No one gets into investing with the hope that they will lose money, and yet people lose money in real estate every day. No joke. This week, I want to talk about how not to lose money in real estate.
I remember vividly the day I sat down for coffee with a hard money lender friend of mine. He happened to run a hard money lending business with $350 Million out in loans. That day he asked me, “on average, how many flip deals, out of ten, do you think break-even or lose money?”
I responded with a guess. “Three out of ten either broke-even or lost money or 30% of flips.”
I was way off. He said that on average, 7 out of 10 flips either broke-even or lost money. That’s 70%!
To me, break-even on a flip project is losing money. In 13 years of investing in real estate, which includes dozens of flips and years of spec home building, I’ve only ever lost money on one property—a flip. I’m not trying to bash home flippers. I’ve made a lot of money flipping houses in the past, but losing $19,000 on that one property broke my winning streak and helped me learn an expensive lesson: you can lose money in real estate.
Today, I’d like to share some lessons I learned along the way about how not to lose money in real estate.
It’s okay to walk away from a bad deal.
I know firsthand how frustrating it can be to 1) find a great deal 2) negotiate the best price and then 3) find out there’s wayyyy more issues with the property than you want to take on.
Unfortunately, I’ve had to walk away from several deals this year, and every time it’s a disappointment, both for me and my agents, who work so hard to find me deals.
But let’s be honest, aside from the initial disappointment, walking away from a bad deal is actually a good thing. Why? Because real estate investing is one of the few investments you can make that can cost you additional money every month if you make a bad investment.
You must follow a due diligence checklist.
We all get busy and forget things. I’m the worst when I travel; I will quickly analyze a deal, make an offer, and then forget to follow my checklist. Every time I’ve done this, I’ve missed an essential due diligence item, and I end up paying for it later.
It’s seen many edits over the years, but if you don’t have your own due diligence checklist, you can use ours. Click here to download our Due Diligence Checklist for free.
It’s the little details like reviewing the rent roll and noticing that the tenant in Unit B has been late six times this year and has a balance due.
It’s forgetting to order a sewer scope and finding out after closing that you need to replace the side sewer…
Make sure you inspect everything.
Unless you are buying a property that does not allow for inspections, such as auction properties or most wholesale deals, get an inspection!
You can read about everything I inspect before I buy in this article.
Invest for the long term.
I no longer flip properties, the time and risk just aren’t worth it to me. I’d rather be hiking with my family, traveling, and exploring new places than having to be tied down, managing a flip project.
Instead, I fix and rent, intending to hold on to properties for at least ten years. Have I sold some properties sooner than ten years? Absolutely.
But for the most part, I’m a long term buy and hold investor.
Remember that property where I lost $19,000? For starters, it wasn’t a great rental property. But, had I rented it out and held onto it for a few years, I could have made a profit. Today, that property is probably worth $300,000 or more, and I sold it for $170,000 eight years ago. Ouch!
Between 2007-2009, I purchased a few other rental properties that ended up being underwater. Had I been a seller during that time, I would have lost a lot of money. Instead of panicking, I focused on learning to think like an asset manager.
As an asset manager, I learned to increase the NOI (net operating income). Then, I focused on only selling those properties for a healthy profit once things recovered years later.
Buy properties that have multiple exit strategies.
Do not buy an investment property that only is a good deal in one scenario. Instead, focus on a flip project that will also work as a rental or a rental property with room to build on. Duplexes that you can condo and sell off individually.
To this day, I won’t even buy a primary residence unless it would also break even if I had to rent it out.
Any property that I buy has to have a value-add opportunity and multiple exit strategies.
Build your A-team through referrals.
The last advice I will leave you with is to build your team by referral. This is how you can find the best agents, property managers, contractors, bankers, insurance agents, lenders, 1031 intermediaries, and more.
A pre-existing relationship increases your chance of working with the right people who are not going to take advantage of you. Do referrals sometimes not work out? Sure, but it’s rare. Plus, imagine the time you save by working off of referrals rather than starting from scratch. Like most things, you don’t need to reinvent the wheel every time. Lean on experienced investors who are two to twenty steps ahead of you.
This is why I built Agents Invest: I wanted to share my contacts with our investor community.
While investing in real estate involves some level of risk, you can greatly lower the risk by taking from these six lessons. Are there any lessons you’ve learned from real estate investing you wish you had known when you first started? Learning lessons the hard way can be, well, hard. But there is a better way, learn from those who are two or twenty steps ahead of you. Real estate is a team sport; you don’t have to do this alone.