As a baby You made tons of mistakes. (Just stay with me here..)
Trying to walk, falling, getting up, trying again, and falling..
Perhaps you bumped your head, cried and tried to be more careful.
Imagine You decided to give up walking altogether?
“This walking thing just isn’t gonna work, it hurts, it’s waaaay too painful. I better quit while I’m ahead’
How would that have worked out?
You see, making mistakes isn’t fun. It hurts. But it’s part of Your cycle to massive property success.
We still make plenty (big sin apparently..)
But the good news is, You can leverage our mistakes. So You don’t have to.
(Remember Attrition wins)
You see, over the last few years Mark and I have talked to 1,000’s of people who have started investing in property but have made mistakes which have cost them a huge amount of emotional and financial pain
Now although we’ve met many ‘experienced’ or ‘seasoned’ investors at networking events who on paper looked like they were doing well, this has mostly been in a rising market, where mistakes can be disguised, rather than solid property investing strategies – absolutely vital in this market
Property is a fantastic wealth creation vehicle, and it can give you long term financial independence if you can successfully get to grips and overcome some of the challenges that many investors face
This article will highlight some of the main reasons why investors fail and give you some solutions you can implement right away to succeed in your property business:
Here are 15 Property Investment Mistakes That Can Financially Ruin You:
Mistake 1: Not Buying Under Market Value
Ok tell us something that isn’t new...Well sticking to the basics is often sooooo easy to forget that it is sometimes important to refresh our minds with the fundamentals. Warren Buffett has stuck to them for 50 years
You are in the business of finding motivated or desperate sellers who want to sell quickly at a discount and where you can help them with their problems. Where price is NOT their most pressing concern
Buying UMV will you give instant equity and a buffer if property prices were to fall further. It also allows you to remortgage and remove your initial deposit as soon as circumstances allow, thereby significantly reducing the risk of losing money in the short term, as you will have left none of your own money in. 0% risk on finds, infinite ROI
With this concept (which works in any market) you do not need property prices to increase in value as you are making money straight away from the discount and locked in profit
Mistake 2: Underestimating the importance of cash flow
Not treating your property acquisitions as a business is a recipe for disaster. We know the old adage that cash flow is king and without a healthy flow of cash your property business will fail
Now, we are not only talking about having good cash flow properties which is essential but also having a buffer of mortgages payments and an extra for expenses, to counter interest rate rises which can put a dent in your monthly profits or if the tenant leaves and you have to fund the void periods.
What if you have an unexpected cost such as having to replace a boiler?
If you are starting out, this can be tough, we know that. However, without having cash reserves building a successful property business can prove extremely difficult
However, all is not lost. If you do not have cash reserves set aside, then perhaps you could find a JV partner who has a cash sitting in the bank [getting no interest], who can have an equity share in the property
You can become very wealthy by utilising and reinvesting using other people's money [OPM]. Have a read of our blog post on raising JV & PI finance
Remember the 'number of properties you own is vanity, the cash flow you make is sanity and the cash you got in the bank is reality'.
Mistake 3: Buying for Capital Appreciation [Growth] and not Yield
Many investors base their entire business model on capital appreciation and underestimate funding the shortfall in running their property portfolio. This is a very big mistake and a very high risk strategy to be avoided at all cost.
It was the strategy that financially ruined many people 2001 – 2007
All things being equal, we buy our stock on the basis that property prices will never rise, meaning our model is based on instant profitability: income from rent NOT just growth. This mentality helps us make sensible decisions that the figures and the investment will provide a positive income. Capital appreciation is seen as bonus
Sure, we all know property prices virtually double every 10 years, but as portfolios grow shortfalls can become out of control if they are bought on a growth only model
Never ever buy with emotions. Remember, an asset is something that puts money in your pocket and a liability is something that takes money out of your pocket. You should be turning away more deals than you buy, making sure the yield is good, and factoring in ALL of your costs
Something to think about...
Mistake 4: Not doing enough research
It is imperative that you do enough research and due diligence before you buy so that you reduce and minimise the risk you are about to make
Most novice investors create the supply without the demand. There is absolutely no point (if your strategy is buy to hold, see mistake #5) buying a property that you cannot rent out.
Your local post code district within your goldmine area must be fully researched in terms of the rental market and the amount of current stock within the area. The bridge between supply and demand must be closed
Buying purely because there is a big discount is a mistake, because you will be left paying the mortgage and the operating expenses that come with holding the property.
Buying property with apparent discounts without understanding comparables can give you unrealistic perceptions of actual value
Other research you should do along the way:
Is the property mortgageable?
Is there any structural damage? Find compatible sold prices, instructing independent valuations, obtain recent sales and letting demand confirmation from agents, check both the Land Registry and current value prices, check LHA rates, have a schedule of any refurbishment costs that will require works, a summary of the locality of the area, transport links, demographics from government and council stats, crime rates, proximity to schools etc
Mistake 5 : Not having an Effective Investment Strategy
Investing in property is a personal strategy based on your personal financial situation, your attitude to risk, the level of funds you have to invest etc
Preparing and understanding your own motivation, goals and aims will help you with your first step and give you a structure about your strategy
For example, if you have a £50,000 worth of capital or less to start off with, then investing in HMO’s will be a pretty tough business because you probably need more upfront cash, but that does not mean you cannot invest in single let properties adopting our model of buying, refurbishing and remortgaging your fees back out
Buying a Property is easy. It’s easy to do, but it’s also easy not to do
However, buying a property that will meet and deliver on your personal strategy and your financial objectives is more of a science and one that you should familiarise yourself with
Other things to think about are how much time you can afford to put into your property business.
Many people are unrealistic about the time they can afford: they think they have more or less than they do in reality. If you don’t have much time, perhaps you may need help. If you have lots of time then you probably don’t need the same seed/start up capital.
Mistake 6: Over killing on the Refurb
If the property requires some sort of renovation, do the bare minimum. Do not get drawn in by those magical makeover TV programmes such as Property Ladder or Homes Under The Hammer, where the selling price is largely overestimated, and the time and cost of the project are both underestimated.
Always over estimate 90% of anticipated selling price which is a good calculation to work on.
Factor in your profit and loss AND account to see if the project is really worth your time. Remember, it's anticipated, it could be more or it could be less!
Mistake 7: Getting emotional about the numbers
The numbers never lie. Do not get emotional over property as this will cost you money. And cause you pain. Don’t chase the deals; let them come back to you. Play the long game – we had a deal that we recently exchanged that we have been negotiating on for 2 years that fell out of bed 3 times! This is not uncommon, and far better than trying to tie a price up too early and getting too emotionally involved and ‘wanting to get the deal done.’
Beginners are especially susceptible to this.
Have a strict set of rules and do not deviate from them. If the numbers do not work for you, don't think they won't for another investor. Consider selling the lead on/packaging the deal up. Maximise your revenue streams!
Mistake 8: Always Selling your Property
If you have read our first book, ‘The 44 Most Closely Guarded Property Secrets’ you will know we bang on quite a bit about you make your money when you buy... and not when you sell.
The main reason we believe selling is a mistake is because you are transferring your wealth to someone else. You are slaying the goose that is laying the Golden eggs.
Now, we do believe that IF your property is not performing well, or you have bought a property out of area or you can flip a low yielding property on a quick turnaround, then selling the property to reinvest in another better performing property project or to get out is a viable strategy.
The mistake we often see is investors not investing for the long term. If we go by past property cycles, and property prices increasing in value over time, then continually selling your properties reduces your asset base and long term wealth
Mistake 9: Buying Overseas, off plan & out of area
This is probably the biggest one and why we have saved it until last. We learned this the hard way in our earlier investing days when Mark bought his flat in Bulgaria which rents out for 2 weeks per year! Many investors are often hypnotised with the fancy artist impression of some beautiful luxury apartments by the sea: somewhere in an idyllic holiday location 3 years off plan
You can read about this mistake here
Mistake 10: Buying Next Door to Bad Neighbours
Play a significant role in the end buyers decision, regardless of whether you bought it BMV.
Plan ahead. Think “what would an end buyer see?”.
If someone does buy it they are taking on a problem and You will ultimately have to pay when You exit (reduced value, limited ability to sell,)
Mistake 11: Hiring Cowboy’s
This is always a recipe for disaster. You would be wise to think how cowboy builders get away with their bad practices? It happens more often than first seems. And this is a big mistake many investors make.
Here’s what many naive green and keen investors don’t do:
-Ask for & verify references by visiting past clients
-Obtain 3 detailed quotes before instructing the refurb
-Appoint approved contractors & go for the cheaper option often paying in cash
A word of caution. These guys are smart. They will seem enthusiastic at the start. They will always return your calls.
“Trust me I’ll take care of you”. It’s amazing the majority of investors still fall for these magic words.
But You’re smarter. Alarm bells should ring especially if:
-Quotes are handwritten & you don’t get a full breakdown
-Offers quick cash discount for money upfront
-Doesn’t offer a contract or sign the one you give them or
- Claims to work for a big firm even producing a fake ID.
This will result in wasted time, overrun of costs and more problems than You think.
Mistake 12: Investing in Property With Title Defects
Now, don’t get us wrong. Many investors we know buy problematic properties. These are great. There is a big opportunity in doing so, but only if you know what you’re doing. We wouldn’t advise buying a property with title issues if you are just starting out in your journey. The overwhelm & confusion can really hurt. It can distort and you can make big mistakes. To avoid this mistake, speak to a specialist conveyancer before-hand or stay away, as it could take years and lots of capital to fix.If you do venture down this road and want to speak to us before-hand, then get in touch and we would gladly help you.
Mistake 13: Buying on Emotion
“I love this place! It has so much…potential!”
How we, and many hundreds of thousands starting out, got suckered right in by those big, colourful, lifestyleee brochures, new build and dreamy holiday homes.
No. Not anymore. This, as we learned the hard way, is vanity. It’s emotional buying. Perhaps you can relate? You see, talk like the above can get you in financial trouble quickly. We know, it’s easy to get carried away. I’ve done it. Mark done it. We’ve all done it. It’s not hard to do it. Yes, you will miss a few ‘deals’ on the way up, the more detached you are which is fine. But the more you stick to your buying rules and the fundamentals, the better cashflowing investor you will be. And if you can’t get the deal, at the price you want, then move on. There will be other deals. It’s a skill to think with logic...not your emotions
Mistake 14: “Faking It”
You’ve heard the phrase, ‘Fake it till you make it’ right? Well, this one’s for new investors, and Yes we know, it’ sooo tempting to do. Early on, when we used to ‘Pimp’ Mark out for his personal mentorships, he took a couple to visit a few estate agents...They were asked how many properties they had, for which they replied ‘over one-hundred’. The look on Marks face ‘..if Mastercard did..’ Suffice to say, we never heard back from that agent. Anyway, the moral of the story..don’t be too tempted to stretch the truth – especially if you’re just starting out. It’s better to be honest (but remember, perception is reality..)
Yes, it’s less glamorous.
You may lose a few deals
Yes, it may even be counter initiative
But in the long run, you will attract more JV partners, more property deals, more trust, more credibility because you were honest.
People by and large want to help You. It’s human nature. In many cases, you will get ‘banker status’ within the estate agency, and have the ‘Wheeler Dealer/Diva’ take you under their wing, just by doing what you said you were going to do. Better still, find a good property coach and ride his coattails to Your property deals. Either way, don’t “fake it” to the extent you lose all credibility. Be up front and honest.
Mistake 15: Breaking Promises and Breaking Trust
You just have to look on the property forums to know the property investing community is tight knit. You’re probably aware that word travels fast, and anyone who is dishonest and untrustworthy will be exposed. And Google will cache that for many many years baby! So how does it relate to you?Well the quickest way to make a bad name for yourself is to cheat, and make promises You choose not to keep. Many of the ‘Get Rich Quick’ scammers are out of business, or in prison. Reputation is EVERYTHING. ‘It’s hard to earn...but easy to lose’ Sad but true. You don’t want a reputation as someone who cannot be trusted. Word spreads like wild fire! Now, we know that doesn’t relate to you, but it’s good to have this conversation, isn’t it? So what can You do?
The following principles will stop You falling prey:
- Always be open, transparent and fair
- Never take advantage of people
- Under promise and over deliver
- Always be reliable
- Treat others as you would like to be treated
- Don’t ever go back on your word. A handshake is a handshake
Mistake 16: A Few Others
- Paying a deposit of more than 10% for a property that isn’t even built
- Buying off plan without a cast-iron compensation, termination or refund clause
- Trusting all solicitors. Do your diligence on them. We’ve heard stories of solicitors handing big sums of money to developers for units that didn’t even exist.
- Assuming a vendor has the right to sell the property – check and double check.
This is the ONLY way of being sure what you are being sold actually belongs to the person selling it to you.
How about You?
Let’s get the conversation flowing about how You overcame your biggest property mistakes.