Making mistakes is part of the learning process, but when it comes to investing, everyone will agree that it is much cheaper to learn from the mistakes of others. In this report we identify and explain what we’ve found to be the 5 biggest mistakes made by real estate investors, both new and experienced.

We first outline each point then we provide you with some guidelines to help you reduce or eliminate the chances of making the same mistakes yourself.

Mistake #1: Not taking the time to write out an investment plan

One of the first things an investor has to consider before stepping into the world of real estate investing is that it is a business. As with any type of business, the most important element is to have a plan.  We often see investors decide that they are going to start investing their money in real estate, but when probed about what their plan is, it quickly becomes obvious that they do not have one at all! 

“If you fail to plan, then plan to fail!”

The investor must resist the urge to just jump in without first taking the time to think about and write out an investment plan. Efforts spent on this crucial step will reap big rewards later. This will force you to think about many of the details that may not be obvious on the surface and will help you clarify what it is you’re trying to achieve with your investing efforts.

Here is a brief summary of some of the elements that should be included in an effective investment plan:

• Intention- What is your reason for choosing to invest in real estate? What are you trying to achieve?
• Strengths and Weaknesses – it is important to look at what you will be able to bring to your investing efforts, what resources are at your disposal, and what your strengths and weaknesses are. By bringing awareness to this step of the investment plan, you will be able to find solutions on how to overcome your weaknesses and develop a strategy on how to deal with them.
• Objectives- Break down your objectives into smaller steps. Identify ways in which you will be able to know when you’re on track and making progress. Please keep in mind a very useful tool called the SMART Goal Setting Process for your goals and objectives- Specific, Motivational, Action-oriented, Relevant to your situation, Time-bound. For example, “I will increase my sales by 15 percent compared to last year.” Be as specific about your goal as possible. “I will start my own catering business” is a lot stronger than “I want to go into business for myself.” Challenging goals are motivating!
•  Advisors/Advocates- We cannot emphasize enough the importance of surrounding yourself with a team of qualified and competent advisors and professionals to assist you. These include for example: a real estate lawyer, an accountant that understands real estate investing, a real estate agent, a property inspector and a mortgage broker. However, it is imperative that you understand that all professionals bring their own belief systems to the equation. This is why we include an advocate in our team, because it is crucial to surround yourself with people who believe in you and in your ability to achieve your goals. There is nothing worse than paying someone who will discourage you from entering into a particular type of venture simply because they are projecting their fears on to you.
• Strategy- Develop a strategy that is specific to you and one which is in line with your goals. There are many different types of investment strategies in real estate investing. What is it that you are interested in and passionate about? Does the idea of buying a property, renovating and then selling it appeal to you? Would you like to become a landlord? Are you looking to buy and sell mortgages? Once you identify which type of investing you’re excited about, you’ll be able to determine what tools and education are needed to help you achieve your goals.

These are some of the major elements in a good investment plan. We strongly encourage you to develop a strong, written investment plan before you spend a single dollar on investment property. There is something powerful about putting things down in writing which helps to propel us forward in meeting our objectives.

Mistake #2:  Basing your investment decisions on emotions vs. using your financial intelligence 

Money, sex, religion, and politics are all emotional subjects. So when it comes to those subjects, most people are not thinking rationally. If you look back at some of the worst decisions you have made in the past, you’ll find that oftentimes, there was a large degree of emotion involved in your decision-making process. When you allow emotions to overtake you, your ability to make a smart decision will go down in proportion. This is a fundamental law in business that you cannot change.

“When emotions go up in a business deal, intelligence goes down. Always has, and always will.” - Keith Cunningham, expert negotiator

It’s all about the numbers- In the world of investments; wise investors will push their emotions aside when it comes time to make a decision. They are not going to be lured by the breathtaking view, state-of-the-art facilities or a seller’s sad story. Successful investors will also do their due diligence and get as much information as possible and not let their emotions leak into the decision making process.

This is one of the reasons why good sales people and effective negotiators will use these tools when trying to make a sale or seal a deal. They realize that the more they are able to play to a person’s emotions, the more likely they are to succeed. So be wise and don’t let this come into play when you are at the bargaining table.

Of course, being human, we cannot always control our emotions. When this happens, the best thing to do is to remain conscious of your emotions and feelings. Continually check in with your “emotional thermometer” to consider whether you’re allowing your emotions to “boil over” and factor in to your decisions.

The following are some strong signs that your emotions may be seeping through and working against you:

• Is your heart beating faster or your breath quickening?
• Are your cheeks getting hotter as you’re discussing with the other party?
• You can’t wait to “show off” your property to your friends or family (as opposed to other investors)
• You begin to feel exasperated while trying to negotiate a purchase on a property and feeling like you must get this deal because you’ve got too much riding on it.

One way to learn to master your emotions when it comes to investing is to have a partner to bounce ideas and thoughts off of. Ideally, share your idea with another investor and ask them to evaluate whether they think you’re allowing your emotions to influence your decision.

The good news is the more experience you gain as an investor, the smaller the emotional component will become. With time, an investor can begin to see that it’s only a real estate deal and not worth getting emotional about. Opportunities will always present themselves and the world will not stop turning if you miss this one.

“Sometimes the best deal to be done is doing no deal at all.”

Mistake #3: Not determining your strategy for that property prior to closing the deal

So often investors do not consider what they’re going to do with the property once they’ve bought it. Do you plan to renovate it? Or would you prefer to sell the contract? Maybe you want to refinance it, or sell with terms. Or are you going to hold on to it and rent it out?

We’ve had investors come to us with what they deem to be an amazing deal. They believe that they can purchase the property under market value, so they simply cannot “pass it up”. However, it is crucial to understand that a good deal is only a good deal if you know how to make money from it!

Your strategy should be based on the type of property. So if you don’t know what you’re going to do with a property you buy, it’s likely that you won’t be able to capitalize on the opportunity that makes sense for that specific property.

Once again, having a solid investment plan to work from will help you determine whether this is the right one for you. This will also narrow down potential properties to the ones that fit the profile of what you’re looking to invest in simply by referring to your plan. If it isn’t in line with what you had determined, then you can search for other alternatives or assign the deal to another investor.

Don’t get stuck with a property that drains your money and energy simply because you didn’t know what to do with it once you bought it. Have a back-up plan; know what your exit strategy is. Ideally, you should have two or three different alternatives you can use, depending on the circumstances. If your original plan doesn’t work out, you don’t want to wind up being a motivated seller.

Mistake #4: Insisting on getting the “perfect” deal as opposed to a great deal

Deals that could have delivered tens of thousands of dollars in profit to the investors sometimes die at the bargaining table simply because the parties refused to accept the great deal and instead pushed for the “perfect” one.

 A sure way to fail in real estate is to try to push every deal, squeeze every seller and every associate to the absolute brink in an attempt to maximize profit. In this particular situation, most likely emotions have seeped through making the investor feel like he has to “win” by getting an even better deal. As a result, he gets no deal and ends up wasting all the energy he put in and feeling frustrated!

When you put together your investment plan, part of it should detail what your expected – and minimum – returns on investment are going to be. This will help steer you with deals in choosing whether a particular opportunity makes sense for you or not. You should be basing your decision on whether the investment is in line with your plan- not whether you think you can squeeze another dollar out of it. There is a law of diminishing return in real estate investing that states that once you reach a certain point in a deal, the amount of energy required to gain or extract a bit more profit or advantage out of it simply isn’t worth the energy or risk required. With experience, you will learn where that diminishing point lies in each deal and be willing to respect it.

Mistake #5: Thinking that investing in real estate is a way to “get rich quick”

As an investor, you will surely be disillusioned and disappointed if you go into real estate investing thinking that it is a breeze to create millions of dollars overnight, with very little effort and without any of your own money. For the most part, this is not the reality with legitimate investors. Now, this is not to say that you cannot generate substantial returns in real estate in a short period of time, but to do so takes significant effort and knowledge.

Most successful real estate investors made it in a slow, steady and predictable manner. They didn’t partake in high-risk deals and didn’t have to resort to unethical and unfair tactics to achieve success. They took the time to create a solid investment plan; they did what was required to execute that plan; and they stayed on track when things didn’t go right.

In cases where a person makes a fortune in real estate in a very short period of time, they will oftentimes lose it just as quickly because they didn’t develop the appropriate psychology required for long term investing success. Whether someone can become “rich” quickly will depend on each person’s definition of “rich”. However, the idea of becoming a millionaire in a matter of weeks or months without money, knowledge or incredible effort is simply a false one that creates a lot of disappointment and frustration.

However, it is possible to create significant amounts of wealth in a reasonable amount of time. Becoming wealthy in real estate in simple-but not easy. We have clients who have generated in excess of $100,000 in net profit in less than a year by investing part-time in real estate while keeping their full time job. Yet, we can assure you that the success these investors achieve is not because of their luck or because it was easy. The “luck” was the direct result of their commitment to their plan, commitment to their financial freedom and hard work. Making millions in real estate is not impossible, but it does require hard work and dedication.

If you go into real estate investing believing that you will become a millionaire by this time next year, we recommend that you save your time and money and buy lottery tickets instead. Setting such an unrealistic goal will give you about the same chances of succeeding as winning the lottery.

Real estate investors must not underestimate the effort and energy that long term investing success requires. It is not for everyone. But for those willing to make the commitment, invest in their knowledge and education and to write and execute a good investment plan, success is inevitable… as long as you stick to it!

Come back next month for our next installment, we will tell you the remaining 6 mistakes made by real estate investors ....

If you have questions regarding this article, please feel free to contact our office at 514-680-3279 for a quick response.

PI Global Properties Group - www.pi-globalproperties.com

 

PI Global Properties Group offers hands on high return investment properties and education-based seminars in the fields of real estate and personal growth toward financial freedom.

 

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