There are so many options and pathways to take to real estate success. Those decisions you make can literally submarine a deal or make it a homerun.
It’s not easy to be an entrepreneur. Not only do you need to manage the day-to-day stuff, but you’ve also got to keep an eye on the long-term strategy to ensure your business thrives. Too often, I’ll see new real estate investors fall prey to the same pitfalls time and time again. The tragedy of it is, these pitfalls are completely avoidable! But how can you know what pitfalls will tank your business and what options do you have instead?
The four major pitfalls you’ve got to steer clear of involve DIYing everything no matter what, being passive, avoiding the numbers, and impulse buying. To avoid doing these, you’ve got to be an active participant in your business and know the value of your time.
Sounds easy enough, right? Unfortunately, the number of failed fix and flippers tells a different story. So let’s dive into these pitfalls and talk about why they’re so devastating and what you can do to prevent your business from tanking because of them.
Mistake #1 – DIY No Matter What
There’s no greater sense of accomplishment than looking at the results of your handiwork, but when you’re in business to earn a profit, you’ve got to see the bigger picture.
Time is money for entrepreneurship, and real estate investing is no different from any other business. Consider the hourly rate or salary you’ll be paid as the business owner, and then check out this chart. I’ve sourced the top types of renovations and how long it will take you (on average) versus a trained professional:
|Type of Major Renovation||Average Time to DIY (Hours)||Average Time for a Pro (Hours)|
Say you plan to pull an income from your business of $50/hour. If you did that floor installation on your own, that’s a $1,350 cost for your business! Now consider that it takes a pro less than half that time on average to do the same job. Even if they charge you $100 an hour, it’s still cheaper than doing it yourself.
What to do instead: When you’re running a business, you’ll need to consider not only the cost of your salary but the opportunity cost, too. Instead of spending 27 hours trying to install new flooring, spend that 27 hours growing your business. What could you do in that same amount of time to bring in more revenue?
Mistake #2 – Being Intimidated By the Numbers
Having “no head for math” isn’t an option when you’re a real estate investor. While you should have an accountant and bookkeeper on your payroll, that doesn’t absolve you from keeping your eye on how money flows in and out of the business. Washing your hands of responsibility for the numbers only means you’ll end up with a rat’s nest to sort out if something goes wrong or your money people decide to leave.
What to do instead: Hire professionals but make it a habit to routinely check in with them to go over the numbers. Have them show you projections and hard data for where the business currently is today. Keep administrative access to all bookkeeping software and bank accounts so that you’ll never have to search for a password should your bookkeeper fall ill, rage quit, or something else that leaves you unable to access your money.
Mistake #3 – Being Passive
Real estate investing is intimidating no matter how long you’ve been in the biz. It can often feel easier to just defer to the people you hire and stay in the background or not speak up when you think something is off. However, there’s a fine line between micromanaging and getting walked over, and as the business owner, you’ll need to walk that line occasionally. Otherwise, you could end up with a mess on your hands that destroys any chance of profits or just breaking even.
What to do instead: Hold your own. Ask as many questions as you can. Be present. Remember, when it all comes down to it, it’s your money that’s involved and at stake here. You need to wear the manager tag. Be involved in every step of the process and manage what gets done to ensure it’s done correctly. Be firm and fair. Have rules and expectations and stick by them.
Mistake #4 – Impulse Spending
If you’ve ever been afraid to look at your bank account after a night on the town, you know the twinge of fear that comes with the consequences of impulse spending. Those new to the real estate investment game love to invest in the “cheap deals,” believing they can garner a tidy profit after a quick “fix and flip.” What they don’t understand is the difference between the price of an item and the cost of an item.
- Price – The flat-rate amount you pay for an item (say, $10 for a T-shirt).
- Cost – The long-term, variable amount you’ll end up paying for an item (say you buy a Ferrari; now add $ for potential repairs, loan interest rates, gas, etc.).
A property may have a low price, but the long-term cost of owning that property could end up being much higher.
What to do instead: Give yourself limits as to how much you’re willing to spend on repairs, renovations, property taxes, and interest rates. Set a budget beforehand, and don’t fall prey to “good” deals that end up costing you more.
Running a business of any type is tough, but real estate investing takes it to a different level. But you can ensure your business becomes successful by making it a point to steer clear of these four devastating but easily avoidable pitfalls.