Seven Common Mistakes Often Made in Real Estate Investment
Purchase of buildings
There’s a saying: “The more things change, the more they stay the same”. In fact, I have been seeing the same mistakes for more than twenty years, among new and seasoned investors alike. They are mostly related to personal development: 80% of success is achieved through self-development, while the remaining 20% is the result of the use of techniques. Pareto’s law applies once again!
With no importance given to the order in which they are presented, here are the most frequent ones.
1) Paralysis by analysis
It’s nice to be able to calculate mortgage constants, debt coverage ratios, yields and overall discount rates, but one still has to move, to take action. So many of the people I encounter know enough to get them going but are paralyzed in analysis.
When these people present their perfectly reasonable analyses to me, I ask them, “How much did you finally bid in your promise to purchase?” They often give me a list of excuses for their inaction instead of telling me the amount they offered to the seller.
Don’t wait until the conditions are perfect and all the lights are green before moving. Do your analysis and when you decide on the price you should pay according to your investment criteria, move! Carefully, but move and make purchase offers.
2) Relying on Pierre-Jean-Jacques
Needless to say, people who want to invest will often share their intentions with colleagues, family members and friends who, most of the time, have never invested in real estate. These armchair quarterbacks will make classic phrases such as: “You’re going to unclog a toilet at night. Tenants are nothing but trouble. The good years are over and there is no more money to be made from real estate. The market is going to crash due to the rise in interest rates”.
Strangely enough, these deterrents have never touched the millions of dollars that real estate can bring in, but give you advice and only make arguments with the murkiest aspects of real estate. Some would-be investors listen to them and give up the idea of investing without even getting into it.
On the other hand, if you talk to people who are successful in real estate and who have been able, among other things, to systematize their business, identify motivated sellers or quickly optimize the value of buildings by exploiting their full potential, their advice will be quite different. They will encourage you, suggest that you go for it, move forward, and tell you that in the end, all the obstacles to be overcome will be insignificant compared to the creation of added value to your personal balance sheet over time.
3) Letting your fears dictate your decisions
Many people are held back by their fears, preventing them from doing what they would really like to do. Don’t be fooled, successful people also have fears: however, they overcome them and still move forward nevertheless.
Some people fail to take action for fear of failure, being told no, being wrong, losing money, and sometimes even success.
It’s certainly easier to sit back and watch the parade go by than to step out of your comfort zone and thereby create and seize the opportunities that will change your financial future.
4) Waiting to have the necessary down payment
Over the past twenty years, I have witnessed several real estate portfolios that were developed by investors who did not have the required down payment, but who had an incredible willingness to go ahead and make things happen.
When an opportunity shows up and you manage to pull it off through an offer to purchase accepted by the seller, you are in a position of power. When you find a property with strong restructuring potential and/or a profit at purchase, people who have money to invest are often interested in your project.
To become a real estate investor, you must first have an opportunity in your hands. Find the opportunity and the money will follow. With real estate not being easy, keep in mind that it’s much easier to find the funds than it is to find opportunities. Please don’t wait until you have the money before you start making promises to purchase.
Raising the down payment required to acquire bigger buildings will be practically impossible to achieve by relying solely on your salary. You will need to use leverage to successfully invest in projects where the return on investment will be much higher than the borrowing cost of the down payment.
Forming a partnership, finding a private lender, getting sellers to participate in the financing are all options available to you to raise the required funds. Be creative!
5) Not improving on time management
After health, the most important commodity in life is time. We are all on an equal footing when it comes to time. Rich or poor, we all have 168 hours at our disposal each week. It is common to hear people say they don’t have enough time to invest, but the reality is that they often don’t know how to prioritize and manage their time.
You’ll have to eliminate the “time crunchers” and learn to say “no”, sometimes at the risk of displeasing people. Do the things that add value to your time and bring you closer to your goals. Even the most efficient people are always looking for ways to optimize and maximize the value of their time.
Being organized, prioritizing, systematizing, and delegating are all principles that are easy to articulate, but that few people actually apply. Since time management is a lifetime’s work, try to continuously improve it.
6) Not developing one’s vision
Investors who stand out are virtually all visionaries. They see untapped potential and are capable of creating value. They dare to buy properties that nobody wants and see beyond what is readily visible. These visionaries know the market, rental values and industry trends; they understand that knowledge equals power.
7) Not increasing your rents as high as possible
Many investors I work with don’t dare to increase their rents every year because they have good tenants in their buildings, often for fear of losing them. Yet operating costs such as taxes, insurance, energy and maintenance costs, to name a few, increase year by year. Yet, who absorbs these costs? The landlords, of course.
Yet, who absorbs these costs? The landlords, of course.
For buildings with more than six housing units, it is important to keep in mind that the economic value of the properties is directly related to the net operating profit, which will decrease if rents are not increased accordingly. The result? The possible loan amount when refinancing will be reduced as well as the price that can be obtained at the time of selling. Always increase your rents as high as possible, especially with rate increases that affect property values.
Please increase your rental income as much as possible and don’t rely on the Régie du logement’s rates that suggest the increment amounts. It’s all about negotiation!
On that note, I invite you to read my previous articles and share them on your social networks.