Are You Making These 7 Common Mistakes in Real Estate Investing?

All right. In today's episode, we're diving into the nightmares of real estate investments. From unexpected expenses to deals gone wrong. Get ready to hear the horror stories that could have been avoided with a little more knowledge. Welcome to the Freedom show, ladies and gentlemen. Today we are delving into the world of real estate investment and uncovering, covering the common mistakes that investors often make.

Yeah, I'm super excited about today's show. So we are going to cover seven common mistakes to avoid in real estate investing. And we're going to start off with two golden nuggets that we don't go into great detail over the course of the episode. So if you're in the car, don't write these down. If you're somewhere else, write these down. 90% of contractors are no good.

Are you sure it's 90%? I mean, that seems a little low.

The second one. Second. Gold nugget. 99.99% of property management companies are not aligned with your interests. This is something that we talk about a lot because of the way we built our property management company. So we are trying to fall in that 0.01% of being aligned with investors interest. So I just wanted you to hear that from us. Cause as we started writing content for this episode, I was like, okay, seven common mistakes. What's the two that are right off the top of my head? And I went, oh, contractors. Oh, man, contractors. Could we talk about some horror stories? And then I went, property management companies. Oh, my gosh. They're not even aligned with your interests as an investor. And so I just thought, you know what, we're not going to go into all of those, but let me just give them those two gold nuggets at the very, very top of this episode. So there you have it. And your success in real estate, whether as an active or passive investor, it's understanding those basic elements that cause catastrophic failures. That's why we wanted to do this episode. The big things are houses getting abandoned during rehab. That's something that we've seen over and over. When we're buying properties, we are buying properties sometimes from investors who just didn't do their due diligence up front or ran out of money or had bad contractors or had some type of catastrophic issue that caused them ultimately to stop doing the rehab. Right. And some of those rehabs actually was a little bit of a benefit to us because not only did we get a good deal on it, but we got a bunch of materials.

Yeah, yeah. The materials were sitting in the house.

And the other Result of that happening is private money lenders or hard money lenders are now not getting paid back from the investor because of the improper due diligence or just things that maybe they didn't have experience or knowledge about going into the deal. And now that private money lender or that hard money lender is having to foreclose. And so those, those are real situations and real stories that we hear all the time. And so I think it's really, really important to know where those mistakes come from so that you can avoid them. So Flip, I think you're going to start off with mistake number one.

Couldn't wait. This is awesome because this is right up my alley here. But this is lack of research. This is number one. And because this is where you start, you know, when you get an address, yeah, you can drive by the address. But it's all about the research. It's about the comps, it's about the location, it's about the condition. Those are the three biggest mistakes. And so I don't want to go too far into these three things, but you can miss just one little thing in the comps that'll just completely make the deal go wrong. Yeah, you can miss one little thing about the location. Like everybody knows what's going on at this location, but when you drive by at noon, you don't know it. And then the condition of the property, there could be things behind the walls, there could be lots of things, but these are the three biggest mistakes. And this is, this all has to do with mistake number one of lack of research. One of the. I do want to give an example. We did have a, we actually had a package of properties and they were all lined up right next to each other. And when you're looking on the map, if you don't actually go to this property, if you look at it on the map, it looks like there's a property, there's a street and there's a neighborhood right across the street. And the properties are all fairly close to the age, same age. But when you actually go to the property, you, you're the subject property is actually up elevated on this hill and the other properties across the street are way further down, like down in this little valley. And the properties aren't even remotely comparable. But when you look at it on a two dimensional map, they're like, oh look, these properties are right across the street. Let's use these as comps.

Yep.

So that was a major mistake that, that's happened in the past. And that's because location they didn't do the proper due diligence on the location. They figured, oh, I can just do the comps in this property. And this property is worth X. I can tell you that right now. That's the guy who acts like he knows what he's doing. Notice I know how to do that, Ralph. The one thing that I have put in place over the years is not just going to one place. When I do my research on a property, I don't just go to one location online and do everything there. And then that's it. I don't look anywhere else. I look at multiple sources. I look at different websites to make sure that everything lines up. Because once one doesn't line up something, it doesn't take more than one. Just one. Once one thing doesn't line up, that's a red flag. You need to figure it out. Because everything should line up. Yeah. Everything should be very symbiotic. Yes, Symbiotic. Wow. That's. But the other thing, too is making sure you have boots on the ground. Make sure, you know, if you're, for example, holding wholesaling in a market that you do not live. I know people that, you know, live on one side of the country and wholesale properties on the other side of the country. Right. That's great. You can do it and have a blast doing it. Make sure you have boots on the ground, though, because again, being at the property, those pictures that are on Zillow or whatever might be 7 years old or 10 years old or 20 years old. So you need to have boots on the ground.

Yeah. Yep. I love that. All right. Mistake number two is ignoring due diligence. So the significance of due diligence on a property is really a lot of what Flip just said. Because if you make a bad buy, that could negate all the other deals that you did a really great job on. Right. Because we've seen such significant losses that let's just say that your Target profit is $20,000 per property, and you lose 40,000 or $60,000 on a property, suddenly these other properties that you actually did, well, it doesn't even matter because the one big catastrophic mistake just flew away. Yeah. Wiped out everything else out. So I think that that's really, really important that you tie in the research with the due diligence. And that leads to what you just said at the very end. And it really is that boots on the ground, seeing the property in person, if the situation that you gave, if somebody had been at the property and knew about running comps and how you research a property, they could have said, hey guys, this is an apples to apples. Like I see the properties you're looking at, but there's no other properties in this area that are actually like this. Like if you're going to pull comps, did you guys make sure that you're actually just pulling comps from the street or whatever it was?

Right.

But even if you had boots on the ground just for the sake of boots wouldn't have known that. Right. You would need somebody who actually had a little bit of a background in buying properties to intelligently say, let me give you some insight about this particular area and this neighborhood. So it's really important that you have somebody go and see the property in person. And it's even better if that person has experience in real estate and knows the things that you're going to look for. If they don't, then giving them a checklist of things. And, and this is one of the things to write down on your list. Right? And then, so that checklist, if you're gonna see a property in person and you don't have a checklist, another idea would be to bring an inspector with you, bring a realtor with you, bring some contractors with you. And remember at the very beginning when I said there was two gold nuggets that I wanted you to write down. If you're not driving a car and it's that 90% of contractors are not good, don't bring one contractor. Bring quite a few contractors with you and they're not all reliable. So if you invited 10, you might have one show up. So you're really going to want to get some references for contractors in the area. Use the realtor that you're working with. I know there's a lot of things going on with the NAR settlement and there's going to be some changes in the realtor landscape about how they work. If you're an investor, you want a realtor on your side. You want somebody who knows the market, knows the area, knows how to run comps, knows how to tell you, hey, you don't want to be pulling comps from this side of the street or pulling the comps for you. Right? So having experienced people on your side is incredibly important when you're doing due diligence.

It's funny, we keep knocking on contractors, but I remember when we first got into real estate, I remember asking another real estate investor saying, hey, I'm looking for a good contractor. And they just laughed out loud and they said, you know what good Contractors are like leprechauns. Once you find one, put them in your pocket and don't tell anyone. I'll never forget that. Anyway, mistake number three, overlooking hidden costs. Now this is very important. These are more like forgotten costs. You know, utilities, taxes. Oh yeah, taxes. You know, general maintenance, like lawn and snow removal. Talk about someone from one side of the country doing a property on the other side of the country. I heard of a guy, he was actually in Phoenix and he was wholesaling a deal and it was in Wisconsin and he put into place snow removal. Well, I think anyone knowing it's Wisconsin would put snow removal. It's just the level of snow removal that he didn't put in and it wiped him out. It just, he, he was, he went completely negative. Just because of snow removal. Not because of any of the other things, just because of snow removal. Because if you don't know it snows.

Yes.

Like, it snows a lot there. And so anyway, so these, you know, these are things that, that can really kill you. And so number one, it kills your cash flow because if it takes up all your money, well then you don't have any cash flow. And you know, when you don't factor it in, that's, you know, with like a cushion. Because you want to, you want to have a cushion. So like you could say like for, for snow removal, okay, I'm gonna put $100, you know, a month, but then I'm gonna also put another 10% over here just in case they get a blizzard, you know, or whatever. So making sure that, so that way you do have a cushion you want to think of. I always. One of our performas that we have is called the Worst Case Scenario Performa. And so far, knock on wood, we have never come across a worst case scenario. But just in case we do, we've got that performance nailed down.

Yeah.

So anyway, so you want to think, think that way because that's the worst case. That. And if you can make money in the worst case possible, well, guess what? You're going to make money all the other cases.

Yeah. And this has to do with time too. Right. We've had rehabs go twice as long as we anticipated. Right. We said six and it went 12, sometimes three or four times.

Right.

It gets rare for it to really go that long, but if you don't have that cushion, you, you end up losing money. And we have lost money for that reason. That's why we do episodes like this, so that we can go, hey, learn from us. We've Already made the mistake. Now you don't have to.

And I know we're beating a dead horse about the contractors here, but a lot of times those rehabs that go long aren't because of the contractors. They're because of permits and city. And city inspections. So I'm not beating the contractor down.

I am.

I was trying to be nice, off the record show. But there's a lot of different things with permits is, boy, that, that one kills it all the time. So I did talk about the Performa. You know, what you want to do is you want to build out a sheet with all the costs for a project. Every time you do, you know, you're evaluating a deal. We have a performer and our Performa is set up so it's the worst case scenario across the board. Like if you, you know, if it's going to be, you know, if it's a small two bedroom, one, you know, one bath, you know, we're saying that the utilities are like $200 a month. They better not be, you know, but anyway, we're saying worst case scenario for everything. But make sure you have something that's, you know, whether it's an Excel document, a performer that you've created or whatever, make sure you have something and you do it for every property. So that way you get this down and you can start tweaking where the Performa after a few properties, like, oh, I'm going to fix this, but do this over here because our Performa has evolved. If you could have saw our first Performa from, you know, five, six, seven years ago it to now, now it's shoo, it's a whiz bang performing now.

Agreed. All right. Mistake number four is emotional decision making. So this is when you make an emotional decision. This is really the example of the house is pretty versus do the numbers work? And I know that females get the bad rap here most of the time to go, oh, that house is pretty. I really want that. But men do it too. So. So I'm speaking to everybody here.

I would think probably with real estate, men do it more than women.

But you don't want to go for the pretty houses. Sometimes the ugliest house out there could be the one that is actually going to be the home run. So you really want to make sure that you're taking into consideration everything that Flip has talked about when it comes to evaluating deals and doing the research. The location, the comps, the condition of the property, making sure you really know your numbers because you, your numbers is what matters. And so we. Fortunately, I'm not an emotional person when it comes to buying things. Flip isn't either. So we have not ever bought something because we thought it was pretty. So when I was trying to come up with a story for this mistake, I was just like, Flip, I'm just going to tell other people's stories because we've heard it so many times. They're like, ah, you know, we were offered a few different properties and we just really liked this one. It was just so cute. We would have lived here, there. And that's probably the biggest mistake that I hear the most when it comes to buying the pretty house. We would live there. Typically, when you're doing a flip or a rental, you don't want the house that you're going to live in. You want a house where the numbers work, where the renter is going to live, then live in. Because the particular story that I was going to share today or I am sharing right now, not only did the numbers not work for that particular property, but he couldn't rent it for the price that he wanted. He couldn't even get good renters for. I don't know what it was about that particular location, but he was having difficulty getting it rented, period. So not only did it not work in general, now he's struggling to get renters to even be there and stay there. And again, I can't remember what the extenuating circumstance was for that, but you just, you don't want to make emotional decisions when it comes to real estate. The reason that Flip and I often talk about how much we love real estate investing is because, or like, they're not emotional. Yeah, right. You're not emotional about the purchase. It's the numbers. The numbers don't lie. If the numbers work, then it's great. And you say yes. And that's really the type of people that we want to work with, because people who are emotional, it's just a roller coaster of just crazy. It's a roller coaster of crazy. So numbers don't lie. Just use that Excel sheet that Flip just talked about. Make sure that the numbers turn green. That's what you have on our sheet, right. You've got all the strategies and everything. And everything pops up green. If it's going to work for a particular strategy, that's really what you want so that you can just go, nope and just walk away and you don't have to let emotions tie into it at all.

Yeah. You know, I've been racking my brain because you said you Know, have we ever bought a property based on emotion? And there was one property, and I remember that I was very emotional about it, but the reason why I was emotional about it was because of how much money we were going to make on the property.

Because of the numbers.

Because of the numbers. But I was, oh, I wanted that property so bad. But. But then we found out that this X and X and X and X and all of a sudden it wasn't making any money. And I was not emotionally attached to that house anymore, but I was. I was emotionally attached to it because of the numbers.

Yeah. Okay. Yeah.

All right. Mistake number five, poor financing choices. So now, number one, you want to factor into the costs because. Because of your cash flow, you want to factor into your cost during the rehab. Private money loan. Your private money loan, what the cost is for that or mortgage, depending on.

How you bought the property. Right.

True enough. Yep. You could, could do traditional mortgage to it. Private money loans, utility, taxes, permits, general maintenance. You need to think about everything else, you know, that goes into the property. Anything possible that you could possibly be spending money on this property, you need to have it in, you know, in your numbers.

Yeah.

To make sure that you're still. Because your cash flow could be negative very quickly.

Yes.

If you don't like, oh, crap, I forgot that number. Well, there it goes. There, there goes my cash flow. So, you know, because again, if you don't borrow enough.

Yes.

Well, then you're going to run out and, you know, and when you run out, well, then you're going to be that guy calling us saying, hey, I've got a rehab halfway done. Do you guys want to buy it?

Yes.

Oh, by the way, I have all the materials for you, too.

That's right.

You know, or some of the materials. Not all the materials.

Yeah. And even your private money lender or hard money lender, they're going to want to know you did your due diligence. Right. That you've got all these factored in. And if you don't, that becomes a little bit of an issue.

Yeah. So when you do flip a property again, private money loans and hard money lenders are typically going to be your best when refinancing. There's a lot of different options you have once your property's done and you can refinance there. You can just do the traditional bank loan, credit unions, and then there's DSCR loans, which are debt service covered coverage ratio loans. And so, and those mainly go for the rent and the property and what the property is making so again, you want to. And some. Some. I mean, some banks, you only have to have it seasoned, you know, have a renter in there for six months. Some are longer, some are a year or two years, whatever. Each bank is different. There's not. It's not a straight line, you know, as far as the rules. So when one bank tells you one thing, find. Look at another bank. Always keep asking.

Yeah. And the loan programs change.

Yep. Daily.

Yes.

So. Yeah. So never stop asking questions.

Agreed. All right. Mistake number six is timing the market. Gosh, just don't do this. None of us have a crystal ball. It doesn't matter how experienced you are in real estate. None of us have a crystal ball. We do not know what's going to happen. So here we are in 2024, and I was, you know, reading some articles and just seeing what everybody's saying about the market and what's going on. What's going on with inflation? What's going on with interest rates? What's the forecast for 2024 and 2025? Where do they think the interest rates are going to go? Is there going to be a market? Housing crash? And it's just hilarious to read all the different opinions, right, because you've got the doom. Is it doomsayers? Is that what you call them?

Doomsdayers?

Doomsdayers or whatever. You got the doomsday day people who are just like, the market's gonna crash. You've got the people who are just really studying kind of what's going on on a macro level. And then you got people a little bit, maybe more like us, who are just like, you know, I'm gonna take in all this information, but I don't have a crystal ball. And I'm gonna make sure that I'm just really smart in the fact that I'm analyzing every single deal, not being emotional, emotional about it, making sure that the numbers work, doing my proper due diligence upfront, and, you know, getting the right loan. Like, you're taking all of these mistakes and you're applying those lessons learned. And so I go back to the Warren Buffett quote that I really, really love, and that is be greedy when others are fearful. Fearful when others are greedy. So as I'm researching these trends this morning, you know, it was just kind of making me laugh. They are saying right now is. Is a good time to buy. Interest rates have stabilized into the mid sixes. They feel like they're going to go down to the low sixes by the. By the end of 2024. But it's better than, you know, the sevens and eights that it was. And essentially, once it approached eight, like, the housing, like, purchases just went, like, they stopped. Everybody's like, no, no, no. The interest rates are too high. The world's falling. Whatever.

The sky is falling.

Thank you. And so now that it's back to the sixes, you know, the activity is starting to get back, and everybody's getting a little bit more comfortable. What I like to do, what we like to do is do the opposite of what everybody else is doing. So, you know, a lot of people, for a little bit, we're saying, you know, multifamily, it's saturated, and, you know, multifamily builders are starting to stop building. And I'm just like, hey, you know, when you guys run for multifamily, I'm going to go into multifamily. And when you guys are going being, saying, everybody's like, self storage. You got to go into self storage. Well, now, you know, that's really where everybody's running. So I'm just going to run the other way, and I'm going to do something like, you know, RV parks or, you know, something like that. So I think this comes down to when I was doing the research for this episode and kind of looking over what we wanted to talk about. I thought this was another one of the gold nuggets, is that people don't realize that the success of most real estate investors who have gotten to a certain level in life and in their business is because they're doing the opposite of what everybody else is doing. And they're not, like, watching the trends. So the biggest mistake. Mistake that you can make is following the herd. So as the herd goes, you end up. You're so far behind, you know, the mark that you end up making the big mistake because the herd is already turning when you're, you know, really catching up, right. Meanwhile, the really smart and seasoned investors are going, oh, you're going that way. I'm going this way. And this is where it ends up turning. So we're already over here. It ends up turning and the people that are lagging. And if you're not watching on the video, you don't see this circle that you just don't want to be on the back half of that circle where you're following the herd and you're constantly making mistakes. You always want to be on the front end, and usually the front end means you're doing the opposite of what most everybody else is doing. So Just make sure that you're not following the crowd and you're just following the people who know how to win. You're following the people who have multiple exit strategies. Because no matter what, when somebody talks in absolutes, they're bound to be wrong at some point in time. So right now, if I tell you to always go opposite, if I say that at some point in time, you're go, danny, you were wrong, and you're right. I'm going to be wrong. At some point. You have to be wise in what you do and, you know, really be watching the market in a way that you're making good decisions and you're surrounding yourself with the people that you know like and trust and watching what they're doing and everybody collaborating. You're going to make some mistakes. That's part of the journey. And if you have multiple exit strategies, and ultimately what you had said, I believe, is if you can hold that property, it's great. And I actually think that you're going to be talking about that next. I think that's mistake number seven, so I'm going to hush on that. So watch the trends. Don't follow the trends. Look where no one else is looking. That's why you watch the trends. So you can go the other way when it makes sense.

Yeah. You know, they be greedy when others are fearful, and fearful when others are greedy. And that was one of the first things. Things we learned when we first got into real estate. And I just. I think it's hilarious because, you know, when Covid hit and all of a sudden, everyone just started going bonkers on buying houses. You know, open houses, had lines down the street of people waiting to get in these houses. I mean, I was just sitting there. I just. I had my popcorn. I'm just. I'm watching this. It was crazy.

Yep.

All right. Mistake number seven. Inadequate exit strategies. Who put that word? Inadequate exit strategies? So this is, again, very important now. What this is not saying is to have one exit strategy going into a house, you should have multiple. And don't even try to pinpoint one on it. Just make sure. Okay, I can do one of five things on this property when it's done. That's all you need. You don't need to say, oh, I'm gonna. This. I'm gonna do this on this property. And force. I believe that's called forcing the square peg in the round hole. So. But making sure you clear multiple exit strategies, it's critical. You cannot predict the time of the markets. You don't know you have no idea. You need to be able to pivot. Even in real estate, you need to be able to pivot from one direction to the other direction as quick as possible. Because again, this is all about you're going to run out of money. If you can't, you're going to be sitting there going, nope, I'm going to do this whether you like it or not. Well, guess what? You're gonna run out of money. So just, just letting you know, heard from somebody else, but so make sure you do that. One example though, and this is true, we, we actually, you know, this is something that we've not done. Airbnb short term rentals.

Yeah, str.

Yeah, we've not done that. All right. And, and I, I have nothing against them. There's people that are just wildly successful at doing it and more power to them. That's right. Have at it. But you know, there could be, we know of one time that somebody had bought a property, they were going to do an Airbnb on the property. And as they were doing it, the city regulations changed and they were. Because they didn't get in at the certain time or whatever. There was a certain reason behind it. But the property that they had was no longer able to be an Airbnb. They couldn't do a short term rental with property, the property. And so they had to do long term rentals or normal rentals and the property didn't ride out. You know, it didn't, it didn't work anymore. They were expecting to get 3, $400 a night on this property as an Airbnb. Now they couldn't even get, you know, double that for a month or whatever it was for cash flow. And so it was just, there's got to know. You gotta, gotta be able to pivot. You gotta be able to figure things out and able to know how to solve that problem if this happens. Oh, no worries. I can do X. Because we've, we've had numerous times where something's happened and we're like, okay, well, let's do this to this property.

Yeah.

You know, we just, last week I, we had a property. This isn't working. Well, let's do this.

Yes.

Okay, sounds great. Let's do that now. We're doing that.

Yes.

You know, so you need to be able to pivot and be able to act fast and not, it's again, not emotional.

Yes.

You know, don't know. I really wanted this property to be a rental property. No, you don't, don't even, don't be emotional about it. Just do it. It's all about the numbers.

Yeah, absolutely. And this is where it really came down to being able to hold a property is. It's the safest way to go. So if you always buy properties with the end in mind that, hey, if this doesn't work out as a flip, or if this doesn't work out as a Airbnb or whatever it is, if you always have the exit strategy in mind that I can just hold it, I can just keep it, it can be a rental for me. If you have that as an alternative exit strategy, then you don't make a bad investment because that deal can always be used as a rental property if you set it up that way from the very, very beginning. So that's just one safe way to kind of protect yourself whenever you're trying to evaluate different exit strategies. And as always, having other people help evaluate deals is going to help you avoid a lot of these mistakes. Because different eyes, different opinions, different knowledge, different experience, all of that comes into play in real estate. We say over and over and over that we continue to learn lessons every day.

Yep.

And we will continue to learn lessons till the day that we die. You just, you never know everything and new things always happen and they teach you something. And so we use form like this to be able to share our experiences so that those who are interested in real estate investing and are watching what we're doing, we can teach you what we're experiencing so that you can add it to your list without actually having to experience it yourself. So we hope that these seven mistakes were helpful to you. If you do have questions or if you'd like to learn more about real estate investing in general, or if you'd like to learn about who we are, just book a call with us at chatwithfreedom.com you can scroll down and be able to get on jump on the calendar of anybody on our investor relations team. It's not a call that sells you anything. That first call is a get to know you call. It's a no obligation. Hey, who are you? What would you like to do? How can we help? And it's really an information gathering and exchange phone call where you can learn more about us and we can learn more about you. So ChatWithFreedom.com is the best place to go to do that. We would love to meet you. You can also follow us on social media. We've laid a foundation and we're really, really starting to be intentional about social media and about getting out there and teaching more people about who we are and what we do. We're excited to be able to share that with other people and also subscribe to our YouTube channel. That way you don't miss any of these podcasts. We cover various topics of real estate. We have guests on and we're always trying to give you do our best to job to give you insider tips and secrets.

That's right now next week we have a special guest who speaks on the fear of being left behind in the digital world. So be sure to come back so you know how to stay in the foreground. And what's cool is our guest next week has a name. You know, just. Just one name. Yeah, you know, and, and one letter and they go, but yeah, yeah, just one letter.

Because everybody has one name.

Yeah, yeah.

Right?

Yeah, yeah.

So it's just one letter.

Kind of like iced tea. No, that's iced tea. Orange. Anyway, you don't want to miss it, so make sure you join us next week for that because there's a lot, a lot in there that you'll definitely want to check out.

Yeah, it's a very exciting episode, so we're excited about it. Thank you for joining us. We appreciate you. Leave us a review, tell us what you think, let us know how we're doing, give us ideas, anything that you'd like to hear, or we can do better to serve you. We would appreciate it so that we can continue to share this podcast with other people. Invest smart, Live happy.

Bye, everybody. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, financial or business professional for individualized advice. Opinions and information on the show are not guaranteed. All investment strategies have the potential for profit or loss.