Real Mistakes by Real Investors, and How You Can Avoid Them (Part One)

by Dave Miller

In the real estate world investors tend to make the same mistakes over and over again. Then after a time they learn and either stop investing or stop making the mistakes. When they stop making the mistakes yet continue to invest, then the dividends start coming in.

Yet new investors emerge into the market place making the same mistakes their predecessors did.

You have a choice; to make the mistakes yourself or to learn from other people. I say, learn from other people’s experiences. It’s cheaper than way.

#1. Ignoring Risk Management

   Investments consist of two sides; risk vs. reward. Yet many tend to skip the risk element. Buying and hoping for the best. “Hoping for the best” is not risk management. You must carefully weigh the risk-to-reward ratio. All investments have risk, there is no such thing as a risk-free investment. Even if the risk is only your time or your money being tied up. You therefore risk your time or money on this project while it could be used on another possibly better deal, losing chance of a greater return.

  Loss of capital can come in various forms; capital loss (devaluation), loss of greater gains, loss of additional capital (lawsuits),i.e.

Here are few ways to reduce risks:

  • Purchase your property in a LLC
  • Discuss the purchase with a trusted attorney
  • Know the market
  • Get liability insurance

This list could be ten pages long, yet I will stop with this. Encircle yourself with trusted and experienced advisors. Ask questions. Weigh your options. Call or email with questions, call 717-951-0201 or , I will gladly give you a free 15 minute consultation. (Consider the risk first, losing 15 minutes vs. gaining 15 minutes of knowledge)

#2. Over Leveraging

Investors love the way leverage increases the return on the investment. Yet they forget it is a two-edged sword. Leverage magnifies both profits and losses. Investors tend to use too much leverage and use it too long in their careers.

Am I advocating no leverage? No.

Investors should use leverage early in their careers, making sure they can cover the payments with alternative means, and move towards more secure loan-to-value ratios later in their career, making the net worth they achieved more secure.

#3. Picking the Wrong Strategy

Pick a strategy that matches your strengths. Not everyone is cut out to raise the rent on eighty-five year old ladies or evict 6’ 5’’ drug thugs. If you don’t know how to fix a roof and are scared of heights then stay off the roof.

Aligning your strengths with your strategy requires honesty. Rather than focusing on how someone else did it, look at yourself and your potential. If you are not a sales person but rather Mr. Fixer-upper then outsource the sales aspect and focus on fixing.

#4. Overstating Returns

Hunters and fishermen tend to exaggerate, telling tales that captivate their wide-eyed audience. Real estate investors tell even wilder tales. Telling friends they made $5,000 on a wholesale deal yet forgetting to mention they spent $12,000 on some guru telling them how.

Whether working with partners that hold an equity position or private money investors, you need to gain their trust. For this deal and for the next. If you overstate the returns and then fall short of your promises you risk losing a partner. But if you honestly and accurately state your expected returns and then supersede them, you win.

#5.Overimproving Properties

There is no profit in fixing something. The profit is in the added value of the improvement. If it costs you $5,000 to build a garage that increases the property value by $5,000, you have not added value. Make sure the improvement adds value beyond the cost.

The profit is in the purchase price. Not in the improvements. Improvements cost money, paying less does not.

Many investors pay too much for fixer-uppers. Don’t be one of them. Make your money on the buy.

Avoid trying to squeeze every penny out of the deal when you can close the deal with a decent profit. A certain dollar today is better than an unsure dollar tomorrow. Here is an example of a property I could have made more money on but chose not to (Click Here). Get the fast buck not the last buck.

#6. Waiting Till April 15th to Check If You Turned a Profit

April 15th is when you report your profits to the IRS, not when you see if you had a profit. In real estate numbers are everything. If you lost money on a deal you need to know that NOW! Not after three more deals like it. Run the numbers. Have your accountant involved in your planning.

Quotable Quote:

There’s blind luck, dumb luck and then there’s get up every morning at 5:30 and sweat the details luck. Few people actually stumble into wealth. It takes persistence, tenacity and a tireless work ethic. In the end, luck has little to do with success. It takes experience and hard work. Pure and simple. –  Smith Barney


Good and Bad Run on Parallel Tracks and Usually Arrive About the Same Time

By Dave Miller

Today there is a gigantic sucking sound heard throughout the United States of America.  April 15th, Tax Day.  Massive amounts of money left the hands of honest hard working citizens. It landed in the hands of the federal government, a place we would not regard a worthy investment. We would advise any good friend to avoid buying into a company so dreadfully run. Steer clear. Make extra effort to maneuver around it.

  • The Bad: My hard-earned money funding activities considered corrupt and morally wrong. Behavior a Christian would view as sinful to be funding or directly involved in.
  • The Good: I take a good hard look at my blessings. I reflect, questioning my expenses and activities. Every year I ask the same questions; where did it all go? Did I take for granted the plenty? Did I count my blessings enough? Then I start to recollect expenses that accumulated, good and bad. I adjust and plan for the better. I learn and vow to be a better steward.

Am I advocating not paying taxes? Au contraire.

Rather I view it as both good and bad. The wasted funds are gone but I identified them as such. Now that they are acknowledged I adjust accordingly; a renewed effort to make frugality prevail. Wiser investments will be made. Less money wasted on frivolous consumables. If I had not looked at the bad I would not be considering making improvements for the better.

Do not dilute the bad with the good to smooth things out. Look at evil as evil, and good as good. Nevertheless, I focus on the good to maintain my sanity. Still at all times believing that good will overcome the bad. Focusing on the good doesn’t mean I turn a blind eye to the bad and pretend it absent. It is present. It is bad. View it as bad and the good as good.

Tragedies happen, people get hurt, some die. We see school shootings, molestations, vehicle accidents and the like, as heartrending times. They are. When a heart is rending, it does hurt, it is not a false prognosis. Even casual bystanders’ heartstrings are tugged. The pain is real.

But can we survive if we focus only on the negative elements? Do we believe that only bad comes from these events? If the world is such an awful place then why does good come from these appalling trials? Timelessly we are reminded God has a bigger scope, but still they are just that; appalling, awful and bad.

Then out of the blue we see daffodil sprouts peeking through the barren ground. Moments ago it appeared so bleak, now it is emitting cheer in a desolate time. Soon the entire garden is flaunting its splendor. A rainbow materializes showing a promise of hope.  We stand in awe. Just when we thought there was no hope and all was lost, that barren dirt transformed into a peacock of color. Beautiful it is, yet only eight inches below the delicate flower is soil. Brown dirt; a substance easily changed to mud with a sprinkle of rain or to dust with the lack thereof. But, nevertheless, the flower blooms. The dirt remains, however it is overwhelmed with an array of grandeur. Hope is renewed, bringing forth confidence in God’s paradoxical plan. A rainbow at the end of the tunnel. In believing that the rainbow existed from the start, we can see optimism in the drear, feel love during the ugliness and have faith in the grip of trepidation.

The fact that good came from the bad doesn’t discount the bad. Flowers grew out of the dirt. That doesn’t make the dirt less dirty nor the flowers less beautiful. Good remains good and flowers are still appealing. Dirt is still dirt and evil is evil yet.

Quotable Quote: “Good and bad run on parallel tracks and usually arrive about the same time.” – Dr. Ron Dunn

Published in: on April 15, 2010 at 4:05 am  Comments (1)  
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