The Biggest Mistake That Newbie Investors Make

We all make mistakes. I seem to make an inordinate amount, but we all make them. Today I want to share with you the most typical mistake that I see from the newbie investor so that you can avoid this trap if you are just getting started.

There is no doubt about it, I am a straight up nerd. Unfortunately, I am not the type of nerd that is intellectually superior to their peers, rather more of a nerd that gets obsessed with a subject matter and spend all available time learning about it. For me, I am very fortunate to be able to tie my passion into my day job as well as hobby to create wealth for my family. I spend a significant amount of time reading, and most importantly listening to other investors both experienced, and those just starting their journey. As with anything in life, I find that there are definitive patterns that differentiate the successful from the unsuccessful investors.

I have named this site “The Lousy Investor” because I fully acknowledge that the investments that have worked out well have been a direct result of “modeling” or copying friends and colleagues. It is fascinating to me that you can be expelled from academic institutions for copying the work of your classmates, yet the easiest way BY FAR to be successful in the real world is to do exactly what your more successful peers are doing. If my friend Joe buys a house on Smith Street for $80k and rents it for $1,300/month to quality tenants that take care of the property and pay rent on time, I am going to do my absolute best to find another house on Smith Street or as close as possible that I can buy for around $80k, that I can rent for $1,300/month to quality tenants. Am I original? NEVER. Do I get style points for identifying a great area to invest? Not even close. Do I care? No. Do I like asking myself rhetorical questions? Yes, it means that I have someone to communicate with even when I am alone. Is the investment profitable? Highly likely especially if I put a solid 30 year, fixed mortgage on the property.

As much as I love to “borrow” profitable investing ideas, there is a downside to this way of investing. Without a doubt, the biggest mistake that newbie investors make is trying to follow everyone simultaneously. One of the greatest gifts of the modern world is the massive amount of information at our fingertips. The problem with this volume of content is that it can make it very difficult to focus on a particular idea or strategy for an extended period of time. A good example of this is Real Estate Investment Associations (REIA’s). I believe that REIA’s have a ton of benefit to them, they provide a structured meeting so that you can learn from experts on a particular topic as well as opportunities to network with fellow investors in your area. Full disclosure: I served on the board of a local REIA so I have seen it from a multitude of angles. I believe that investment groups can be the most beneficial to a new investor that is looking to obtain some fundamental information on investing strategies as well as find mentors to learn from. However, when you attend meetings, you will be inundated with a variety of ways to invest. You may meet someone who will buy, fix and sell houses and in a few minutes you will learn that they typically make $40k a house and they do this with 10 homes a year, SIGN ME UP!!!! The next month, you meet someone who lends money to other investors and rarely comes to meetings anymore because their lending business is so easy and passive that they spend all of their time on cruises and traveling the US in their RV, I WANT THAT!!!! Then the following month, the group has a speaker that shares their story of growing up poor in Canada, crossing over the boarder in their beat up truck with $14 dollars to their name and only a few short years later they have been putting together massive commercial real estate deals and they casually drop a little morsel that they are so wealthy, and their company is so profitable, that one of their employees embezzled over $100k and they don’t even care, they are just upset about the betrayal of the friendship (not making this story up, and by that I mean a speaker said this, but obviously I don’t know if that actually occurred). Wow, someone who is killing it to the point that they don’t care about losing $100k, I want to be that lady!!!

To be clear, there are many investors that make a lot of money flipping homes, lending money, and acquiring large apartment building. However, as a newbie investor, you need to focus. I cannot tell you how many hundreds of times I have seen people go to meetings for years and years and never do anything because they get caught up in a new strategy every few months and when it isn’t as easy as they thought, they move onto another investment strategy. This is commonly referred to as analysis paralysis and it can ruin your chances of ever getting anything done. To ensure that you do not fall into this trap, I suggest a two step process. First, I would suggest taking inventory of your skills and goals so that you can find an appropriate strategy. For example, being a lender for other investors is going to be a tough way to start if you do not have access to money to lend. However, you may have a flexible work schedule which allows you to spend time driving around town looking for properties that are in rough shape. If you take the time to learn the neighborhoods and understand that value of a property you can create the skills necessary to become a wholesaler. In a nutshell, a wholesaler is someone who puts a property under contract and sells the property to another investor at a marked up price. For example, the wholesaler puts the property under contract with the owner for $110k. They turn around and sell, or assign, that same property for $120k. That second investor is willing to pay the marked up price because they will spend around $30k to rehab the property and will sell the property for approximately $220k. Believe me, this happens daily all across the country. As you investigate these strategies, it is helpful to find experienced investors in town and buy them a cup of coffee or lunch to pick their brain about the pro’s and con’s to their investing strategy. Not everyone is going to be willing to share a great deal but I have found that if you approach the interaction with a humble mentality, you will find that many investors are willing to give you a bit of insight.

After you have thoughtfully identified the strategy that seems most logical to you, dig in! Accept the fact that there will be lots of deals that you will hear about but if it doesn’t fit your specific plan, let it go. Again, focus is the key to making substantial progress. I cannot think of a successful investor that started their career by doing rentals, flips, and lending simultaneously. In the beginning you may have a finite amount of resources (capital and time), and as you are networking with investors, you may hear about an opportunity to lend $15k as a second mortgage on a property, unless your strategy is to lend money, don’t do it. It is incredibly tempting to get involved in any real estate deal just so you can say that you are an investor but inevitably you will hear back from a seller that is willing to accept your offer and you will be kicking yourself for no having that $15k to put towards your down payment on the rental property that you REALLY wanted to buy.

If you have been in the investing game for a while, how did you get started? Did you invest in different ways in the beginning or did you narrow your focus?

For more information please go to The Lousy Investor.