Setting out as a real estate investor? Congratulations.
But what could go wrong? You’ve heard the horror stories from friends, family, or people you see on TV, but you’re determined to prove them wrong — and get rich.
But before you jump in with both feet, it helps to learn some lessons from those that failed first. From slacking off on research to underestimating respective costs, we’ll cover a handful of pitfalls that could tank your property investment efforts. Most importantly, you’ll learn a proven trick around each of these challenges and increase your odds of success.
Let’s get started with some numbers.
How Many Real Estate Investors Fail?
There’s no universal way of figuring out this number, but a Biggerpocket post estimates that 95% of aspiring real estate investors never purchase a property.
So what’s going on?
There are plenty of reasons to consider real estate investment. Perhaps you want to build an investment portfolio that will help you retire early, or you’ve got a ton of cash and want to see what happens when you sink your money into something substantial. Either way, it’s essential to know what you’re getting yourself into—and there are plenty of ways that getting setting out can go wrong.
10 Reasons New Real Estate Investors Fail
Here are some common mistakes beginner real estate investors make:
- Lacking a meaningful “why” and “how”
- Insufficienct education
- Poor market research
- Taking too much risk
- Poor negotiation skills
- Analysis paralysis
- Understimating costs
- Not knowing when to pull the plug
- Trying to to it all by on your own
- Being impatient
1. Lacking a meaningful “Why” and “How”
One of the main reasons beginner real estate investors fail is working with a vague business plan. If you don’t know why you’re doing it, or if your reasons need to be more robust or precise, then it’s unlikely that you’ll be able to stick with it through the rough patches.
Having a plan doesn’t mean seeing into the future. It’s about setting the direction for your venture and outlining the steps to realize your investment goals. A solid real estate business plan includes:
- Company values and mission
- Short-term and long-term goals
- SWOT analysis
- Best investment strategy for your property choices and goals
- Potential marketing efforts
- Applicable costs and financing options
- Backup plans and exit strategies
2. Insufficient education
Failure to invest in the necessary education means you’ll never know if your approach makes sense. You keep running in circles rather than raking in profits and taking lessons. Plus, the market is constantly changing. So, if you don’t know how to keep up with it—or worse yet, if you don’t even know where to look for information—you could invest in properties that aren’t worth what they once were.
You can get most of the information you need online for free. That includes YouTube videos by successful investors. They’ve made mistakes along the way, just like you will, but they’ve also learned from them (and so will you). Other lower-cost alternatives for new real estate investors include library books and local meetups.
3. Poor market research
The market is your playground—the more you learn about it, the better you can play.
Without market research, you could invest in a poorly performing property. An attractive price tag or a property might tempt you, but you could end up overpaying if you don’t know how much comparable properties are fetching.
Real estate investing can be very profitable, but only if you do your homework and take the right step:
- Understand the local market. Right from the listing prices, how much rent you can charge, demand level, and whether or not there are any incentives or programs in place that would benefit your business.
- Understand economic trends.
- Familiarize yourself with the legal and financial implications of real estate investments (which vary from state to state)
4. Taking too much risk
The world of real estate investing is full of opportunities for those willing to flex their risk-taking muscles. But frustrations are likely if those risks aren’t calculated correctly or weighed against short-term gains versus long-term goals. For example, if you were to put all your money into just one investment and lose it all to a bad deal or poor timing, then you’d be out of luck and probably bankrupt.
You need to be smart about how you approach real estate investment. So many variables are involved: the economy, market trends, local regulations and politics, construction costs and timelines—the list goes on and on.
While certainty is limited when it comes to investing, there are some things we can do to increase our odds of success. Learn more about reducing real estate investment risks.
5. Poor negotiation skills
During real estate transactions, you’re always bartering. And the last thing you want is to make it easy for people to take advantage of you. Proper negotiation comes in here. It’s what gets real estate deals done satisfactorily.
Whether it’s a buyer and seller coming to terms with a price or hiring a professional team, creating win-win scenarios is critical. But can’t just assume that everybody will get what they want in every deal, so you have to be prepared to compromise. Even if both parties aren’t delighted with the outcome or solution reached during negotiations, at least they got something.
Consistency is the secret sauce when mastering real estate negotiation strategies. The more you do it, the better you’ll identify what works and what doesn’t for different types of people (and real estate properties).
6. Analysis paralysis
It’s a classic story: you’re a beginner investor who spends too much time analyzing options but never takes the plunge. You’re worried about losing money. So you wait for the perfect moment. One month goes by. And several others after that. And then, one day, you look back at all the time (and potential money) you’ve lost because of your fear. And all of a sudden, it hits you: “I could have been investing in real estate since I first got into this!”
Understandably, you want to make sure you’re making the right move. But as with any investment field, you don’t have to get everything perfect from the beginning—you’ll learn by acting. But again, don’t rush into things; look at each step as an opportunity for learning and growth.
7. Underestimating costs
Let me break it down for you.
A typical investment property requires about $543,000. The estimated 20% downpayment is $108,720. That’s before we even get into maintenance or taxes. That can be a huge obstacle, especially if you’re buying in an expensive market like Newbury Park, San Francisco, or New York City.
And then there are all the closing—attorneys, insurance, title deed…you name it. If you don’t have enough cash to cover these expenses, your business plan is DOA. Consider also unexpected costs. You should also understand how loans work and how they can impact your ability (or inability) to make payments on time.
Bottom line: ensure your finances are in order before you sign on the dotted line.
8. Not knowing when to pull the plug
It’s easy to get carried away by the rush of excitement when dipping your toes in real estate investment. After all, there’s nothing like the feeling of making a deal that will make you money—and maybe even change your life.
But things rarely work out exactly as we hope.
So, what happens when you realize your investment isn’t as promising? One of the biggest mistakes you could make is holding on to such ventures for too long. And this can happen for two main reasons:
- Being too optimistic. You want to see the project through until completion, hoping things will get better in the future.
- You feel guilty about walking away from a project because of how much work and personal sacrifices went into getting it off the ground.
It’s essential, not only for your finances but also for your mental health, to recognize when an investment isn’t working out and cut your losses early enough.
9. Trying to do it all on your own
Another reason new real estate investors fail is trying to be a jack-of-all-trades.
It’s tempting to think that handling everything yourself will save you money, help you gain more experience faster, or save you the hassle of delegation. But the truth is, if you don’t have a team that can help fill in the gaps (whether legal or accounting advice) or provide mentorship and guidance on making informed decisions, you could be setting yourself up for frustrations..
Delegating tasks to professionals—whether an accountant, an attorney, or a property manager—often makes sense in property investment But while it’s important to keep tabs on your investment portfolio so that nothing slips through the cracks, there’s such a thing as being too hands-on. Micromanaging everything will end up frustrating everyone involved and slowing down progress.
Work with a mentor, too— it’s like having a safety net underneath you. Along with being your source of inspiration and motivation, they can help you stay patient by providing guidance and perspective,
10. Being impatient
The cost of impatience is high for real estate investors. It can lead to a higher purchase price, leaving less money for renovations and other associated costs. When you rush into buying a property without doing proper due diligence, you could spend thousands more than necessary. Such scenarios could have you feeling a loss of control over what happens next in your venture and life, leading to emotional distress.
It takes time to learn the ropes of real estate investing. You want to take your time with decisions with your money, taking care not to expect too much too soon.
Patience goes beyond waiting until something happens. It also involves knowing how best to handle things that don’t go according to plan. That’s especially when those plans include setbacks like losing money due to unforeseen circumstances such as market fluctuations.
And folks, I hope this list helps. You’ll want to research different approaches to real estate investment, look into your legal rights and obligations, and build a network of trusted professionals to work with you.
Sure, it might take a while to get your feet wet. But with the proper knowledge and undying consistency, you can make it happen.
And if you fail? That’s not necessarily a bad thing—even the most seasoned investors run into trouble from time to time. The key is to learn from your mistakes.
All the best in your new venture!