Seven Sins in Real Estate Investing

Success in real estate investing requires a big ask of first-time investors and veterans alike, avoiding apparent mistakes.  In real estate investing, the pendulum often swings its entire reach.  At any time, the pendulum swing can include any or all of the following:

  • Swings in price (buyers disappear as they flee to liquidity, buyers are plentiful, which means if you sell, there's no place to reinvest)
  • Economic devastation based on investor sentiment (whether real or imagined)
  • Occupancy issues (because of new competition or job losses)
  • Competition for property to purchases (based on product availability - finding nothing to buy that makes economic sense)
  • Availability of financing - piercing the eye of the needle in real-time even when banks change the rules based on their risk appetite
  • Changes in interest rates (when increases in interest rates making the costs of borrowing too high or when lower interest rates compress cap rates)

Avoiding mistakes in real estate investing requires a balanced approach to your implied real estate strategy. People change far more than real estate changes. They decide, individually and collectively, about what's happening in the marketplace and if they will be willing participants. The only other alternative is becoming an unwilling participant in the form of being on the wrong end of a disposition or forced sale.

A pendulum with little swing reflects a market in balance. How unusual is that? Very unusual. Will someone tell me what's going to happen next? Please! A market that can't find its footing is apt to drift and produces that deer-in-the-headlights feeling.

Normal Times Will Happen (Occasionally)

Many investors so are accustomed to the constant flux that when stability arrives, it is unrecognizable. Granted, real estate does not love or feel.  Nor should it be treated as a family member.  But very often, it can require only nominal tinkering.  Not to be left alone unattended, of course, but unobstructed from producing positive financial results.

You will occasionally see a market in balance, but this seems to be the exception.  We are all still so jumpy from the constant flexing that a market in balance makes us feel like the farmer in John Grisham's book A Painted House; there is always something to cause worry.

Wait, hold that thought. Let's say your assets are in a stable market, expectations are for continued stability, and the asset meets your financial expectations. Do you buy, hold, or sell - this can't be right!  Stability?  What an unusual thing!

The playbook of success in real estate investing and avoiding real estate investing mistakes are two sides of the same coin. The following missive represents what people do that gets in the way of success in real estate investing.  It's not a complete list.  We humans, after all, seem always to find new ways to fail.

real estate investing mistakes

The Seven Sins in Real Estate Investing

Greed (ignoring the fairness principle)

In life and real estate, there is always the potential for litigation. Some people operate under the belief that a transaction that is fair to both parties is a quality objective.  Other people, not so much.  For some, their aim in life is to crush, diminish, and peel the deal to the nth degree exclusively to benefit their side.

There is nothing you can do to stop such a person from acting in this manner other than deciding to take a pass on doing business with them and seek the next opportunity to buy/sell/transact with others operating more in alignment with the fairness principle.

Nothing wrong with hard/tough negotiations. But there is a line that makes the entire process near impossible.  If you decide to stay in the mix, well, then pick your fox hole and ready for a fight.  Welcome to business as usual for all too many people.

Example:  A real estate syndicator was buying up small apartment complexes (under 100 units) in Los Angeles.  He expanded to Las Vegas and needed a new team of advisors.  The real estate attorney he settled on had some red flags flashing from the beginning, but he was engaged in a hurry.  The attorney was nothing but a problem from the get and became an impediment to getting deals closed.

In frustration, the syndicator flies to Las Vegas face-to-face.  It is a contentious meeting.  They decide to part company.  As they are closing out the meeting, the syndicator asked the attorney, "why is it you are so hard to work with?".  The response was, "I just am.  But you knew that when you hired me."

Boredom

Why are you selling/buying?  Did you run out of things to do? Was Starbucks closed that day?  All the re-runs on cable boring and the cash flow just seemed too darn stable - this is why you are trading assets?  Some owned deals are just stellar - as-is - no changes necessary.

Sure, there are capital expenditures to address.  Yes, bad debt and evictions occur (that's part of being in this business).  But please, do not sell for a non-business reason or to create some excitement in your life.  Make a business decision, not an I-need-a-new-project decision.

boredom real estate investments

Over-leverage

Occasionally, over-leverage is a post-acquisition knowledge event. Over-leverage often occurred in the great-recession depths when property owners did not know they were over-leveraged until it was too late.  The rules of the game had changed in the middle of the game! Pre-acquisition, it's one thing to press the loan limits because of equity capital constraints. Still, there is a red line.  This line is different for every investor based on their risk tolerance, expertise, and market conditions.

We can all make tea, but we can't all read tea leaves.

Example:  Sam Zell set the market in 2007 when he sold Equity Office to Blackstone Group for 39 Billion dollars. Blackstone immediately re-sold pieces of the portfolio to other investor groups that used excessive leverage to make purchases.  Sam did well.  Blackstone did well.  The next buyers, many of whom were wiped out in the 2008 financial crisis (see timeline).  No one had the crystal ball about just how bad things would get, but everyone did know those re-sold deals were some of the highest leveraged real estate deals ever.  This fact didn't stop investors from pursuing them or banks from lending.

Corruption (theft, graft, payoffs)

Stuff happens- these things sometimes happen by design.  (after all, the poor investor will always be with us).  Thieves and people that excel at underhanded dealings abound.  Addressing this sometimes requires forensic accounting, other times updated security protocols, and modern-day common sense.  The most straightforward advice is to trust but verify - and have competent counsel!

Plans fail for lack of counsel.  But with many advisors, they succeed.  Proverbs 15:22

Competent counsel means having a quality team of professionals around you concerning your real estate business.  In my humble view, the dumbest people in the world are those that know everything.  They don't need help, a hand up, advice, or guidance- ever.  God bless them.  I want multiple sets of eyes on any document I sign - before I sign it. The best people to have around you are honest reporters who will tell you their honest, professional opinion, whether or not it aligns with your reality.  I want a quality attorney drafting documents with oversight from a senior partner at the firm.  These are simple safeguards that can assist investors in avoiding other people that are out to do wrong.

Inattention to detail

Auto accidents and bad things on property both occur based on negligence and carelessness.  We often refer to this as taking your eye off the ball.

Example: A man that owned several dozen homes called me in distress.  He was selling one house at a premium.  It was in escrow and three days from closing.  Now, he didn't want to sell.  Well, why the heck not?  He said the house in escrow was one he was thinking about keeping for retirement. Well, this is an excellent time to remember that!  He said, "I just forgot until now."  At this point, the bottom line was that he could write a check to keep his house or go through with the sale and get a check at closing. This example tells the story of buying-and-selling, getting in the way of a longer-term strategy.

Over-confidence in real estate investments

Heed the advice of Napoleon, a man known for his military genius.

“You don't reason with intellectuals. You shoot them.”

Regardless of your reasoning and confidence, if the decision (to buy/sell/hold) is not your decision to make, then perhaps it is better to keep your opinion to yourself.  If it is not your money at risk, it is not always necessary for you to express an opinion.  It is better to keep friends and family from avoiding you all the time - outside of matters in real estate. Most of us get along in the world without sharing what's on our minds to passing strangers for the sake of just having something to say. If that weren't true, my daughter would have a continuous stream of consciousness about my fashion choices - but it's just not that important.

Considering equity as liquidity is a presumption.

Presumed Liquidity

Equity is a gift, not right (this is an ethereal statement).  Rental property of size, even in a "hot" market, can take months to sell.  That's one of the misnomers about multifamily; that although it is the most liquid class of commercial real estate assets outside of single-family homes, the timing of a specific sale is difficult to gauge, nor can you rely on a date.  Please note with extreme caution that considering equity as liquidity is a presumption until a liquidity event occurs.

Many of these seven sins rest on false expectations. Presumption killed the cat.  Another quote from Napoleon:

"If you wish to be a success in the world, promise everything, deliver nothing."

We are accustom to politicians delivering half-truths, yet they are not the only ones to stand in front of a room of people or look at you eye-to-eye to share false promises.  Best to keep your own counsel along with that of those you trust.  Regarding new acquaintances, time will tell.

John Wilhoit is the author of the best-selling book on rent roll analysis: How to Read and Rent Roll. See also the companion guide to measuring the quality of rental income: Rent Roll Triangle.  Find JW's Podcast here.

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