate Investors Make

Posted by Joe Samson on Thursday, November 27th, 2014 at 9:00am.

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. Under water 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 were 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 any 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 any one 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

Real Estate InvestorYou 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 over rule 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


Calgary, AB Real Estate Blog

 

I am a licensed member of the Real Estate Council of Alberta since 2005 - proudly representing CIR REALTY, Calgary’s largest real estate brokerage. I enjoy keeping my readers up to date with real estate related information that they can easily understand and use for their own benefit. I welcome feedbacks and comments equally from first-time visitors to my blog, past clients and also from my fellow REALTOR® colleagues. Thanks for stopping by!

8 Responses to "The 3 Biggest Mistakes New Real Estate Investors Make"

Sonja Skage wrote: Another useful article Bill. I always appreciate hearing from another investor who has a lot of experience and offers practical advice. If I were going to add to this article, I'd also put not knowing what to do or who to go to when you get in a bad situation. Whether it's with tenants, a problem with the property or partners, there's going to be problems. Building a team of good advisors that have more experience can make a huge difference. Mine have helped me many a time.

Posted on Thursday, November 27th, 2014 at 11:23am.

Angelito de Jesus wrote: It's always good to hear from fellow landlord that understand the business of renting successfully. As I am still new to the business and learning as I go along, I've encountered many nightmares with tenants, Thank Bill for his many useful advise and ever worthy newsletter, I kept a copy of them all and review them once in a while that I was able to apply in just about any situation I found myself in.

Surely we need to treat our property as a business but many times I humble myself and treat my tenants like a humans in need and I bend backwards and understanding to their needs. granted that some are BS and some are legit, I learned to be discerning as I somewhat have a good sense of what's going on. I keep records of the conversation whether verbal or texts as Bill advised in one of his newsletter. if the situation surfaced again (late rent etc.) you can have a better handle of them and can decide whether leniency or drastic action is appropriate. so far I have very good tenants through Bill's insights, I don't think I could continue from all the pressure I get from family (wife especially). I press on even I am not at par with profits yet, but heading to my 7th year I continue to be an educated landlord.

Happy land lording.



Posted on Thursday, November 27th, 2014 at 2:12pm.

Rick Nyman wrote: I got into the rental business because of a new Plan the gov't approved which was call "Murbs" in the early 80's. The idea was you would get Tax breaks by investing in these units. All kinds of developers had these units-Laidlay, Abacus Cities and others.
You buy the townhouse & these guys would manage them. That was right up my alley. I could live & work in Fort McMoney and I would get a Check in the mail. Only it didn't quite work out that way. In almost ever case The Mortgage payment was more that the RENT, & so I was subsiding the tenants by paying for them to live in my units. This went on for years and eventually the rents were close to the Mortgae payments. Anyhow that's my story and I'm sticking to it. During this period The Minister of Finance was Elmer McKay-father to Peter McKay. I still own one unit, Rule or Lesson- Investing in Rental property is LONG term, Any plan or thinking ortherwise is dangerous to your Bank Account

Posted on Thursday, November 27th, 2014 at 2:21pm.

Igor wrote: Thanks Joe and Bill, those are really good tips.

Posted on Thursday, November 27th, 2014 at 4:03pm.

Sing wrote: Bill, you touched a bit on a eventual downturn as "nothing lasts forever". Do you have some exit strategies that you want to share?

Posted on Thursday, November 27th, 2014 at 11:34pm.

Joe Samson wrote: Sonja has a good point about another issue of having advisers at hand when you need them. Surrounding yourself with like minded people and knowledgeable supporters is extremely important, especially when your are facing some problems. But hopefully one can reduce the chance of a problem by being proactive and listening to other’s advices. In my past I found it very helpful to have the knowledge up front, read lots of books, mingle with other investors, team up with a knowledgeable Realtor, mortgage broker, home inspector, contractors, etc… Remember, you want to have these relationships in place prior to the problem starring you in the face.

I am glad to read Angelito de Jesus’s feedback about treating tenants fairly. Far too often landlords tend to operate their businesses without any compassion towards others. There needs to be a balance for sure between doing the right thing or just ignoring the tenant’s concerns. Any landlord reading this I hope that you realized that your tenants are your biggest assets and not the property. You better treat them right, otherwise you may end up with a depreciated property.

Cashflow is very important Rick. In most cases we can only keep feeding an alligator for a limited period of time. Subsidizing an investment is not the best scenario, but sometimes we have to deal with it because of unforeseen circumstances. Congratulations to you for being able stick with it until you were able to raise the rents again.

But if you look closely, you should be still able to find positive cash flow properties out there. My perspective on any investment is that it should be making you money month-after-month and in the long run, it should accumulate enough wealth for you that you can retire on.

I am actually very curious why would the government get into project like this? Was it because they wanted others to be the property managers and owners of a housing problem that they tried to solve? Thanks Rick!

Sing - Let’s see if maybe we can get Bill and I to have another conversation about exit strategies. I think that is an excellent topic as well. Dropping oil prices are all over the news and many people might be getting a little jittery about what’s going to happen to real estate prices in Calgary if people will be let go of their jobs. At this point it’s probably too early to tell or I wouldn’t want to get the carriage in front of the horse, but last week I did some research on how home values in Calgary had compared to changing oil prices in the past. You can take a look at it here: http://www.joesamson.com/blog/evidence-of-oil-prices-impacting-calgary-home-values.html

Thanks for everyone’s comments.

Posted on Friday, November 28th, 2014 at 1:00am.

Sheri W. wrote: Hey Bill! Thanks so much for all you do! I've said it before, but I'll say it again, your information over the last three years has been invaluable to my husband and I as new landlords. We started out with one rental and now have six. I print off all of your information, along with material from landlord and tenant etc., and everything goes into my procedural manual (something you recommended!) this has helped tremendously in keeping me organized and on top of things, everything from tenant contacts to renovations or repairs.

As our number of property investments has grown, we are very aware of cash flow. We follow the rental market and real estate market almost daily. We've learned our lesson about single family dwellings and now we buy strictly multi family dwellings, usually bi levels with LEGAL suites. Based on the current rental market at the time, we use a 50% "worst case scenario" to determine if we should go ahead with the purchase at that time. In other words, if rents were to decrease by 50% tomorrow, would we still be afloat on all properties, based on total revenue and total expenses? If not, then we don't go ahead. That may be drastic to some, but we don't want to have to carry these properties and we fully expect a downturn in the economy at some point. Growing your business too quickly can be a detrimental mistake that we hope to avoid. By the way Bill, any chance of a weekend seminar in the future?

Posted on Friday, November 28th, 2014 at 6:03am.

Bill wrote: Wow, thanks to everyone for all the great feedback!
Sonja, Angelito, Rick always good to hear from you.

Sing, the basic exit plan is to make sure you don't get caught with huge payout fees (think open or variable mortgages during the year you plan to exit) and to make sure you have a plan to replace the income if you depend on it!

Panic plans due to the current oil markets are usually poorly thought out and as the saying goes, buy when people are selling and sell when people are buying if you want to make money!

As Joe mentioned, perhaps we can go further into this in a further article.

Sheri, love how you're taking action and using the tips I share. You're 50% scenario is an awesome way to make sure you are covered whether the market goes up or down.

Bill Biko

Posted on Monday, December 1st, 2014 at 6:55am.

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