The Biggest Mistake that New Investors Make (That Will Ruin Them)

Mistakes are just a part of life. We all make them. With investing, they’re inevitable, and the best you can do is hope that you don’t make huge, ginormous ones that will cost you money, time, your reputation, or something else major.

New investors are usually more susceptible to mistakes simply because they lack the experience of their more seasoned counterparts. This isn’t to say that veteran investors are immune to errors, because they’re not. I’ve seen plenty of them screw up. But one thing most of the experienced investors I know seem to have learned is that there’s one area you don’t screw with, or you WILL fail.

And that area is your emergency fund.

Let me explain. You don’t need to be rich to get started in real estate investment. Honestly, you could buy a rundown house in a bad part of town for as little as a $1,000 or less. I wouldn’t recommend it, but there are people who do it. You don’t need to have tens of thousands of dollars in your bank account before you buy property.

What I do recommend, however, is that you have some cash laid aside for emergencies that come up after you’ve purchased a home. The dollar amount depends on you and what you feel comfortable with, but setting aside at least $3,000 or so is a good place to start.

Many of the new investors I talk with say they’ve got money saved up. They’ve got the cash, and they’re ready to invest. But what they’re not considering are the costs that will come up after the deal goes through. Their money is earmarked for the down payment, but beyond that, there’s not much in the way of a fund.

Here’s the deal: you MUST set money aside for post-purchase emergencies. It’s crucial to the success of your investment, as there will, without a doubt, come a time when you need to dip into this account. What happens when the furnace goes out at the property? That’s a few thousand to fix. What about when your tenants don’t renew the lease and your property is vacant for 4 months while you find a new one? Or how about when some reckless teenager without insurance crashes into the side of the house and you’ve got to pony up the cash to make the immediate repair? (Okay yeah, that one is a little out there, but you never know!)

My point is, you’ve got to be prepared. You must have a fund available for scenarios like this, because emergencies will happen. If you don’t have these funds, then you’re forced to absorb the cost yourself, and most people simply can’t handle that, nor do they want to dip into their personal account to cover costs associated with their rental.

The veteran investors will tell you: one of the most important lessons you can learn is to put money away for future expenditures at your property. Before you even invest, have some cash set aside for the management of the property after you’ve purchased it. After that, it’s up to you to determine how much you’re comfortable saving, and whether you want to leverage any of that cash to purchase more properties. But trust the experts: if you don’t have cash laid aside for AFTER you buy a property, you’re setting yourself up for failure.