THE 9 BIGGEST mistakesMADE IN REAL ESTATEinvesting

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TABLE OF contents

#1. Not Starting with Your Goal in Mind 4#2. Thinking They Can Start with Nothing 6#3. Not Learning First 8#4. Not Matching Your Personality and Workstyle to Your Type of Real Estate Investing 10#5. Not Running the Numbers! 12#6. Doing Everything Yourself 14#7. Over -or Under- Renovating 16#8. Spending the Principal 18#9. Not Having Patience, Then Quitting 21

When I first wanted to invest in real estate, I didn’t know where to get started, and I was worried about failing: that meant losing mon-ey, which I sure didn’t want to do! So, I start-ed interviewing everyone I knew that was in-volved in real estate. I talked with Real Estate Attorneys, Real Estate Brokers that worked with investors, bankers that lent money to investors, commercial Real Estate Brokers, contractors that worked with investors - and, of course, anyone I could find that owned multiple properties. The questions I asked surrounded finding out who they knew that was successful in real estate, who had multi-ple properties and who had lasted through at least one market downturn (like that of 2007 & 2008). I asked what they would do different-ly if they could start over. Then I also asked, “Who do you know that invested in real estate and failed? And, more importantly, why did they fail?” I gained incredible insight that gave me a huge leg-up in investing, and helped pre-vent me from making major mistakes.

To help you get started, I’ve distilled down those learnings into “The 9 Biggest Mistakes Made in Real Estate Investing”.

If you want to take a road trip, there are two ways to go about it. You can just wing it by quick-ly throwing some things in a bag and jumping in the car and going. And this can be a lot of fun.

Or, you can do a little planning. Decide when you want to start, who you want to invite along with you on this journey, where you want to end up, and any places you want to stop along the way. Both types can be fun, but by taking a step back and doing a little planning first, you can get a lot more out of your trip. This is a helpful analogy for any project, or for life in general. By doing a little planning first, it can help you get to your goal.

Think about why you want to invest in real es-tate? Is it for more income? To have a better life? To get braces for your kid? Is it to have extra money to travel the world? Is it so you can af-ford your dream car? Is it so you can quit the job you hate? No matter what it is, write it down.

Now that you have the compelling vision or goal, let’s put some numbers to it. Say you would like to have your dream car. What does it cost? $50k, $100k? or is it $500/month, $1,000/month, or more?

Or say you want to travel, what are the places you want to go? Go browse several travel sites

NOT STARTING WITH your goal IN MIND

#1

and create a list of the top ten places you want to go. See what hotels or Airbnb average a night.How long to do you want to go? Do you want to fly coach or business class? Go search KAYAK and see what the flights costs. And how many trips do you want to go on per year? Get some rough estimates, then write it down. Do you need $10k/year? Maybe $24k/year? Whatever it is, write it down.

Or perhaps you just want to quit the job you hate, and have your dream life. Regardless of what you want specifically, you need to create your Target Monthly Income goal so you know what you’ll need to afford living your dream.

Learn more about creating your TMI here.Once you have your compelling reason “why” and a good idea of what it will cost, write it down all together. While real estate can be a very easy way to achieve financial indepen-dence, you’ll probably face some hurdles along the way. Being able to go back and reference your “WHY” will help you stay focused and mo-tivated!

Then put it in a place where you can look at it ev-ery day. Having a compelling vision of what your goal is and having it written down are both incredibly important to your success. You’ll want to reference each one constantly.

I am sure at some point you have seen an ad for that Real Estate Guru that says you can get started in real estate with NO Money, NO Ex-perience, and NO or bad credit. And then they present a case study highlighting someone on their “system” that just made $100,000 in their first year. This is complete B.S.! And it is B.S. for multiple reasons.

First, they pick their best-case scenario. Second, that person most likely had some competitive advantage to get started. I get it: it’s marketing, and they want to sell a product. But still, let’s all be sensible and realize that it is marketing, and 99.9% of individuals won’t achieve those results.

Just to expand on the idea of disproportionate success rates, only 62% of individuals in the United States own a home. Then only 11% are real estate investors (my assumption is a lot of them have a vacation home that they rent out and not a true investors).

HOME OWNERSRENTERS

62%

38%

THINKING they CAN START

WITH nothing#2

Then out of all the Landlords in the US:

• 79% own 2 or fewer properties• 8% own between 3-5 properties• 4% own between 6-10 • 9% own more than 11 properties

That is less than 1% of individuals in the US that own more than 11 properties.

Do you get the point I am trying to make? It is a very select few (and it isn’t those folks with no money, no experience and bad credit) that have success in real estate.

Referenceswww.en.wikipedia.org/wiki/Home-ownership_in_the_United_States

www.static.realtytrac.com/rnshared/HNR/Inman/landlord_land.pdf

www.biggerpockets.com/renewsblog/2012/09/30/impact-real-estate-investors-infographic

But, it’s not that hard if you start by building your foundation first. There are 4 Pillars of Success in Real Estate Investing. They are:

1. Capital to Invest2. Good to Excellent Credit3. Knowledge & Connections4. Time

If you want to learn more about the 4 Pillars of Real Estate Investing, check out my article here.

Real Estate investing isn’t rocket science, but it’s a lot easier if you start with a solid foundation.

11+

3-5

1-2

6-109%

You don’t know what you don’t know. That is why it is important to start by learning about real estate and your local market as one of your first steps: you need to know how to spot a good deal; you need to know how to estimate rehab costs; you need to know how to estimate on go-ing expenses; you need to know how to run cal-culations. You need to know how to do all of this so you know a good deal when you find it.

It’s not rocket science, but it does take a little time. You can do your first investment in less than six months. One of the best ways to start is by learning from others: that’s why I created www.FIbyREI.com so you can follow along to learn firsthand.

Another great option is to join your local Real Es-tate Investment Association. It is a great chance to network and learn from others.

Then there are hundreds of books out there on Real Estate Investing. Here are some of my favorites. It is incurability important to build a habit of reading.

Rich people (annual income of $160,000 or more and a liquid net worth of $3.2 mil-lion-plus) read for self-improvement, ed-ucation and success. Whereas poor people (annual income of $35,000 or less and a liquid net worth of $5,000 or less) read primarily to be entertained.

NOT learning

FIRST#3

Also, experienced investors know that you need to have a mindset of continuous learning. Laws and regulations change, and you need to stay current on them so you don’t get hurt. Banking guidelines change, and if you don’t stay abreast of new or different financing options, you might find your sources of capital quickly drying up.

You also need to learn about any new Metro-politan Statistical Area (MSA) you want to invest in. Or perhaps you want to diversify your Real Estate Investments and start investing in com-mercial, retail, or self-storage. You need to learn the ins and outs of this new niche you want to expand in.

Above all, however, you should always keep a mindset of wanting to learn and grow.

Referenceswww.huffingtonpost.com/andrew-merle/the-reading-habits-of-ult_b_9688130.html

RICHPOOR

READ TObe entertained

READ FORself-improvement

educationsuccess

#4 NOT MATCHING YOUR personality

AND WORKSTYLE TO YOUR TYPE OF real estate INVESTING

To have success in Real Estate Investing, it helps if you really enjoy it. It is easier to be successful if you match your strengths to the type of in-vesting you do. Here are a few examples:

• Do you hate interacting with people? Maybe you shouldn’t do buy & hold, or if you do, make sure to hire a property manager so you don’t have to deal with tenants. Or maybe avoid buy & hold all together and focus on flip-ping, new development, or new construction.

• Do you love marketing? Maybe you should look at wholesaling or doing house flipping as you can create massive marketing campaigns to find motivated sellers.

• Do you hate sales & negotiating? If so, find a great Realtor to work with to represent you so you don’t have to do any negotiating.

• Do you have a job where you can’t take personal calls during the day? If so, doing marketing campaigns where you field calls might not be a good idea. Or if you do, work

with a call center to field and screen calls for you while you are at work.

• Are you afraid of long-term commit-ment but want quick access to capi-tal you invest? If you want to invest in real estate, but want to maintain quick access to your capital, you should look at a publicly-traded REIT, or an ETF that focuses on real estate. This lets you be involved in real estate and gives you the ability to invest and exit quickly.

Matching your investment to your life-style will also help keep you from chas-ing potential money. This happens all the time: a great example is the individual that starts doing buy & hold investing, and then just hits a roadblock. Later, at his local REIA meeting he hears a whole-saler talk about how he just made $15k in two days on a deal. But what he doesn’t hear is how the wholesaler spends $5k/month on marketing, spends thousands more testing different letters to find the perfect one, and fields hundreds of calls a month all to get that one big deal.

By focusing on a Real Estate Investing strategy

that best aligns with your values & style

you help to set yourself up for greater success.

The old real estate saying is, “You make your money when you buy, not when you sell”—which means, you have to buy a good deal. And how do you know if a property is a good deal? By knowing and running the numbers! There are so many critical parts to Real Estate Invest-ing, but knowing your numbers is key.

So, there you are, reading an email about an off-market property that’s for sale. You’re think-ing it could be a good deal as a rental property, but how do you really know? You need to know how to accurately estimate the numbers:

• You need to know what current lending terms are, so you know how much cash

you need for a down payment. Besides that, you need to know what a likely rate might be, and what the other terms are like: for example, is it a fixed rate or balloon, then what is the loan amortization?

• You need to know what similar style properties in the area rent per month. You can find this out by using sites like Zillow or Rent-O-Meter.

• You need to get a rough sense of the con-dition of the property. How much work is needed to make it rent ready? Does it need an updated kitchen, does it need paint, does it need landscaping, does it need any knew flooring—and what will these items roughly cost?

NOT running THE NUMBERS!

#5

• You need to know what the average va-cancy is in the area. Besides that, you need to know what maintenance averages per year for similar properties of this style, and for the tenant base. You need to know if you will pay for any utilities and if so how much will they cost.

Once you get these numbers, you need to learn how to plug those estimates into an in-vestment calculator specifically designed for a rental property acquisition. Then you decide if the property makes sense as is, and if not, you need to learn how to adjust the sales price to make the deal work.

Knowing your numbers is critical for success. For some general rules-of-thumb, for basic Real Estate Investing formulas, and to see what spreadsheets and calculators I use, check out our Book Smarts page at www.fibyrei.com/book-smarts

DOING everything YOURSELF

#6This is a big one for new investors, because they usually have more time than money, and so they try to do a lot of the work themselves to save money. But, they forgot: time is money. They don’t analyze the time they spend doing a project versus the cost.

Almost all of the time, a professional can come in and do the job in significantly less time and at a higher quality of work that you can do your-self. A great example is someone trying to do tilework without professional help. They work a full-time job, and they have family commit-ments. Still, they want to save money on their renovation project. But, because of work and other commitments, it takes them two weeks to prep the site, lay the tiles, then come back

and grout the tiles, then seal them. This slowed down the job by two weeks, that is two weeks of carrying costs. Now, compare that to what it would have cost to hire a pro who can do the job in two days while you are at your day job.

Another great example is of what a friend of mine just went through. Her and her husband were doing their own kitchen remodel for a rental. They did the gut-job themselves. They assembled the cabinets, then hung them. Then they came in and did the floors. Then they did the painting. It took them almost a month to fin-ish the job. That was a whole month of lost rent. It also meant very long nights and extra stress on their relationship. But they rationalized it be-cause it would save them money. Here’s what I

proposed they do instead: take a step back and plan the project really well so they only do part of the work themselves. They gut the old cabinets and floors on a Saturday, then they rest on Sunday before they go back to their day jobs on Monday. Then the cabinet installer comes on Monday and is done in half a day. The countertop install-er comes on Tuesday. The floor installer comes on Thursday and Friday. They come in and do the paint themselves on Sat-urday. Then they take pictures and start marketing the place for rent on Sunday. They still save money in the end, because they’ve drastically reduced the downtime for their rental unit from a month to just a week.

The longer you pay carrying costs for that flip, or the longer your rental unit is vacant, the more that will cost you. I fully under-stand when you first start out that you’re short on cash, and need to save money. But keep in mind, a lot of the time you can get a professional to come in and do the job done in a fraction of the time you could. In the end, this saves you money.

The longer you paycarrying costs for that flip

or the longer yourrental unit is vacant

the more that will cost you.

OVER - OR UNDER - renovating#7

This is a big one. And it doesn’t matter if it is for a flip or a rental. If you over - or under - reno-vate, you can create a big issue. The best way to prevent this is to know your market extremely well.

If you over-renovate, you spend more than you need and this cuts into your margins and hurts your overall return on investment. And if you under-renovate, it will hurt your margins, because you won’t get the max sales price, or maximum amount of rent per month. In addi-tion, it can cause your place to take longer to rent or sell.

The best way to learn about how much rehab work to do is to go to open houses. Spend time looking at other properties in your area.

If you have a property that is a 3-bedroom and 2-bathrooms, and it will rent for $1,000/month. Go look at other 3- bedroom & 2 bathroom properties for rent in your immediate area. Do they have laminate floors, or hardwood? Do they have tile in the bathroom, or vinyl? Are the kitchen counters laminate or granite? The better you know your competition, the better it will make sure you don’t under - or over - renovate.

My rule of thumb has always been to make my property equal to or slightly better in quality than that of my compe-tition. Then, when I rent to tenants, I al-ways try to be at the fair market price, or just slightly below. I found taking these two actions always means that my rent-al properties get rented quicker and stay rented for longer.

Also, to make your property stand out, fo-cus on the bathrooms & kitchens. These are key areas in a home that tend to make properties sell and/or rent fast. I also like to add something to make my proper-ty pop, stand out, or catch attention. It could be something as simple as putting in a tile back splash in the kitchen, when your competition doesn’t have one. Get creative!

Take the time to learn about your area, and about the competition, then renovate your property accordingly!

My rule of thumb has always been to make my property equal

to or slightly better in quality than that of my competition. Then, when I rent to tenants, I always try to be at the fair

market price, or just slightly below.

spending THE

PRINCIPAL #8If you Google the phrase “Don’t Spend the Princi-pal,” you will get thousands of articles all around habits of the very wealthy and how they build wealth. And one of the biggest common themes is that they don’t spend the principal. This goes the same for Real Estate Investing. Once you build up some capital, you invest it, and make sure to not spend it. The key here is to let it grow forever.

Where a lot of new and experienced investors alike make a mistake is they tap into the prin-cipal. Sometimes they do it for justifiable rea-sons like their kid’s college tuition, health care, or some other emergency. Other times they tap into the principal for foolish reasons like buy-ing a dream car, a new boat, a bigger house

(that doesn’t produce income). The best way to circumvent this is to properly plan. Build up an emergency fund to take care of those unex-pected expenses. Create an additional savings account for those known upcoming expenses.

The other mistake investors make is spending their profits too soon. The key to building wealth quickly is to reinvest your profits. A lot of new in-vestors will go out and buy a cash-flowing prop-erty, and end up making say $400/month in cash flow. Then they go out and use this cash flow to buy a new car that costs $400 /month. This keeps them in the rat race. Instead, they should have used that $400 in monthly cash flow to build up an emergency fund, pay off high-interest debt,

and save it for their next investment. Here are a couple things to think through before you start spending your profits:

a. You need to have hit your Target Monthly Income before you quit your job. By keeping your job as long as possible, and not spending any of your profits, it creates a snowball effect let that’s you quickly building more in-vestments.

b. You need to build enough cash flow so you have a buffer for unexpect-ed costs. Real estate income ebbs and flows every month based on repairs, vacancy, and much more. Once you quit your job, you want to be able to live at or below the average of your cash flow, not off your high months.

c. You need to build adequate re-serves. Having healthy reserves will sustain you through a market down turn. In addition, you need to build reserves to cover capex, or large un-planned maintenance expenses.

d. You need cash flow that won’t just cov-ers your expenses, but which will also build your reserves. You need to have extra for additional savings and to invest outside of real estate. You want enough to add money to tax deferred accounts like an IRA or 401k.

As you start investing in real estate, plan ahead and figure out what your income goals are, then make sure you exceed them before you quit your job. This lets you reinvest your profits so you can grow your principal. Don’t forgot: never tap your principal!

Once you build up some capital, you invest it,

and make sure to not spend it. The key here is to let it grow

forever.

So many new investors get into real estate be-cause they think it will give them a quick wind-fall. They think they can make tens of thousands of dollars overnight and that Real Estate Invest-ing will solve their financial problems. Investing in real estate is not a get-rich-quick scheme. On the contrary:

a. It takes time to build your networkb. It takes time to find solid dealsc. It takes time to learn how to do it right, and

there will be mistakes along the way

Yes, you can make tons of money, with very little effort, but it does take time. If you do it right, and have patience, you can change your

entire financial picture in 3 to 7 years. Start thinking long-term and you will notice a huge change in your finances after no time at all.

NOT HAVING patience, THEN QUITTING

#9

A. It takes time to build your network

B. It takes time to find solid deals

C. It takes time to learn how to do it right, and there will be mistakes along the way

We hope you enjoyed our guide on the “The 9 Biggest Mistakes Made in Real Estate Investing”.

To learn more, follow along at www.FIbyREI.com

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