How NOT to Invest In Real Estate!!

Lots of you guys! It's great here. So, when it comes to investing in real estate, just like anything else out there, there is a right way to do it too and a wrong way to do it. And since I have a bajillion videos on my channel already about exactly what you should be doing, let's flip this around and talk about what you should not be doing. So, with that said, these are the wrong ways to invest in real estate, and you should avoid doing this at all costs.

And again, even though I say this in pretty much every video, something as simple as just hitting that like button dramatically helps out the channel a lot. I've noticed that when it comes to the almighty YouTube algorithm, they tend to promote my videos a little bit more that have a bit more engagement. Something as simple as just gently tapping that like button helps out tremendously. So, with that said, thank you very much, and let's get into the video.

So, anyway, let's start here. Number one: one of the biggest mistakes I see people make when investing in real estate is not properly running the numbers. Here's what I typically see happen with a lot of newer investors: they go and start looking at real estate, and then all of a sudden they find a property that seems like a really good deal on paper. So they go ahead and buy it, thinking that there's a lot of upside potential. But then, unfortunately, what ends up happening is that they grossly underestimate the amount of repair the property needs and grossly overestimate the amount of rental income they can actually receive. Trust me when I say this: that this happens all the time.

First of all, anytime you invest in real estate, I will tell you from the very beginning, 100%, it is going over budget. I personally have done and seen enough renovations over the last decade to know that every single project is going to go over budget in some way or another. So, if you're planning a renovation and running the numbers based off the end value, just assume you're going to be spending anywhere from 25 to 30% higher on the renovation than you originally planned to.

I've seen it happen all the time where someone gets absolutely screwed from buying a property with a very thin margin for profit. Then all of a sudden, the renovation goes over budget, and then all of a sudden they're underwater on what their home is actually worth. There goes all of your profits and the entire reason you even bought the property in the first place.

Now, in addition to that, what's even worse is that many times listing agents will provide a projected rental income that is often hundreds of dollars a month higher than what the unit would actually ever rent for. The listing agent will usually assume the best possible scenario in the best possible rental market for the stupidest tenant who ends up overpaying hundreds of dollars higher for the unit, which, let's be real here, never happens. And they could legally get away with saying this by putting in the disclaimer in there that "buyer to independently verify all information, information deemed reliable but not guaranteed."

Now, any sophisticated, experienced real estate investor knows just to always ignore the projected rental income and to do all of the research themselves. But many new investors simply don't do this and just take it for its face value. Then, they get surprised when they can't get the prices that they thought they could, and the property is in cash flow, and then all of a sudden they're losing money. It's not a pretty sight.

This is why it's so important that you know how to properly evaluate a property, that you understand how much it's actually going to cost to repair, and you know how much you can realistically get in rent. Otherwise, you could be stuck with a property that costs you too much money to renovate, doesn't get the rent you thought it would, and all of a sudden you start losing money. That is not how you invest in real estate.

Now, the second mistake I see a lot of people making when it comes to investing in real estate is over-leveraging, and that just means they're taking on too much debt. Now, this can be totally okay if the person makes enough to cover the loan or if the loan is at a low enough interest rate, so it's not always a mistake. But it is a mistake if you take on too much debt on that property, and you're entirely reliant on the rental income or a strong real estate market to sustain those payments.

Who cares what happens when this goes wrong? Because you took out too much leverage, you have a much higher mortgage payment because you took out a larger loan. Unless you either have the income or the savings to sustain those payments, you can go broke very, very quickly in the event of a prolonged vacancy or a down real estate market. 2008 was a perfect example of this of everyone who took out more loan than they could afford and couldn't afford to ride out the drop in real estate prices.

Now, usually, the more equity you have in a property, the lower the monthly payments you have, and the lower the monthly payment you have, the easier it is for that property to cash flow. This is basically your safety net when it comes to investing in real estate. This is why I typically recommend people put down anywhere from 15 to 25% down anytime you buy a property, and this is pretty much your buffer. But if you over-leveraged yourself and the market drops, and you start losing cash flow, you can start losing a lot of money very, very quickly.

And if you can't afford the property without a renter and you don't have the savings to continue making those payments and you have no equity in the property, you're going to be foreclosed very, very quickly. And even worse is that if you're underwater on a property, which means that you owe more on it than what it's worth, which is very common for people who put very little money down, if the market drops, what's going to end up happening is that in order to sell the property, you actually need to come out of pocket just to get rid of it. And if you don't have that money, that just means that it's gone.

So, like I said, put down about 15 to 25% anytime you buy a property. This is your buffer, and this is your safety net in case something happens. And also, it's going to be slightly easier for the property to cash flow with the more money you put down. This just means there's more room for things to go wrong, and you still come out okay.

So, the third thing you should never do when investing in real estate on cash-flowing properties is to take out a short-term loan or get an adjustable-rate mortgage. This just means your loan interest rate is fixed for the initial term of that loan, and then after that, it readjusts to whatever the market rates are, which chances are is going to be a lot higher than they are today.

Then, every single year after that, your loan is going to readjust at whatever the current market interest rate is, which, like we all know, and like I said, is probably going to be way more expensive as the Fed continues to increase interest rates. The problem that I see with this is that the low interest rate you get right now on an adjustable-rate mortgage is really just a teaser interest rate for which the loan will inevitably just end up going up in price. This just means your payments over time are going to end up becoming dramatically more expensive.

This is largely what ended up causing the 2008 real estate crash: people were buying properties they couldn't afford with too much leverage on an adjustable-rate mortgage. Then, what happened is that eventually, the teaser interest rate readjusted to current market interest rates, which were a lot higher than what they originally locked in at. All of a sudden, they couldn't afford to make the payments anymore. The real estate values dropped, and many people lost their home to foreclosure.

So, here's why I recommend not taking out a short-term loan: because we're coming off right now historically low interest rates. From the way I see it, interest rates are never going to be as low as what we've seen over the last few years, and they're only going to be going up over time. Now, because of this, I feel like the safest option that you can take is by getting a 30-year mortgage on a fixed interest rate. Then risk paying more money on an adjustable-rate mortgage seven or ten years from now.

And as you get more experienced and start accumulating more properties and really know what you're doing, then by all means, go ahead and take out five or seven or ten-year adjustable-rate mortgages. But I do not recommend this for anyone just starting or for anyone who has a very long-term outlook on rental property. Chances are, it's better to get the fixed rate now.

The fourth mistake here, and I have definitely been very guilty of this one, is picking a bad tenant. This one can absolutely ruin you if you pick badly. I'm going to give you two examples for me. I ended up making the mistake of renting out my first ever property to the first tenant who called me on that property. Basically, it came down that at the time, I was desperate for money. I was absolutely broke. I had zero dollars in my bank account; I owed a contractor about $2,000 for a renovation that went slightly over budget.

At this point, I was desperate for anybody just to rent my place so I can go and pay off those bills and finally start getting some cash flow. So, while the story short, this guy ends up coming around. I end up not doing any research on him or his girlfriend. I trust them entirely, and what do they do? They end up growing weed in the garage. Now, because of that, I wasn't able to do a cash-out refinance on the property to go and invest in other real estate.

The tenant then stops paying his rent, and then I end up going through a three-month eviction process trying to get him out. By the time I got him out, it cost me about four months of lost rent, about $8,000 of damages, and a few thousand dollars in eviction fees. That was basically my entire year's worth of rent that was gone, flushed down the drain because I picked a tenant now. I take 100% of the blame for that. That was entirely my fault for not doing the proper research, and how they just waited for a better tenant, none of that would have happened.

But you know, lesson learned. I've also seen firsthand another story happen to someone in 2009. It was a real estate developer who ended up building a very expensive property, couldn't afford to sell it again because he owed more on the home than when it was worth. So, he decided instead to rent it out, and he was entirely reliant on that rental income to make the payments.

So, what happens is that the tenant decides to move in the property, and then shortly afterward stops paying his rent. The owner then gets behind on his payments to the bank, and because of that, the tenant figured out that there's a weird loophole that if the owner wasn't making the payments to the bank, the tenant could stop paying the rent as well.

The owner tried to get the tenant out; the tenant then filed for bankruptcy so that he could extend their stay. Long story short, the owner ended up losing that property to foreclosure because the tenant didn't want to make the payments because the tenant wanted to live there rent-free. It ended up taking them two years to get this guy out of the property because he was a very smart person, was an attorney, knew all the ins and outs of real estate law, and basically did everything in his power to stay there entirely for free. The owner ended up losing the property to the bank.

Now, my entire point with that is this: you should be very, very selective about whatever tenant you choose, and don't necessarily pick the tenant who's paying the most amount of money either. A good tenant is always worth taking less money. Get a tenant you know you're not going to have any issues with, who's going to stay long-term, who's going to pay on time, who's going to be resourceful. That by itself is worth not getting a little bit more money and dealing with a ton of headache.

For example, when I was renting out my last duplex, I had an application come in that was $300 a month higher than my other highest offer. I turned them down because I felt that the lower-priced offer would be a benefit, and so far, the lower-priced offer has been absolutely one of the easiest tenants I've ever worked with. To me, that's absolutely worth the difference of $300 a month.

So, with that said, take your time, pick good tenants, do proper screening, and I personally use the web mysmartmove.com. It does a background search, it pulls their credit, it pulls basically everything you need. MySmartMove.com is highly recommended. It's what I personally use myself. And trust me on this one: if you rush this process, you will end up making a very costly mistake. It's a lot cheaper for you to keep a place empty to find the right tenant than to try to rent it out immediately to a person who might not be the best fit. Just trust me on that one.

The fifth mistake I see people making when investing in real estate is by simply overpaying for the property. Oftentimes, what happens is that the buyer gets very excited about buying the property or gets emotionally invested in the property for fear of losing it. And when that happens, all logic just goes out the window. Many buyers will also get caught up in the excitement and the ego of a bidding war and trying to beat out all the other buyers.

When this happens, again, you usually will end up overpaying, and that just means less profit for you at the end of the day. When it comes to investing in real estate, your profit is very much made at the time you purchase the property. You could very easily find a deal with $50,000 or $100,000 of upside immediately at the time of purchase, and that for you is pure profit. Otherwise, you can end up overpaying for the property, which at that point, there could either be zero upside potential or, even worse, you end up losing money than what it's actually worth.

Now, when it comes to buying a property, it's so important that you understand what that deal is worth, if there is any upside, how much upside there is, and what you're willing to pay for it. When you find all of that out, just stick with that number. Now, obviously, when it comes to this, don't get too hung up on the price and still have a little bit of flexibility. Don't be too stubborn. If the perfect deal comes up and it's like a few thousand dollars more than what you had anticipated, it's not the end of the world.

So, still have a bit of flexibility, just be reasonable with it, and don't grossly overpay for something. Now, finally, number six: the last mistake I see people making when it comes to investing in real estate is not having enough cash saved up as a reserve anytime they're investing. Anytime you buy a property, it's so important that you have enough money saved up to renovate it plus 30% because we all know it's going over budget, and enough to sustain the property for all the mortgage payments and expenses over the next three to six months.

You need to keep these reserves on the sidelines, saved up at all times. Just trust me on this one, otherwise, you're gonna run into a situation where all of a sudden, out of nowhere, a $2,300 auto repair comes up. Then, all of a sudden, the tenant decides they want to leave, and then that's a $2,000 repair on top of that to get the unit back in rental condition. Then, it sits empty for another month while you then try to rent it out again. All of a sudden, you're over five grand in the hole. That has to come out of somewhere, and that's coming out of your pocketbook if you don't already have money saved up to account for this.

And that might seem excessive, by the way, but I've gotta say it happens all the time. All of those examples I just gave have happened to me, so I know firsthand this is just what happens, and it's just a part of business. One of the easiest ways to just soften the blow of all of this is to account for this ahead of time and keep a healthy reserve so that you don't really feel it anytime this happens.

Now, what I personally do that works really well for me is that I have a separate checking account for every single property that I have with a bank online. They're phenomenal. Now, when it comes to this, what I end up doing is always keeping three to four months of expenses in that checking account at all times for anything that happens to come up. Then, all of a sudden, when that checking account exceeds about four months' worth of expenses, I just take that extra money and put it into my personal account. That's it. It's super easy.

That way, if something ever comes up, I have enough money already in the checking account to cover it, so I don't even think about it whatsoever. And I highly recommend that you end up doing the same thing as well. Otherwise, you could come into a situation where all of a sudden something comes up, you don't have the money set aside for it, you end up putting it on a credit card, you end up paying interest on that credit card, and there's nothing I hate more than paying interest on a credit card, as all of you know.

So definitely avoid doing that. Keep it simple, keep some cash reserves on the side, and then it doesn't really matter when anything comes up, and you're going to be safe from coming out of pocket. So, as always, you guys, thank you so much for watching. I really appreciate it. If you made it to this point and you haven't already hit the like button, subscribed, or commented anything down below for the YouTube algorithm, it really does help out a lot. So feel free to do that.

Also, feel free to add me on Instagram. I post pretty much daily, so if you want to be a part of it there, feel free to add me there. Finally, I have a private Facebook group in the description for anyone who's interested in real estate, real estate investing, real estate agent thing—anything real estate, really. The link to that is in the description, so feel free to join that. We have now over eleven thousand members, which is amazing. So feel free to add yourself to that. Thank you again for watching, and until next time.