When looking at examples of successful real estate investors and contrasting them with unsolicited advice I hear from people about not investing in real estate, toilets break. I often wonder: why do real estate investors fail?
After researching the subject, it turns out that most real estate investors fail due to a lack of money or not treating their investing activities as a business.
There are varying degrees in which real estate investors can fail. The most common way is that an investor tries a strategy such as flipping or rental properties casually one time. Then they have a bad experience and swear off it completely.
The less common way real estate investors fail is much more dramatic by running out of money and either selling off their portfolio or going into bankruptcy.
Not enough capitalization
This is a situation where “Mo money mo problems” does not apply.
If you run out of money, bad things happen. For example, you could get properties foreclosed on; liens can get filed on your properties if you do not pay your contractors; you basically become stuck unless you can inject capital into the business.
If you run out of money, you may be forced to sell the property when you are mid-rehab and take a loss.
This is why it is good to have a healthy reserve account and a plan for what to do when finances get tight.
Not treating Real Estate Investing Like a Business
Not taking the business of real estate investing seriously can be the defining moment in your investing career. There will, at some point, be a wake-up call.
Having consistency, being informed, and having plans for issues will go a long way towards success.
Most successful businesses have an area they define as their core competency. They try to focus most of their efforts on growing the business that fits in that competency. I often see investors fail because they move from one strategy to another. Trying each one out, but not thoroughly learning them to where they see success from it.
Leaving on “Auto-Pilot”
Real estate investing is a semi-passive investment, sure. However, there are things you need to do to keep up with the maintenance of your properties. If you let some maintenance items start to slip, it can be a cascading effect.
Don't trust that your tenants will inform you either. I have had tenants not notify me of a roof leak before. You need to be proactive and inspect your properties regularly.
Not Sticking to the Lease
If you are looking for a bad time, start routinely accepting late or partial rent. Then when it comes time to evict someone, the judge or magistrate will likely say that you have presented a pattern of business where it is fine to pay late. That they will not evict the tenant until they are a full month behind. That will leave you with a terrible feeling for sure!
This can all be prevented by sticking to the lease. However, IF you think about giving a tenant some leeway on late fees, 2 strategies can help you down the road. The first is still collecting the late fee and then returning it. The other option is to send a letter saying that you decided to waive the late fee this one time due to X, Y, and Z factors, but that does not waive your right to collect the late fee for future months.
Investors who do not stick to a lease are just inviting in bad experiences and rarely do anything good happen by being soft around enforcing a lease. Some of these bad experiences will cost money for the investor, and others will cause headaches. Both will impact the investor's outlook on the long-term viability of real estate investing.
Failing to Start
This is obvious because you cannot be a successful real estate investor without investing in real estate. However, I see so many people get into the analysis paralysis state where they want to continually learn more before actually jumping in the water of investing.
Being prepared is one thing, but if you have read a book on every real estate investing strategy that exists before trying a single one, there could be a problem. The idea is to get started taking action, even if you are a beginner investor.
Giving up before Success
I often say that the worst number of rental properties to own is 1. Typically, an investor's first rental property is a fairly low cash flow. Maybe $100-200 a month. Since an investor's comfort level in more aggressive strategies is limited, this is usually a fine result.
The problem with 1 property making $100-200 a month is it does not take much of a headache to make it feel like the whole enterprise is not worth the effort.
The other problem with owning one property is that you still have to learn everything, set up processes, and answer questions you have never been asked before. But, again, all for $100-200 in cash flow per month.
A similar thing happens when flipping houses for the first time. After putting your life into this house, hoping to make a huge profit, many first-time house flippers usually break even. Sometimes, worse, they lose money. An incredible amount of learning must go into that first flip. Usually, it will start to pay off on the second or third.
An ideal graph of any business venture's profit should look kind of like a hockey stick. Whereat first it sticks to either no profits or negative. Then it has a long handle portion that goes up and to the right. Increasing overtime.
But if you quit after 1 property, you short circuit the whole thing and do not reap the rewards of the handle portion of the hockey stick. You miss the profits!
Not continually educating
In business, it is hard to stay at a stable point. Usually, you are either in decline or growth. So one way to tip the odds of your investment strategy working out is with continuous education.
When your investment portfolio grows, so will the complexity of managing it.
Real estate is hyper-local. If you do not have your finger on the pulse of your market, how can you make strategic decisions on where to allocate your money?
Not Being Disciplined
Running a successful business takes discipline. This does not go away in real estate. In Jim Collin's book, How The Mighty Fall, stage 2 is undisciplined pursuit of more.
Growing without keeping sight of what worked in the past, why, and systemizing it can lead to failure in real estate.
To avoid this failure, you need to take financial responsibility personally and your real estate business seriously.
Not Being Prepared
Investors who are not prepared when a tenant calls with a question or issue tend to respond with off the cuff answers that can cost them money.
Being prepared for various situations helps alleviate this problem. Another strategy is to tell the tenant they will check with someone or check on something relating to the conversation and get back with them with an answer.
If an investor is not operating as a business, their records are likely all over the place. Not properly keeping track of expenses,
Sloppy accounting leads to sloppy decisions.
The problem with nothaving good records is when it comes to expansion. With sloppy records, doubling down on the same style of investment can make sense. What if it is actually losing money, or not profiting as much as expected?
Sloppy decisions can lead to catastrophe.
Wrapping it Up
If you are looking to learn from other real estate investors that have failed, the big lessons are:
- Don't Over Leverage
- Don't Run out of Liquidity
- Keep at it
- Always be learning
- Treat investing as a business
- Don't let the property go