2259: Some of the Biggest Mistakes Real Estate Investors Make (And How to Avoid Them)

This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit hartmanmedia.com I'm@jason Hartman's event and I found that this event is really helpful because I'm totally a newbie to real estate investment and so far I found it extremely helpful in looking at this as a sort of less risky way of investing in real estate. And it's been really an amazing event for me because all the content has been extremely helpful with what I want to get into.

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's own properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your financial Independence Day. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors. Call me a conspiracy theorist, but there is no way that eight different fires starting within a period of 4:48 hours in LA is due to climate change. You want to tell me that insurance companies canceling people's policies in these areas over the past few months, officials cutting firefighting funding, emptying water reservoirs and being more concerned about sending aid to another country is just coincidence?

I want to talk to you today about the biggest mistakes people make when investing Part two. Next big mistake, failure to communicate. Failure to communicate with who? Well, a failure to communicate with your investment counselor. It amazes me how many times this happens. I mean, we try to communicate to everybody out there and all of our past clients, and occasionally one of our past clients, they'll come to some obstacle, some bump in the road with their investment portfolio and they won't call us or they won't email us, they're not talking to us. And I'll give you an example, okay? One of our clients recently had a property in Indianapolis, one of our many markets, and they were told that they had a $2,000 repair bill and they didn't check with their agent in the local market, the person we referred them to, the local market specialist, and they didn't check with their investment counselor here. And they were getting really bugged because they thought they'd have to spend $2,000. Well, finally, somehow or other, they got in touch with us, and we made them aware that they had a warranty on the property that they did not even know about, and we saved them $2,000. So stay in touch with us. Stay in touch with our investment counseling team here, and if you ever have a problem, let us know. We're here to help. Okay? Communicate with your property manager, communicate with your local market specialist, and communicate with your investment counselor. We're here to help. Don't have a failure to communicate. All right, next one. Next big mistake investors make, panic buying. Have you ever been like this? Or maybe if you have children or somebody you know you've said this to them. You spend money like it's burning a hole in your pocket. Sometimes people are so anxious to buy something that they're the fool that rushes in. Okay. And they make big mistakes through panic buying. I have to say, though, this one is actually pretty rare. It does happen from time to time, but it is not the one that you probably need to guard against as much as the next one. And the next one is panic selling. Panic selling is where people, they have some little bump in the road that's quite manageable, quite solvable, if you will. I don't even solvable a word. I'm not sure. But it's something that can be taken care of just with some little bit of work, a little bit of communication, and all of the other things I've mentioned. They all. Panic sell the property. Stupid mistake. These properties are usually such fantastic little investments. Why should you be selling them? Keep them. Okay, a property that has a performer return of 20 or 25% annually. So you have a problem and you take off, you subtract from that return, and this little problem might cost you 5% annually. Well, if you started with a 20% projected return on investment and things didn't quite go that well, and you got down to a 15% return on investment that year, shouldn't you be overjoyed? Shouldn't you be happy? Shouldn't you be backing up from the canvas? Shouldn't you be gaining some greater perspective and realizing that you still have a phenomenal investment here? Look, folks, the crooked scumbag Bernie Madoff, who made off with over $60 billion of people's money. You know what his big promise was to the investors? He duped out of so much money. His big promise was that he had some unique technique. And I can't remember what it was called, but I remember hearing it on the news that would yield his investors 8 to 12% annually, consistently year over year. With the right rental properties structured and managed the right way, you can easily outperform that in most markets. Okay, you can do much better than that. I mean, last year, in the worst economy in seven decades, 70 years since the Great Depression, we have an example, a specific real life example of a client who got a 36% return on investment. And you might be thinking, well, Jason, that was because the property appreciated a whole bunch. Not last year it didn't. Okay, well, that was because he got a great deal. No, didn't get a great deal. He just got a prudent good deal. Like the vast majority of our properties, this Property appreciated about 2%. Yet because of the special multi dimensional characteristics of an income property investment, the true return on that investment, all things considered, was 36%. Now imagine if this investor, this real person that I'm talking about here, and you've actually heard him on the show before, but I won't mention his name this time, but you've heard him on the show before. This real world story, which, by the way, there are many stories like this, this is not a special story. This is a fairly normal story, okay? Imagine if he would have had a call from his property manager saying that the garbage disposal broke and he has to spend $200 to fix it and that bugged him. And then imagine if the tenant moved out and he had to find a new tenant and the property was vacant for two months in between. He might have gotten discouraged and he might have sold this property that had a return of 36%. That maybe would have been diminished a little bit through a bump in the road here, and it would have been diminished to a 25% return on investment. Perspective is a very important thing. We get upset at these little things and we forget about the big picture. A lot of people, you've heard the saying, a lot of people go through life and what do they do? They major in minors. Okay? That's what little people do. That's what people that never get anywhere in life do. The winners major in majors, the losers major in minors. They let little conflicts, little upsets derail their whole plan. The mature, prudent person doesn't do that. They major in major things. Stephen Covey. I'm a huge fan of Stephen Covey. In fact, you know what? We should get Stephen Covey on the show. I met Stephen Covey on a cruise ship. Oh, I guess that was about eight or nine years ago in Russia. Of all Things. Yeah, there was a little event in, in one of the restaurants on the cruise ship and they announced, I can't remember his wife's name now, but they said, this is so and so Covey from Salt Lake City, Utah. And I thought, is that Stephen Covey's wife? And sure enough, it was. And I got to meet Stephen Covey, one of my all time favorite authors. Well, he's written the book, the famous books, the 7 Habits of Highly Effective People and many others. And one of the things that Covey says, and this is very important to remember, is. Here it is. This is a lot of wisdom in this little statement. The main thing is to keep the main thing. The main thing. Let me repeat that. The main thing is to keep the main thing. The main thing. So don't major in minors. Major in majors. Okay? Do what matters. All right. Okay, let's move on. Next mistake. Saying no. Saying no. Do you know that it is very possible and likely, although I have not researched this, that no is the most overused word in the English language, second only to the word I. People say no too much when they should say yes more often. Okay, so yes, you could make the mistake of being a panic buyer, you could make the mistake of being the fool that rushes in. But that's the much less likely mistake than the mistake of saying no more often than yes. So I encourage you to say yes more often and no less often. Remember, yes opens the door. It creates opportunities, it creates possibilities. Well, no puts up walls, closes the door, shuts you in and insulates you from life. And if you want to be insulated from life because you're more concerned about seeking security than opportunity, then there is one place I can guarantee you complete security. And it's certainly not going to come from the government. It's not going to come from your spouse, it's not going to come from your parents or your kids or anybody else. And it's not really going to come completely from you either. The most secure place is to be dead. That is the ultimate security, because there is no risk in being dead. Okay, well, we are alive. We are the very definition of insecurity. Everything about life is tender and delicate and it can be taken away at any moment. Your money, your health, life is a very insecure thing, and that's just the way it is. Say yes more often. You might as well, because nothing is guaranteed. Open some doors in your life. Create some opportunities. Stop using the word no so much. No is a limiting word. Okay, the next big mistake investors make overextending themselves. I talk a lot about and recommend leverage when we invest in real estate. The power of opm, other people's money. It's one of my favorite characteristics of the multi dimensional wonders of an income property investment. And people misinterpret that a lot because they see all these people getting themselves into trouble with debt and with financing and they tend to misinterpret that. And some people get themselves overextended and that is a very dangerous thing. Remember leverage, borrowed money, debt, other people's money. That is a very powerful tool for wealth creation. But it is a tool that needs to be used with respect and prudence. It deserves. Some people say that nuclear weapons are an evil, terrible thing because they can destroy all life on the planet in a matter of minutes. Really. Right. But others say that nuclear weapons are a wonderful thing because nuclear weapons, through mad, or Mutually Assured Destruction, that was used more during the Cold War with the Soviet, former Soviet Union, have really saved a lot of lives. Now, why would I be saying that? Well, because the threat of nuclear weapons has caused people to be much more careful with dialogue, with diplomacy, with moving their armies around and doing things to each other. Okay, so the threat of Mutually Assured Destruction, or mad, many would argue that that has saved millions and millions of lives. Which one is correct? I don't know. None of us really know, do we? But what I'm saying with leverage is leverage is a very powerful tool. And just like nuclear weapons, you got to be careful with it. Okay, so what do you need to do? First thing you need to do when you use leverage is have proper reserves. So we recommend a minimum reserve of 4% of the value of your properties, your portfolio. So if you have a $100,000 property, you would have at least $4,000 in the bank that you are not spending. That is the dedicated reserve account for that property. And think about it. If you have vacancies, then that could cover you for a few months, couldn't it? If you have repairs that could cover you. If the reserve account is ever diminished, you need to replenish it. Okay. As soon as possible. So if you have a million dollar portfolio, $40,000 in the bank earmarked as reserves, this is not money you can spend. It has to be reserved for the property. If you have a 10 million dollar portfolio, how much? $400,000. Now, as your portfolio gets larger and larger, you can probably, and it depends on the age of the properties, depends on some other circumstances, but you can very possibly lower your reserve account. Why is that because the likelihood is if you're diversified and you may not need quite as much money in reserves, okay? That's an individual case by case thing, but just go with my rule of a minimum of 4% of the property value in reserves, okay? The other thing, and it kind of goes to the same note about over getting overextended. Don't mix reserve money for income properties with your personal financial reserves, okay? So if you've decided that in your life with the threat of the economy the way it is and the threat of getting laid off from your job, that you want to have three months living expenses in the bank or six months living expenses in the bank or whatever the number is for you, okay? I'm not saying what number is right or wrong, but that reserve account is different than the income property reserve account. It's not to be co mingled. Now it doesn't have to actually be a separate bank account, but in your thinking, you dedicate. Look, if I've got a million dollar portfolio of properties, I have $40,000 dedicated, set aside for that portfolio. And if I want other reserves, other savings, that is in addition to this, okay? The other problem people have is not planning for contingencies, not understanding what could happen. So I want you to think about some things that could happen, okay? Now I don't want you to get all mired in negative thought and worry and so forth because worry is usually a pretty useless pro suit, okay? But do understand and just think as a prudent educated investor about things that could go wrong and plan for possible contingencies, all right? Next big mistake people make. And I've really already addressed this one, so I'll just mention it quickly. Not seeing things in context, okay? Making irrational decisions when a crisis occurs. And so that's just really what I was saying before about stepping back, seeing the big picture, okay? See things in their broader, bigger context. Major and majors don't major in minors, okay, next one. And this is also related, letting one problem sink the whole ship, okay? And this is where the investor gets all worked up about some dumb little thing that really just doesn't matter that much in the bigger picture. And they assign blame incorrectly. Give you an example, this is a real life example of a client from a few years ago, okay? This client made a series of mistakes and blamed the wrong people. She kind of blamed us to some extent, okay? And here's what happened with this person's life, okay? They had a live in relationship that ended and they broke up. Expenses increased and at the same Time this particular person decided it would be a good time to change careers. And so, let me see. Increasing living expenses, losing income. Not a good picture so far. Right. And then listen to the next thing that sunk the ship here. Purchased a property, not from us, from another group in imprudent property that never made sense the day it was purchased in Arizona. At the time when Arizona was a totally frothy bubble market, they bought this property on speculation property, never made sense, and it turned out to have a huge negative cash flow and it was a very bad deal. And then the next mistake is that this particular person did not communicate with their investment counselor here at Empowered Investor Network. And the combination of all these mistakes sunk her ship. She ended up letting several properties go into foreclosure because she just threw her hands up. And instead of cutting off the bad property, the one bad property that was really sinking the ship and understanding that there were no reserve accounts. Okay, that's another mistake. I didn't even mention no reserve account. Did not listen to us on a reserve account. Overextended on this property that she purchased from another group and was basically gambling and speculating on that. Not the prudent cash flow type properties that we recommend. Obviously, the combination of these mistakes coalesced to really cause a lot of emotional strain and just sink the whole ship. Okay, so don't ever put yourself in that position. All right, next one. Changing the financial picture or changing the playing field. Well, that really weaves into what I just talked about. So changing careers or changing relationship status, because that could change your lifestyle and your expenses, right. At a time when there are other risks being taken or other growth opportunities being pursued. So we have to have a certain foundation of stability sometimes to kind of make the leap into a higher plane or a higher plateau. You know, it would be kind of like working out. If any of you work out. I like to go to the gym. I like to try and eat reasonably well and be healthy and stay in shape. Okay. I'm. I'm not totally into this or anything, but I certainly think it's good to work out and stay in shape and look to stay in shape. Say you go to the gym and you just get all motivated all of a sudden. Although you've never really spent much time working out or being in sh. And your ligaments and your tendons are not built up and your muscles are not built up and you go into the gym and you work out like a fiend. And you, what are you going to do? You're going to sprain your muscles, you're going to overwork them. You're not going to build the proper foundation to then jump to a new plateau. Same is true with our finances, isn't it? So we've got to have a decent foundation. So be very careful making changes in your life. If you are taking big growth risk, make sure your life is reasonably stable before you take big risk, okay? Now, this doesn't mean you find a reason to say no about investing. If you have a reasonably stable job and you have some reserves and you've been prudent about your financial life, you can buy one or two properties. Maybe you don't want to go out and buy a dozen properties. That might be way too big of a risk. That would be like going to the gym and working out like a fiend when you haven't built the foundation for fitness, for general fitness. Next one. Listening to your sphere of influence. So our friends, our relatives, they've always got a lot of advice for us, don't they? I think I got a fortune cookie that said this once. It said, advice is usually worth what it costs. Nothing. Now, we've got a lot of people that are always willing to be armchair quarterbacks, don't we? We all have this in our lives. They're always wanting to give us advice about this or that, yet they haven't been there, they haven't done it themselves. So we've got to be very careful. The role models we choose, don't we? Because we want to make sure we're listening to people that actually have credibility. All right? So if your parents have never really made a success of themselves financially, they may be wonderful people that you love very, very much, but they may not be the best people to go to for financial or investment advice or business advice. So make sure you understand to whom it is you're listening before you decide to let their advice influence you. Enough said. False expectations. Having false expectations. When you go into a deal, when you go into an investment, what are your expectations? The first thing is you need to know what they are. I mean, are your expectations reasonable or are they completely unreasonable? So know your expectations before you go into a deal and just have proper, prudent, realistic expectations that aren't too low. You're not being a pessimist, but they're not too high. You're not being a stupid optimist. Next one. Not maintaining control. So my commandment number three, which, as you know, is one of my favorites, if you don't follow them all, and you at least follow a couple of them, this being one of the important ones. Thou shalt maintain control in my 10 commandments of successful investing. If you follow this commandment and you don't leave your financial future in the hands of somebody else, an incompetent, unethical, greedy investment advisor who may well have a total conflict of interest when I talk about maintaining control of your investments We Got to Talk about the Stock Market. Let me play for you a little clip, it's seven minutes long, from one of our video podcasts that talks about why the stock market can be dangerous in the current economy. Listen in.

Taking Stock why the Stock Market Can Be Dangerous in the Current Environment Conventional wisdom has long held that the way to become wealthy over the long term is by compounded investment in the stock market. Now, the reason for this was quite clear when one looked at the chart of historical returns. By making very modest investments at irregular intervals over a long period of time, small investors could create very large amounts of wealth. This line of thinking is what has prompted most employers to source their 401 retirement plans with mutual funds that invest in the stock market. Unfortunately, the movement of stock market investment into the mainstream of America has caused it to become less of an investment vehicle and more of a gambling casino. The primary purpose of the stock market is to provide companies with a means to raise capital for business investment by selling a partial ownership stake, also known as a share of ownership. Typically, investors were rewarded for their investment by the payment of dividends from the company profits. Thus, stock market investing was originally based on the notion of finding a company that was likely to make sufficient profits to pay healthy dividends. This sentiment changed as the secondary market for trading stocks became more popular. A primary issue of stock happens when a company issues more ownership shares. A secondary stock transaction happens when one investor exchanges an existing ownership share with another investor. This is where the stock market turns into a casino. When the focus of investment shifts away from the ability of the company to viably pay dividends on a consistent basis toward the probability that the secondary market will pay more for the company's stock at a future date, stock investment becomes much more akin to gambling. When returns are primarily based on price appreciation, continued growth in market value requires a perpetual stream of new buyers. This phenomenon is true for both stocks and real estate, and it explains the recent booms and busts very thoroughly. The only factor that can push up the entire stock market is if there is an aggregate increase in investment capital, similar to how increases in the money supply from the Federal Reserve drive price inflation. When corporate profits grow, it is natural to assume that more capital will be attracted to the market. However, when market values rise faster than corporate profits, the only cause can be a net influx of investment capital. In the United states, there were two sledgehammer events that sparked a colossal 25 year bull market for stocks. The first was the passage of the Employee Retirement Income security Act, or ERISA, in 1974, which created standards and stability for company sponsored stock market investment plans that dramatically increased the supply of equity capital. The second was the paring of tax cuts in the 1980s and a significant reduction in the cost of debt capital that spurred a rapid growth in corporate profitability. These two events combined to generate a massive increase in stock market investment that pushed values sky high. However, these massive gains came with a bit of a shadow. This problem has been created as investors stopped directly buying stocks of individual companies and started investing in funds where a manager buys and sells the stocks. Now, these brokers and managers have control over incredible amounts of other people's capital. This control gives them the power to create or destroy tremendous amounts of value based on the decisions that they make. It also channels market activity more and more toward gambling as managers seek to maximize value appreciation. This set of incentives is very adverse to investor interests as managers have incentives to take insane risks since big gains mean tremendous bonuses and losses only mean that they get fired. Furthermore, most managers charge very hefty fees for their services which cut into the net investor returns. Now, thus far, we have assumed that the fund managers are honest. When the crook dynamic is factored in, the risk increases significantly. Fundamentally, there are four principal risks implicit in this kind of stock market. One, your broker may be a crook. Two, your broker may be incompetent. Three, even if your broker is honest and competent, he'll take a big slice of your profits in the form of fees and commissions. And number four, these problems are not limited to your brokers, but include all of the middlemen like stock promoters, CEOs, bankers and all other flavors of hucksters or salesmen. On top of all these risks, there is a bigger dynamic to consider. Currently, corporate profits are taking a very steep tumble relative to their prior levels. In addition to this, most of the working population is already invested in the stock market, so there is no large pool of capital to attract so that valuation can continue to inflate. Finally, the current market price per earnings ratio is well above its historical average. This means that the market is discounting in a future increase in corporate earnings. If that increase does not come or takes longer than expected, it will Most likely result in market values decreasing. Finally, there is a longer term risk of very average performance. Even if the anticipated recovery happens as expected, there is no looming influx of capital to push the market up at explosive growth rates. This means that future market appreciation will look very average by historical standards. Granted, nominal values will be pushed up by inflation, but real returns will still be very much in the average category. Ultimately, the stock market is in the midst of a return to reality from the large rates of return in prior years. The fundamentals are pointing toward difficulty in maintaining prior growth rates out into the future, including the risk of more near term price compression if the forecasted economic recovery does not materialize as expected. Granted, there is a probability that the stock market will recover better than expected and produce favorable returns. However, prudent investors should seek to diversify their investment activities into other emerging areas of opportunity to limit exposure to the stock market. Situations such as prudent real estate investing with a small to negligible downside and significant to infinite upside are what economists call affordable free option. Principally because the investment volatility runs mostly in the up direction because of the downside risk mitigation. Needless to say, these are the investments that we would like to create.

See, when you're investing with someone, you want to make sure your interests are aligned, okay? That you have the same interest and usually your investment manager in the typical Wall street type model. Stocks, bonds, mutual funds, life insurance, all of this junkie products out there. Again, just my opinion. Don't sue me, Merrill Lynch. I don't like your investments. I think they're pretty bad, okay, just my opinion. You listeners can judge for yourself, but they generally have a conflict of interest. They want to charge you high fees and they want to keep you in the deal. They want to keep you invested in the market. I've talked to many investment advisors who say be in the market when the market is collapsing all around, okay? Because they don't make any money. When you're in the cash fund, in the money market fund, they want you invested. I have heard of many people that have worked at firms like Merrill lynch or the other financial firms that say that they are under huge pressure to keep a minimum of 80% of the client's money invested in the market at all times. So when you have a brokerage account at one of these firms, you'll have a money market account that'll go along with it. So when you're between investments, your money will sit in cash in the money market account. And guess what? They're not making money when it's in the cash account, are they? So they want you invested and you may be invested at a bad time. Okay? And of course they usually haven't followed their own plan, which is obvious. But the one thing I would say that's the most important is you may need to be a direct investor. The three major problems when you are not a direct investor. Number one, you might be investing with a crook. Number two, you might be investing with an idiot. Number three, assuming they're honest, assuming they're competent, which is rare. But assuming you pass those two hurdles with them, they take a huge management fee off the top for managing the deal. You've heard me talk about this enough before. I'm not going to go into it anymore in the interest of time. Alright, we better conclude there. We've gone over a lot of mistakes. We've got a lot more coming up and we'll play those for you on a future show real soon and we'll get to the rest of the 30 or so mistakes that investors commonly make. And we see these all the time. So the best way to avoid these mistakes and not make them yourself is to understand them Self knowledge is the first key to understanding. Thank you so much for listening. Please be sure to subscribe so that you don't miss any episodes. Be sure to check out the show's specific website and our general website, hartmanmedia.com for appropriate disclaimers and terms of service. Remember that guest opinions are their own and if you require specific legal or tax advice or advice in any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to itunes or Stitcher Radio or whatever platform you're using and write a review for the show. We would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.