Why Investors Fail? Part 1

Question

This post will probably make a few if not a lot of folks mad but I figured why not mention realities of investing in real estate.

My Opinion: Most investors over time will have marginal results at best when they invest.

I have often pondered this question. Everyone wants to succeed. It is not that they lack desire, passion or are not smart. The fact is that real estate investing specially if you want to do well is tough. I wish I could say it was easy but it's not. My feel that most people will get bruised and bloodied . This is not just my opinion this is the fact.

So let's start with the basics.

70% will fail

25 % will have decent results

3 % will have success

2% will succeed at an extra ordinary level

A lot of  investors invest for quick profits or appreciation. I think this is very fool hardy. Most people invest in real estate for the following reasons

Appreciation or quick profits then cash flow they never think about equity.

Personally I have a few very simple rules

1. If you take care of real estate for the first 5 years it will take care of you for the rest of your life.

2. Any property that does not put money in your pocket at the end of each month is a liability.

3.  Any body that said High Risk = High Return was a complete fool.

Low Risk = High Returns

The entire point of investing is to keep reducing your risk so you can increase your returns.

The three basics that need to kept in mind when investing

1. Equity - When you buy a property it needs to have equity. The greater the equity the better the grade of investment. The point of investing is to buy something that is worth a lot more for a lot less.

2. Cash Flow - Any property that you buy must have a debt coverage ratio of a minimum of 1.5% otherwise it's too risky. (I know folks will think I am too conservative)

3. Appreciation - Is not something you invest for. It's something that happen over time and you should be great full when it does come along. You cannot predict appreciation. Over time it will happen be great full when it does.

Always Remeber: Pigs get fat, Hogs get slaughtered

Troy W. · Answer

@Andrew Holmes

Way to start a conversation...there are some things I can agree with, and on the other hand I can pick apart. For one your fail rate is way to kind. The fail rail actually proven in REI is well over 90% within the first 2 years, as most people hang their hats and step aside. Heck I was almost one of them...and any person that has been in REI has contemplated this as well. To me this a true test of determination, because it really all rely on YOU!

There have been valid case studies of this fail rate. And personally about 3 years ago I called eveyrone that was in my REI class back in 2007...and we each paid roughly 6k to take the class. The total people in the class was 36 people. Total still doing the business in any capacity was 3 Including me. Goes to show you just because you pay for education doesn't mean you are going to stick with it.

You will have to define your rate if success..that's to interpretation.

Anyway, there are 3 types of Investors..and I happen to be all 3.

Quick cash (wholesaler) and no risk* - well the only risk is your name will be mud if your numbers are not wrong, so repeat business will never be had if so.

Fix and Flipper - Quick Cash - a lot risk, if your numbers are off, CMA's...repairs, etc...you can get your tail handed to you!...I know...I have been there too! Haha :)

Buy and Holder: The Wealth Builder. This is where wealth is made and contant revenue stream is realized when done correctly.

I have buddy of mine that has over 25 properties in Baltimore( I'm about 45 mins away...seems like another state sometimes...just a totally different part of Maryland...maybe because I'm closer to the nation's Capitol DC!).

I personally wouldn't own in city of Bmore if someone gave me a property...well..hmm..let me rethink statement hahah...

But seriously 25 properties..some in war zones, a few near John Hopkins University and Morgan State U... and net profits for him is over 7k a month.

Where we differ is I have 9 rentals and my numbers are the same. But I'm in PG/MO county, where my avg rent is over 2k on all my SFHs. I also have a DC brownstone, that I bought in 2009 semi-regut at the time cost me $535k, rehabbed over $500k, today its worth $1.7MM (3 years ago it  was worth $2.6MM....whew!... come market...turn again baby!) converted 6 unit apt that alone  pays for it self. Rent on each of these units is 3k a month.

My friend and I chop it up (talk) all the time, and compare our REI like a monopoly board... We lol...He has houses scattered all across the board he likes to see a lot of the his lol green pieces ...and I have maybe 5 Red hotels.. And if you know anything about monopoly Hotels rule! Haha...

Bottom line is, our constant bebate... I don't see the reasoning behind owning over 20 low rent properties in war zone BMore..and he doesn't see why I have  9 high end properties  (ARV avg. 300K) because of the risk....insurance..etc

So lastly, I beg to differ your statement and will debate you regarding Low Risk=High Returns.

I don't know where you market it is...

But let me tell you...High Risk=High Reward...any day!

Thanks again for the post...

Jay Whitfield · Answer

You have very good points, most people like to do what others are doing. Watching reality show like flip this house. I talk to people in general about real estate investing, but most just are or 90% just talk b.s. I move from California to the southeast to be where my investments are. Most people don't want the truth, but your point are well spoken.

Jay

Arnell Enriquez · Answer

@Andrew Holmes

Great thoughts and insights into the reality of real estate investors particularly to newbies and perhaps to not so newbies. I totally agree, whatever the percentages are for those  who fail and succeed in real investing, the fact of the matter is , it is TRUE a lot will fail. And there are only two possibilities, either you fail and never act , or you fail but you succeed by taking actions!

Vincent Crane · Answer

I think there's also too many people who use the 50% rule as gospel which is a big problem, or worse... they don't even account for expenses at all after the mortgage. Another thing is people seem to avoid the value add part of all this. If you put $15k-$20k into a property and increase the value so you can do a cashout refi, you can move onto the next property and build the portfolio faster. A lot of people think you need to save up for each property, buy one, then save up to buy the next one and that's not the case. It takes a lot of time, dedication, and learning on this site to be able to spot a deal, run the numbers, and know how to manage a property and tenants. People often just don't want to put in the time.

Gilbert Dominguez · Answer

The point being that real estate is also a subjective investment. Things are worth what people are willing to pay for them at any point in time. Market sentiment, Economic performance. or which way the wind is blowing on any given day will determine what a property is worth and what people are willing and able to pay in rent before they decide to revolt against the whole thing, heheheheheh. Real estate investment performance is as wide spread as there are locations. The real estate is generally as stable at the location where the properties are located. The more stable the higher price and generally the poorer the cash flow but the appreciation is better. We all want fairness when it comes to our own personal situation but given the opportunity we will create a system in which people just cannot afford to have a place to live and then the whole thing reverses. A $25,000.00 investment should pay off in 10 years. That mean the rents should be $5,000.00 per year because of all of the expenses involved over the years. That means the rents should be around $417.00 per month. Will people charge that? No, we want the rents to be between $600.00 and $700.00/mo. This logic follows at all levels until it cannot. Investors in general are not concerned about fairness they are mostly concerned about their own personal greed. Why will they and do they fail? Simple, many are ill prepared for whatever they undertake. Real estate investing is an expensive game. Most try to do it before they are truly prepared to succeed. People fail to calculate properly all types of costs or they simply buy in areas where the property will just not perform economically.

I want to start out with $1,000.00 and become a millionaire. I just do not understand why the world will not cooperate with me.

God gave us the power to reason and if we used good reasoning then we should in the end succeed. The problem is reason tells us what we do not want to adhere to and that is the real reason those that fail do fail. Who cares where a statistic comes from. You can create 1000 sets of statistics all showing their own logic and result. What is important is that we invest in our environment and produce an environment of contribute to the creation of an environment that is lasting and of benefit for all otherwise we are doomed to fail.

Andrew Holmes · Answer

@Troy W. Yes I have been generous with the fail rate. If you look at the number of people that will go to real estate seminar or anything else and do something with it then the old 99% to 1 %. May be 1% will do anything.

What I was talking about was that off that one percent 70% will fail.

To address the issue you brought up about my statement that

High Risk Does Not Equal High reward.

Low Risk = High Reward

Life in it self has risk. So they I personally invest is the example between riding a motorcycle vs. Driving in a car. Both the bike rider and the person in the car will have an accident. It's not if they will get in to an accident. It's a manner of when. Those are just the statistics. The only question is statistically on a bike you will be hurt more than in a safe late model car.

You are just playing the odds. Not to say that you could not get killed in the car.

So when it come to real estate investing there are 3 type of areas

1. A - Affluent or Aspiration areas

2. B - Bread & Butter

3. C - Challenging

Challenging people like in challenging area and they do challenging this. I just choose not to deal with those challenges. In some of the challenging areas in Chicago you can acquire a property pretty cheap and get great rent but I choose not to. Getting shot, mugged and robbed is just not in my business plan. Not to say that other investors should think like me but in the long run I can beat the numbers of the people investing on the high end and the people investing on the low end with very low risk.

Here is the math that I work with. Over the last 5 years i have accumulated about 153 single family and town home. (85% Single Family Homes and rest are townhome around Chicago Suburbs)

There are suburbs that if I left my car unlocked it a really nice expensive car. It would not get stolen in term of the statistics. There are rock solid, huge employment, very low crime infact lower than statistical average for the US as a whole.

So 153 Houses X 420 Cash flow per month = $ 64,200/Per month.

I can pay off all my properties with in 7 years down to ZERO.

Now here is the kicker. Each property will have a minimum of 25% and I have 0 money of pocket in all these house. I am buying 125 more over the next 2 years.

This is impossible to do in A area because the taxes and PITI will never work with the number I want. In C areas this will work but the cash out refi's will get stuck.

I studied how people invest since I was 20 to the age of 34 before I ever pulled the trigger.

There are lot of way to make money in real estate but I think it will be hard to beat this one.

Just my opinion.

Great discussion guys.

Andrew.

Andrew Holmes · Answer

@ Nat Chan: The definition for success from what I understand is

Success is the progressive realization of your goal.

I cannot determine if you are successful or not. It up to us individually.

For me success is an ever moving target.

When I was young my go was to be able to save $ 10,000 each month. Today if we don't buy a minimum of 5 properties a month with at least 25 to 30% in equity shame on me.

What seem like a nice car or a lot of money at one time today it's just okay so not sure if I really define success for someone else.

Andrew Holmes · Answer

@Christopher: The house we live in is not an asset. We all need a place to live so just a place to live and it costs us money even if it is paid off. Yes if it is all paid off it will be an asset but only once you sell it.

Personally most investors mislabel assets and liability. Just my take.

Christopher Telles · Answer

#2 on your list includes your primary residence (eww, I hear the loud booing from here)

2nd #2 spot on. I'll also add this doesn't mean you need to put more money down on properties you're buying rather you need to remain patient and find better values to buy.

I generally agree with the remaining points.

John K. · Answer

Can you post a link providing studies showing these numbers? One said 75% and the other said 90%. I know I see it all the time that almost everyone fails in real estate. Are these numbers including real estate agents?

@Troy W.

Seems like your doing very well for yourself. I was also looking in the Baltimore area, and it looks good on paper but I don't know about the area at all. I spend half of my day looking up multi families all over the country, and never look at SFH for buy and hold. I don't know why, but at least in New York I don't see why anyone would rent out a SFH. Maybe I should rethink my investment plans and learn more about SFH's.

Why Investors Fail? Part 1

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