Losing money on first deal?

Question

Hi guys,

I dont know any full time investors in my life so I have to come here for a lot of newbie questions. Hope this is ok.

I often read about people who have or are losing money on their first investments.

I just wanted to know what are the reasons for people losing money?

-Is it just a few people who are not paying rent?

-major repair that they did not anticipate?

-Wrong numbers to start with, and now they have to pay "X" amount monthly out of their own pockets?

I just want to know if their are a few more 'common' mistakes that people make when starting off, or if its really just a mixed-bag-of-inexperience.

thanks a million

James Vermillion · Answer

To answer in very general terms, there are a hundreds of reasons why real estate deals can lose people money, whether it is a first deal or a hundredth deal.  I believe the biggest general reason is lack of due diligence. As with any investment, real estate requires a great deal of research, analysis, and education before one can make a truly wise decision.  
With so many variables (the overall economy, the specific market, rehabs costs, holding expenses, vacancy rates, etc) it is very easy for someone to miscalculate and make a poor investment decision.  That is why the more experienced posters always talk education when someone asks how to get into real estate investing.

Gregory Childs · Answer

When we have lost money on a deal  it is for one reason only - time! If we had moved faster to exit we would have made money. 
Time is a killer in this market. Have your exit strategy in place and don't delay. Momentum is essential.
TTFN,
Greg

Anthony Nelson · Answer

Jonathan, I am by no means an expert and Im sure many people will respond with more knowledge then myself, but in my opinion many people fail because they "jump off the deap end." I feel a lot of newbies neglect all of there holding and interest costs when analyzing deals, they under estimate repairs, and I also beleive that some people try and do things themselves which takes more time, and money. Before i ever bought my first house I made sure that I spoke with everyone I could and had a list of all the costs I could expect. There are always unknowns, but thats just aprt of real estate.

Again, I know Im not an expert but I do beleive that is a big reason people lose money.

Jeff S. · Answer

Hopefully you won't lose money but getting in there is how you learn, and if you have tough times you are learning valuable lessons.
When a partner and I bought our first fix-up we were told to plan on repairs costs to be 2-3 times our best estimate. That proved true for us. Secondly, time destroyed our profits as it took 3 times longer to complete than we planned. When the market softened we had to dump and get out. We made money but very little. It was a Masters level course though with some tough teaching moments.

J Scott · Answer

I'm going to go with, "They paid too much for the property."

There aren't too many risks that wouldn't have been mitigated had the investor paid less upfront for the property.  Certainly it's not the only mistake investors make, but it's the one that is most easily corrected.

Account Closed · Answer

It is actually very easy to lose money in real estate.

1)  Lack of planning or poor planning can contribute to this.  Knowing your exit strategy is extremely important.

2)  Without a clear strategy in place you have no framework for accounting for all of the costs involved.  Many properties will need some rehab and there may be some holding costs even when you have a rental property.

3)  Not including all of the costs in the deal analysis including vacancy and future capex expenditures.

4)  Not performing adequate due diligence or assuming that others have done your due diligence for you.  Never trust a proforma or trust verbal statements made by the sellers agent.

5)  Not building an analysis based on actual and anticipated market conditions.  If businesses are leaving town or population is decreasing there is quite likely going to be higher vacancies or downward pressure on rents.

6)  Poorly managing a property and allowing tenants to stay though they fail to pay rent on time.

Rachel H. · Answer

Good question, Jonathan. I think failure is a much better teacher than success. Without failure, it's hard to really learn as we tend to usually learn from our mistakes. For me, where I lost money in my earlier deals tended to be with using contractors and just not knowing the going rate for certain jobs. Though I lost money, I also gained experience and knowledge, which is priceless. Hope that helps!  :D

Mike McKinzie · Answer

As other's have listed here, the number one problem is paying too much for a property.  We have an informal saying here on BP:

"YOU MAKE YOUR MONEY/PROFIT ON THE BUY"

Buying right will cover a lot of mistakes, including under estimating repair costs, under estimating holding costs, under estimating market value.  But buying wrong will tempt you to cut corners on repairs, cause you to have to sell further below market, and worst of all, stop making those loan payments and lose the property entirely (including your entire investment which we call 'skin in the game.)

Jonathan H. · Answer

HAHA!

My whole view of investing has completely changed since finding this forum! Its an incredible tool. Sometimes Im on here for hours at a time.

Will Barnard · Answer

Biggest rookie mistakes:
1. (By far #1 of all, rest in no particular order)
Paying too much at acquisition
2. Not getting educated first
3. Not completing your onw due diligence
4. Not knowing your market conditions
5. Not building a strong team.
6. Not joining Biggerpockets!

Losing money on first deal?

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