You’re about to discover what NOT to do when investing in real estate. So often, creative real estate investors and educators share their positive experiences. But there are a ton of pitfalls in the world of real estate, too. In fact, I would argue that more people fail than succeed in this business.
So rather than focus on what to do, you’re going to learn what NOT to do.
Why am I qualified to share with you what NOT to do? First, I am a regular contributor on this blog, and from the comments I receive, it would appear that y’all recognize me as an authority on this subject of creative real estate investing.
Second, as a real estate mentor, coach, and trainer, who has worked with thousands of real estate investors on thousands of deals, I have been exposed to a gigantic number of “real world” situations.
Third, I buy distressed real estate, and the owners of those types of properties usually have a story to tell of what went wrong.
When you combine all of this, it becomes obvious that I have been exposed to more real estate deals (both good and bad) than most people will ever have the opportunity to experience in an entire lifetime.
Here’s what NOT to do when investing in real estate…
Do Not Get Involved in Deals You Don’t Fully Understand
Real estate is not like other investments.
Let’s take stocks, for example. If you buy stocks the traditional way, the worst that can happen is you lose the money you invested, right?
However, what’s the worst case scenario with buying real estate the traditional way? You could not only lose all the money you put into the deal, but you can also sustain additional loses if you borrowed money and some of that borrowed money was lost.
Plus, real estate requires consistent, ongoing oversight on your part. As the owner, you have ongoing responsibilities, even if you hire a property manager. New problems you never expected appear and decisions have to be made. Therefore, a bad real estate investment can cost you more than just your original investment. You can go into additional debt if the loses exceeded what you put into the deal and the whole ordeal could take up a ton of your time!
NOTE: This article is not intended to frighten you, but this is the real world here and we might as well get real with this!
Deals You Don’t Fully Understand
If you don’t know what’s the worst that can happen if a deal goes sour, you don’t fully understand a deal. The list of investors who have fallen into this category is long and distinguished. Classic examples include:
- Developers who take on projects that sustain gigantic loses and cause them to lose everything.
- Turn key property buyers who have purchased pre-rented, already managed rental properties half way across the country
- Landlords who own barely cash flow positive properties who get a bad tenant who lives for free for several months
- Rehab projects that end up half done because a contractor walked out on them, or a building inspector required work be ripped down and done over.
- Tax lien investors who discover that getting the property back at the tax deed sale was not all it was cracked up to be and now they are stuck with a basically unsellable property and have to pay property taxes.
And that’s just the beginning of such a list of situations where the investor did not truly understand what they were getting themselves into when they got involved in a deal.
“Getting Involved” in Deals by Using Your Own Cash or Credit
By “getting involved in deals,” I am specifically referring to when you put your own money or credit into a deal. If you invest creatively, and avoid putting any of your own cash or credit, and you have no personal liability in the deal, if things go bad, you have very little downside risk.
For beginners (and even seasoned professionals), creative, low risk investing is a terrific way to avoid getting too involved in any one deal. However, most people are not truly educated on how to invest creatively so they put their own money, their own credit, their personal signature, or all of the above on the line.
The Danger of Getting Lucky
A hidden danger lurks when an investor gets involved in deals that they don’t fully understand but still manage to end up making money. I call that, “getting lucky.” And I have seen how dangerous it can be because the investor gets a false sense of reality.
What can happen is the investor pushes his/her luck by going bigger on the next deal, and that’s when things can come crashing down. This happened to many part-time real estate investors in the mid 2000s. They were not fully aware that they were in the midst of the biggest real estate bubble in history. They started off good, but with each new bigger deal, they didn’t realize they were inching closer and closer to disaster.
When the market collapsed, these unfortunate folks not only lost their original investment but, in many cases, their properties went to foreclosure or short sale and (in some states) created deficiency judgments.
If you are one of those people, my heart goes out to you, and I hope that it doesn’t scar you for life because it can be an expensive, but very valuable learning lesson.
There is hope! You can avoid investing in real estate unwisely…
Investing in Real Estate Wisely
Investing in real estate wisely can be done in one of two ways.
- Get involved in deals that you fully understand. That requires education.
- Avoid using your own cash, credit, and personal guarantee.
Even if you don’t fully understand the deal, you’re only big lose would be your time. However, that approach to investing requires education, too. So no matter how you slice it, if you truly want to invest wisely, you have to educate yourself. And to educate yourself, you need to read, watch, and listen to trainings, as you are doing right now.
Certainly stay connected to CREonline.com because there is always new and fabulous education on creative real estate. But you are also going to have to apply what you learn and try it out in the real world. A ship may be safe in the harbor, but it wasn’t built to stay docked at port.
Share Your Real Estate “War” Stories
Using the power of this wonderful and varied audience of readers, let’s all learn from each other! Please share examples of real estate deals that have gone really bad.
Comment below. The more extreme, the better! We can all gain from hearing real estate war stories because there are always great lessons in them. Let’s hear some stories of what NOT to do when investing in real estate!