Top 5 Worst Real Estate Mistakes
Philosopher George Santayana said, “Those who do not remember the past are condemned to repeat it.” So let’s take a moment to jog our memories with a brief history lesson—you’ll find out why it’s relevant in a few minutes.
Do you remember the global financial crisis of 2007 to 2008? Of course. It was a monumental disaster triggered by the subprime mortgage crisis and the collapse of the U.S. housing bubble. It was the worst housing crash in the country’s history and nearly caused a second Great Depression.
As the markets of the world crashed, many people had no idea what the crash meant. Most people had no idea how it would truly impact their lives.
In any kind of investing, what sets the gamblers apart from the true investors is understanding the fundamentals. Knowing and following the fundamentals takes much of the risk out of investing. There’s always some risk, but by sticking to sound investment strategies and planning for ways to cover the downside, the risk can be greatly reduced.
For anyone who is considering real estate investing as a career, they need to understand that while it can be a profitable business venture, it is hardly a get-rich-quick scheme.
Life doesn’t work that way and real estate investing surely doesn’t work that way… there are some serious mistakes you need to avoid.
While mistakes can’t be eliminated, you can learn from the most common ones that trap other investors. By doing so, you will create an investment approach that helps you invest more effectively and reach your goals faster.
Here are the top five mistakes to watch out for.
Mistake #1: the Go Gig, or Go Home Mindset
If you find an investment you want to invest in, put a little money down. It is amazing how quickly your intelligence grows when you have money on the line. Don’t bet the ranch, your mortgage payment, or your retirement. Simply put a little money down, pay attention, and learn.
I bought my ﬁrst investment property in 1973. I had no extra money to invest. I was still in the Marine Corps and had just purchased my ﬁrst home. Rather than let low pay and no money stop me, I signed up for a real estate investment course for $385. Within a few months, I purchased my ﬁrst investment property, a one-bedroom condo on the island of Maui, for $18,000. The property was in foreclosure, and the bank was desperate to get rid of the unit. The bank let me put the $2,000 down payment on my credit card.
The property made me about $35 a month after paying my mortgage and credit card bill, which is a great return since I borrowed 100% of the money. Once I proved to the bank that I could manage the property, it let me buy two more units. My investing career was launched.
In 1989, Kim’s ﬁrst investment was a $45,000 two-bedroom, one-bath home in Portland, Oregon. She put $5,000 down and made $50 a month. She was extremely nervous when she took her ﬁrst step.
If you start small and learn to solve problems, you will gain immense wealth as you become better and better at solving problems.
Mistake #2: Investing for Capital Gains
Many people think investing is risky because they invest for capital gains. In most cases, investing for capital gains is gambling or speculation. When a person says, “I’m buying this stock, mutual fund, or flipping a pice of real estate,” he or she is investing for capital gains—an increase in the price of the asset.
Investing for cash ﬂow is a lot less risky. Investing for cash ﬂow is investing for income. If I put savings in the bank and receive 5 percent ien interest, I am investing for cash ﬂow. While interest is low-risk, the problem with savings is the return is low, taxes can be high, and the dollar keeps losing value. When I purchased the 300-unit apartment house, I was investing for cash ﬂow. The diﬀerence is I was investing for cash ﬂow using my banker’s money for a higher return on investment and paying less in taxes.
One of the reasons I love investing in apartment houses is that people, rich or poor, will pay for a roof over their heads. In America, as real estate becomes more expensive and diﬃcult to aﬀord, and as wages come down, I believe these trends will cause more people to be renters.
One of the reasons Kim and I didn’t panic during the financial crisis on August 9, 2007, is because we rent real estate for cash ﬂow. We do not sell real estate.
Mistake #3: Investing With No Education
Someone without financial education doesn’t know a good investment from a bad investment, or good advice from bad advice. All they know is to go to school, work hard, pay taxes, live below your means, buy a house, get out of debt…
And die poor.
Today people will say to me, “Can I take you to lunch? I want to pick your brains on investing in real estate.” It makes me unsettled to see people so naïve about financial education. Becoming financially educated is not something you do over lunch.
I also have had wannabe investors tell me, “I’ve bought and sold several personal residences. I know how to invest in real estate.” There’s a massive difference between buying a home and buying 300-unit apartment houses.
Mistake #4: Trying to Be Perfect
A person who continually searches for the right answer is often afflicted with the disease known as “analysis paralysis,” which seems to affect many well-educated people. Ultimately, the way we learn is by making mistakes. We learned to walk and ride a bicycle by falling down and then getting back up.
My rich dad said, “Some of the biggest failures I know are people who have never failed.”
His point was that because people try to play it safe, they never take any risks. And because they never take any risks, they never get ahead in life. They get stuck. Rich dad pointed out that he was successful because he had made many mistakes and had learned something new each time.
And most importantly, he tried to not make the same mistake again once he learned from it. He called that moving from experience to wisdom.
After I lost my first business, I was nearly a million dollars in debt. It took me almost five years to reach zero. In many ways, learning from my mistakes and taking responsibility for my mistakes was the best education I could have asked for. If I had not learned from my mistakes, I would not be where I am today.
Kim and I created the CASHFLOW game as a simulator. The game allows players to make as many mistakes as possible with play money, not real money.
Mistake #5: Never Getting Started
Nike’s slogan, “Just do it,” says it best. Unfortunately, our schools also say, “Don’t make mistakes.” Millions of highly educated people who want to take action are paralyzed by the emotional fear of making mistakes.
One of the most important lessons I have learned as a teacher is that true learning requires mental, emotional, and physical learning. That is why action always beats inaction. If you take action and make a mistake, at least you have learned something, be it mentally, emotionally, or physically.
Reading, watching, and listening are all crucial to your education. But you must also start DOING. Make offers on small real estate deals that will generate positive cash flow.
Play it smart,
Editor, Rich Dad Poor Dad Daily