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 short 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:
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, distressed 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
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, try to do the minimum. Do not get drawn in by the TV programmes, where the selling price is overestimated, and the time and cost of the project are both underestimated.Factor in your profit and loss AND account to see if the project is really worth your time. Also remember that a refurb to rent needs FAR less work and expense than a refurb to sell!
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 – 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 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.