What common pitfalls are overlooked by 1st time investors?

Question

Hey everybody!

This is my first post here on BP. I've been listening to the podcast for about a month now and have given myself 6 months to close on my first property. I am 23 years old, and would love to learn from all of you and any tips/experiences you'd be willing to share.

I'm currently working in the Silicon Valley and plan to purchase in Austin, TX. What pitfalls do you notice 1st time real estate investors getting into? Is there any advice you wish you had known prior to buying your first property? If so, what is it and why? Would love to hear from you!

Cheers,

Mikey

Jim K. · Answer

@Mikey Maher

I am a renovation contractor and DIY landlord working in low-income properties that are 50-100 hundred years old in my city. My city is one of the highest rental cash-flow major population centers in America. The pitfall that I have a special advantage seeing is people who are trying out long-distance investing for the first time getting used by unscrupulous middlemen.

Again and again, you'll see posts here on BP from people out on the West Coast trying to get into rental properties in the Midwest for passive income. Of course they want the highest possible return for their money, so they look hard at marketed "C-class properties" in "working-class neighborhoods" in large cities like mine.

You'll see utterly insane posts here on BP about it all the time. This dude with no profile pic on his second post will ask about buying a $179,000 triplex built in, say, 1925 in a place like Turtle Creek, Pennsylvania. he'll have some description sheet ginned up by the seller with some vague language about the questionable roof and the convoluted heating system and all he'll want to know is if it's a good deal...the cash flow upside looks awesome, PLEASE HELP!!!

What are you supposed to tell these people? That they're walking into a minefield of problems with absolutely no chance of coming out the other side without blowing off their legs? I had this one guy asking me if I had "systematized" all the problems of defunct housing down a checklist and a guide and could I share the .pdf with him.

But the con artists who sell this garbage housing to newbie long-distance investors must find plenty of takers, because the takers show up here with alarming frequency. There's also an extraordinary tendency among these newbies only to listen to the opinions that they want to listen to, no matter whom the opinions are coming from, discounting any voices of sanity that tell them to avoid long-distance deals that no one but a local specialist could possibly make money from.

If you're going to go long distance, buy renovated turnkey from people with a long-term record in the business. Don't spend time looking at unrenovated housing approaching 100 years in age. Don't buy a long-distance BRRRR "opportunity" for your first investment. Don't believe that anything marketed to you as a C-class neighborhood is anything but a slum. Stay away from occupied foreclosures, properties acquired in a tax sale for unbelievably low prices, anything described as a "fixer-upper" with "strong investment possibilities."

Real estate is often a very rough business. You cannot assume that all the people in it all have clean hands and clean hearts and nothing but honorable intentions.

Account Closed · Answer

Pitfalls? Too many to list. Here are some main points to take away:

1) Don’t invest in markets you don’t know.

2) Everything in life has a price. Something is cheap for a reason so is something expensive.

3) Why would someone rent from you when the cost to own is much cheaper to own, and the barrier of entry is so low? If you buy these cheap assets, what type of tenant do you think they are?

4) If you decide to invest, have adequate reserves.

5) Know your end goal and work it backwards.

It’s a rewarding journey if you can decode it.

Best of luck.

Ned Carey · Answer

@Mikey Maher not understanding all the hidden costs in real estate.  Being totally ignorant of the law.

Michael Noto · Answer

@Mikey Maher The two things that come to mind are

1. They do not have enough in reserves cash wise should something go wrong that is unexpected.

2. While preparing to for their first purchase they spend all of their time worrying about running numbers, which in my opinion is easy to do once you find a system that works, and they do not spend enough time researching the tenant/property management aspects of a potential deal which are a lot more intricate than running numbers in almost all cases.

Michael Ablan · Answer

@Mikey Maher Congrats on your purchase!

• Budget 10-20% of your original budget for rehabs
• Factor in holding, closing, selling , and management costs when you're analyzing your deal
• Don't pick your contractor based on the cheapest price
• Don't get any less than 3-5 bids per project
• Learn how to properly vet a tenant and DO IT

Good luck!

Russell Brazil · Answer

1) Ignorance of the law

2) Ignorance of costs

3) Inability to understand and properly measure the risk involved with an investment.

Ryan Kelly · Answer

@Mikey Maher First of all, welcome to Austin! As everyone has mentioned, there are numerous pitfalls to consider. The ones I see most with investors are:

1) Not having enough cash to handle expenses and rehab

2) Unrealistic expectations on returns (especially in a hot market like Austin)

3) Lack of patience

Keep us posted on your plans and I’d be happy to connect if you would be interested to talk in more detail about our current market.

Mike Taravella · Answer

Hi @Mikey Maher

Congrats on working on buying your first property! That in itself is a huge step.

I would recommend providing value to investors in the area as a free internship. Eventually you will be able to learn and start getting deals in, plus you get to pick which part of real estate you like.

Reach out if you need help with anything!

Andrew Angerer · Answer

Always expect the worst to happen with your tenants, they can be good people but still cause major damage to your property. Always have a very strong lease agreement and be sure to have a refundable security deposit, that way they have incentive to not ruin your property as much!

Best of luck !

Andrew

What common pitfalls are overlooked by 1st time investors?

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