4 Big Real Estate Mistakes to Avoid

My 10 years in the real estate business have been action-packed but relatively short from a long-term perspective.  Time and wisdom teach us how to avoid the biggest mistakes.

That’s why I love to absorb wisdom and stories from those who’ve been around longer than I have.

One of my favorite old-school real estate teachers and storytellers was Jack Miller.  He is now deceased, but his stories and real estate lessons live on at cashflowdepot.com where his books and seminars are still published.

In this article I want to give you 4 big mistakes that Jack often taught others to avoid.

Mistake #1: Trying to Hit ‘Home Runs’ Instead of ‘Singles’

“The turtle has been beating the rabbit since Aesop started writing his fables. One might think that beginners run the highest risks, but the danger comes to most of us when we’ve accumulated enough money to play for larger stakes. “

Jack Miller, The Success Secrets

In baseball the big, strong home run hitters get most of the attention.  But ironically the most consistently valuable players in my memory were the hitters who just got base hits.

The safe and steady hitters (or investors) don’t experience as many glorious highs (home runs) but they also don’t fail as much (strikeouts). These players just get on base and win games.

In real estate some people get bored with the little deals. Another mentor of mine John Schaub has a book called Building Wealth One House at a Time.

John’s motto is to buy the consistent, safe, profitable investments, and then do it over, and over, and over again until he meets his goals.

Mistake #2. Investing in Something You Don’t Understand

“Investing in large, expensive, and complicated properties for the average investor is an invitation to financial disaster … The single family house is far and away the easiest of all of these investments to understand and to use to build wealth because of its simplicity, availability, demand, finance-ability, and ease of management.”

Jack Miller, The Success Secrets

It’s no coincidence that this philosophy sounds a lot like that of Warren Buffett.

Buffett says there are thousands of brilliant ideas for making money out there, but often the simple, understandable plan is the one we can actually execute and make work the best.

The single family house is my version of the simple (but powerful) little investing plan.

Why is it so great?

First: We understand single family houses because we’ve lived in them.

We’ve probably also been in the shoes of our primary customer, a renter, at some point in our lives.  Intimate knowledge of our customer is a powerful advantage in marketing and business.

Second: Single family houses are consistently in demand.

Think about a single family house in comparison to a commercial building.

If I have a rental house in a decent neighborhood stay vacant for longer than 30 days, something is wrong. A commercial building may sit vacant for years without producing any income. That’s normal!

Third:  Houses are the easiest real estate to finance (and thus easiest to sell if needed).

An owner occupant loan on a well located single family house is the perfect loan for a banker. Government loan programs like FHA and institutions like Fannie Mae are focused on single family houses in the median price ranges.

Even in a tight lending market, we can still find buyers for our single family houses. This means you can cash-out in a reasonable time for near retail price, which is a hallmark of a safe investment.

Fourth: Single family homes are abundant and available everywhere.

Even with their abundance, you still have to hunt for deals.  But the point is that every town has them.

Wherever people with jobs (or something valuable to trade) need a place to live, you can be in the single family house business.

Fifth: Houses are easier to manage.

I own both lower rent apartments and single family homes in median price ranges. The median price single family house is much easier to manage.

Tenants are more responsible, more likely to do minor repairs, and in general less transient. This makes for a more pleasurable and hands off management operation.

Mistake #3: Using Financing That Creates Negative Cash Flow

“After a couple of bankruptcies, even the brightest starts soon discover that ‘Nothing Down’ leads to ‘Nothing Left’. Feasible financing is the key to real estate cash flow and wealth. This is best obtained from motivated sellers than from skeptical bankers who insist that you personally guarantee your payments.”   

Jack Miller, The Success Secrets

Jack would recommend that we all adopt this as our mantra:

Don’t buy and finance real estate with negative cashflow!!

Cashflow is more important than profitability in most cases. You must survive before you can thrive.  

Another good real estate teacher, Ron Legrand, always used to say “Focus on cashflow first, wealth building second.” He’d say that until you are overwhelmed with positive cashflow and face big tax bills, don’t worry about wealth building.

Jack also taught that feasible financing is the secret to buying real estate with positive cash flow.  To get this feasible financing, Jack recommended using sellers and individuals instead of banks.

This is why I have focused so heavily on creative financing in my business (be sure to join my upcoming Creative Financing Class if you’d like to learn more). Seller financing, lease options, self-directed IRAs, and other non-traditional sources have had the flexibility to help me  prioritize cash flow first.

Bank terms are written in stone and have little wiggle room, despite the unique needs of each deal.  As a result borrowing from banks often leads to poor or negative cash flow for investors.

I often quote Jack when I tell people that the most likely way you’ll lose your financial kingdom isn’t being sued or experiencing  some other business calamity.

What’s the most likely culprit for real estate investor bankruptcies?  Not  being able to make the mortgage payments!!

If that’s our biggest risk, then let’s focus all of our energy and effort on mitigating it up front by avoiding negative cashflow and using creative financing.

Mistake #4: The Grass is Greener Syndrome

“When it comes to investment, absence doesn’t make the heart grow fonder. Somehow, we are prone to think the grass is greener in the other fellow’s yard … The net result of this is that, while the grass may indeed be greener, it could be a lot more expensive. The properties we acquire in remote locales must be able to produce as much as 50% more cashflow than properties in our own area just to pay for all the inefficiencies and costs that accompany remote property investment.”

Jack Miller, The Success Secrets

Finding the right location for  investment can be difficult. While some locations do have better fundamentals than others, I concur with Jack that you should stay in your own backyard to invest.

First of all, you’ve probably chosen to live in your area for a reason – you like the schools, the amenities, the landscape, the people. Stick with what you know and understand (see Mistake #2).

Secondly, it’s just more convenient when it’s close by. A town 2 hours away may be wonderful for investments, but how wonderful is it to you if you can’t execute or maintain your investment plan?

To be successful you need to get out in the field, get to know people, get to know neighborhoods. This market knowledge is crucial, but you lose this advantage if you invest out of your area.

Thirdly, hiring third-party managers and service providers is much more difficult and expensive out-of-town. You’re more likely to find well recommended property managers, landscapers, plumbers, and other professionals in your own town.

A famous speech was made over 100 years ago called “Acres of Diamonds”. In it the orator noted that failure to seek out opportunity in your own locale may indeed be merely an excuse not to try rather than a fact of life.

Look for your own “grass is greener” excuses, and ask this excuse buster question:

“Has anyone in my area facing similar circumstances been successful at what I’m trying to do?”

If the answer is even a remote yes, get rid of your excuses. Change your habitual question to “How can I?” instead of “Why can’t I?”

Jack (and I) will be proud:)

Enthusiastically your coach,

Chad

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2 Comments

  1. I agree that investing in something that you are unfamiliar with is a bad idea. I have been thinking about buying a home, but I could see how it would be important to ensure that I know as much as possible before I spend that much money. I’ll have to make sure I do my research if I decide to invest in a home.

  2. Hello, this is a good blog with a lot of information about real estate to avoid those common mistakes,
    Thank you for sharing valuable information with us; please post some more informative articles about aviation.

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