Why Real Estate Investors Fail – My 4 Observations

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By William Charlton

Many books and articles have been written on “how to be a successful real estate investor”. However, after spending the past decade working with hundreds of real estate investors, I’ve seen far more failed investors than I have truly successful ones. So I gave it some thought as to why real estate investors fail.

Here are my observations:

During the 2005-2006 Alberta real estate boom, home prices were rising double digits monthly. ANYONE could make money buying real estate and selling for a profit just by simply buying a house for asking price and by the time they took possession it had already appreciated. These people fall under Observation #1.

1) They Got Lucky in a Good Market. The  se people became speculators and not real estate investors. They bought in after watching a half hour TV show. They didn’t take the time to obtain valuable real estate education. They didn’t have an understanding of the changing market conditions, what makes a good deal vs. what makes a risky deal. They didn’t know which properties to avoid or how to refinance and rent the property to create cash flow in a down market. After making a lot of money in the great market of 2005-2006 they continued to buy property in 2007 until, suddenly, the price of their fully priced home started to fall before they could sell it. They were speculators with no backup plan. They were buying property without rental cash flow potential and buying property in bad locations. They had early, easy success but started to overextend themselves. Most lost everything. A few lucky speculators who happened to own good lower priced property were able to rent out the property to make the mortgage payments, but still faced hard financial times. As a mortgage lender, the investors I watched lose the most money had owned property they couldn’t rent to cover mortgage payments (homes valued over $600,000) and/or owned property away from transit and jobs (rural, small towns, acreages, high-end homes outside of a city’s core etc.). Write this down and revert back when you start to see home prices start to depreciate – you’ll quickly see what I am talking about!

We were in another really good market in Alberta in 2014 and saw it again. Investors buying marginal deals just barely squeaking out a profit or not cash flowing their rentals. The market is masking their poor purchases. This leads to Observation #2:

2) Being Too Emotional. After thinking about the strong real estate investors I’ve worked with, I tried to figure out some of their common traits. The #1 trait I always come back to is emotion. The very best remove emotion from their real estate transactions. To them it is strictly business, strictly numbers, and all a matter of fact. They don’t do marginal deals. They don’t settle for weak numbers. Top real estate investors do extensive due-diligence on the economic and market conditions. They inform themselves on what makes a good deal and a bad deal in a specific niche buying area. They immerse themselves in the values and specs of homes in a particular area. Then, they decide on a number that works for them to purchase a home and a price and spec of the renovations they need for a house in that particular area. If their offer isn’t accepted, they move on. If they don’t get financing, they move on. If their inspector indicates a problem, they move on. They don’t waste time figuring out if it is a good deal after finding the house, they already know before they find the house. Successful investors enter a deal without emotion because they have done their research and now it’s just numbers to them, just a transaction at this point. This also separates them from any competition because they can act fast when an opportunity arises. In nearly every instance I have dealt with a failed real estate investor, they struggle with removing emotion from their deals because they have spent too much time thinking about all the possibilities after they found the deal. Real estate investors who aren’t successful can always be found desperately trying to make a marginal deal work, spending hours trying to convince lenders or appraisers that they have a great deal. This is often found with a first-time investor. They’re excited to get into their first deal so they try and make things work. Advice to any struggling or first-time investor, delete your emotion, focus your energy on the next opportunity.

Speaking of focusing energy, successful real estate investors stick to what they know and understand. They don’t waste energy chasing 2nd or 3rd ventures unless they are already independently wealthy. Many unsuccessful real estate investors fail because they went beyond their vocation or had their hand in too many different cookie jars. Leading to Observation #3:

3) Not Staying within Their Plan. On the top of mind, I immediately think of at least three “former” successful investors. These investors made really good money in real estate. Then perhaps a form of attention deficit disorder set in. One particular real estate investor, who bought and held residential homes, decided to get into land development and commercial building with no previous experience in these categories. Huh? He saw the big money other developers were making and said, “I can do that”. It proved, as it almost always does, to be a disaster. As problems arose, focus and energy was pulled away from his successful residential portfolio. As further issues mounted, equity started to be eroded from his successful residential portfolio to pay for mistakes in his other ventures. Soon he was left with nothing even though he had been a very successful residential real estate investor. Words of advice from some of the best investors, “stick to what you know”. The turtle usually wins over the rabbit when it comes to real estate investing. Warren Buffet has a great quote, “I don’t look to jump over 7-foot bars: I look around for 1-foot bars I can step over”. In my experience, the most successful real estate investors have very boring business plans and very boring real estate portfolios. If you have overly exciting plans with elaborate ways to achieve them, you’ll likely fail. Stay within your limits, stay true to your plan, take it slow, and be boring.

When a real estate investor doesn’t have a plan or goal they usually fail because of Observation #3:

4) No Real Estate Education or Network. Investors often fail when they don’t take the time to educate themselves through local network groups, books, seminars, etc. Most successful real estate investors have a strong network and mentors in their lives, always learning from others. Less successful investors try and do everything on their own and don’t take advice or criticism well. With hundreds of ways to structure deals, fix problems, find deals, renovate homes, etc., an investor just starting out can benefit from finding successful investors or lenders who can provide guidance. I’ve found that many investors come from a special background strength, but lack skills in another area. For instance, a trade person might be able find and renovate great property, but lack deal structure or financing expertise. This trade person’s success is often determined by whether they sought help with the lacking skills or if they tried to do it all themselves. Investors often fail when they don’t develop a strong team around them to help them with the areas they are not experts in. Successful investors have a strong, go-to team of lenders, realtors, lawyers, trades people, etc. Unsuccessful real estate investors are often found trying to do everything on their own. Unsuccessful real estate investors often end up spending $10 to save $1, they trip over dimes to collect pennies from the ground. When an investor spends all their energy and efforts on every component of a property deal, the next opportunity is passing by. Smart investors educate themselves on how to maximise their wealth and portfolio efficiencies. They learn how to delegate specific components of the deal. Real estate investors who fail always lack understanding of two critical concepts: cost of doing business and opportunity cost. Some words of advice: educate yourselves on these concepts and develop a strong network to help with your business plan.

In summary, if you are just starting out as a real estate investor or you haven’t turned a profit on your deals; get educated, get focused on making this a real business by using numbers not emotion, and stick to your plan and expertise.

William Charlton has been a mortgage lender in Alberta for the past decade.  He has been a speaker at several real estate conferences, including REIN events.  With a passion for mortgages and real estate, William focuses his mortgage business toward real estate investors. You can reach him at william@wrref.ca or 403.701.7766.

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