New investor? 5 Traps to avoid
It’s easy to fail as a first-time real estate investor. Trust me, I’ve been there. But with a little Insider Foresight this does not have to happen to you.
Here are the five biggest traps faced by new real estate investors, and proven strategies to avoid them–
Smart investors learn from others’ mistakes
As teacher and “chief coach” of the Chicago-based Urban Rehabber Program™, I find too many new investors join our program really worried by what they believe to be the great risks involved in real estate investing.
And there are others, who come licking their wounds from “unfortunate” experiences. They are still recovering from deals that, for them at least, went badly. Both groups can really use a little Old Timer’s advice.
Lots of things can go wrong in real estate investing. But if we take a hard look at the major causes for investing failures big and small, a pattern soon emerges that we can learn from.
Truly successful entrepreneurs and investors are students of business and “best practices”. It is seldom a matter of mastery. We are always learning, always refining our systems.
Let’s take a look at the five major causes of problems with real estate investing. Address these, and you are well on your way to Success in your investing.
First, "Investor, what Are You Up To?"
One of the biggest problems I see time and again is new investors’ failure to view their interest in real estate investing as a Business Opportunity first of all. And, as a business opportunity ( promising rich rewards if done right ), they miss the fact the effort warrants real preparation.
If you approach the Small Business Administration (SBA) today for a loan to open a barbershop or beauty salon or muffler shop, the first requirement will be for you to submit a written Business Plan. How else to assess the prospects of your venture?
A decision to invest in real estate that may quickly involve tens if not hundreds of thousands of dollars deserves some respect! Purchasing and improving real estate involves the use of Real Money and, generally, substantial “OPM” (other people’s money).
So there’s your own cash at risk and generally even greater financial obligations to lenders or investors. As we say, at least in Chicago, “That ain’t beanbag!”
Why an Investing Business Plan?
￼Two important processes take place when you prepare a reality-based business plan. The first is a careful analysis of your (the entrepreneur’s) financial capacity and needs to accomplish the goals of your plan.
For many this analysis is a “reality check” on what a Real-World Venture will require to be successful. Your plan serves at minimum as a first look at the financial side of your whole initiative. But there’s more.
Done right, your business plan is not all numbers and spread sheets. There are important written narrative sections to be thought through and included as well. These sections will describe your intended market, competition, staffing or the “team” required or already in place, exit strategies, and so forth.
The important thing is, preparing your plan requires truly thinking through the many requirements of a successful venture. In many ways your plan is “visualization” of the venture as a whole, from beginning to–presumably–successful conclusion (else why do it at all?).
This is a very powerful first step for you. With your plan in hand – a written document on something more than the back of an envelope – your venture is no longer simply an expression of your “passion for real estate”, but a true Plan of Action based on realities at hand, not dreams or speculation. To be honest, going ahead without such a plan is a risk no one should take.
Issue: Investors relying on The Wrong Experts
What it takes to succeed as a real estate investor is too often under rated. We’ve all heard it: “Investing is easy. Everyone is doing it…” Sadly this is too often the tempting Siren Song of real estate brokers and itinerant “free real estate seminar” hacks, hustling their Secret Real Estate “Success Blueprint” at some suburban motel conference center.
1. It is never as simple as: (1) Buy the property,
2. Hire a contractor
3. Sell or rent it up
5. And 5. “Rinse and repeat”
Think of the motives of those saying that to you. Real estate agents want to make the sale. Regardless of their seemingly knowledgeable insistence on how little it will cost to fix, how simple the work will be, and the great price you will get for the property once completed, can you really trust this “information”? Your question must be: Have they done such a property or project themselves? Ever?
When a contractor gives you his initial estimate for work to be done, do you think it is his Best Price? Or is it the price he feels you will find attractive at this early date? The fact is he is quite confident the price will be “up for renegotiation” once the project is underway.
And then, of course, there’s always the relative or friend who owns a 2-flat (and knows all about it…). To have purchased something in the past may not compare at all with the project you are looking at.
Empty-handed Investor? –Going into your mission without a Team or Network in place
No matter how savvy, no investor goes far in his program without professional and industry-related advisors in hand.
Just for starters, your brother-in-law the divorce attorney may not be your best choice for handling your real estate deals. You need a qualified real estate attorney.
Have you connected with an architect who will be available, at reasonable cost, in the event you need help with permit drawings or second opinions on building structural issues or municipal code requirements? Likewise, if you don’t have an accountant now, you will need one by tax time, one who is particularly familiar with treatment of real estate assets and, ideally, small business tax issues.
These professionals, and perhaps a couple more, will make up Your Team. We are seldom successful going it alone. Such experts are comfortable with important yet specialized aspects of real estate investing and dealing (buying and selling, perhaps “flipping”). Get to know them early on. So they will be there when you need them.
On being the Investor 'Lone Ranger'– Or, how not to “sweat the small stuff...”
Finally, we have identified no one to whom you might turn for help “in the breach” for moral support. Real estate investing can be a lonely business.
The brokers, contractors and professionals we employ all have their place in your scenario. But each too has his or her personal agenda which may or may not extend to your day-to-day adventures or the inevitable mishaps (short of catastrophe).
When it comes to dealing with the day-to-day issues that come up, we all need one or more “fellow travelers”, others who share our real estate interests and, ideally, who are likewise directly involved in buying, fixing, selling–or whatever–as we are.
You need those few reliable souls who you can call upon–day or night–to lend a hand. Who will be there for you, as you will be for them. This will be your Network, those you call upon during good times–and the other kind as well.
Captive of your Contractor?
Working with contractors needs your special attention. Newcomers to real estate investing are generally told that, being new to the business, they are best advised to simply find a good general contractor and he (or she) will “take care of everything”.
There’s a problem with that advice for many a beginning investor: Our projects are seldom large or costly enough to attract truly qualified and reliable contractors. There’s just not enough money in the project to get their attention. So, we lower our sights–
What a general contractor does
Traditionally, general contractors (“GCs”) undertake almost complete responsibility for the construction process, subject to the terms of a written agreement with the owner investor.
The GC will hire and supervise the many specialized sub contractors required to complete the work–the carpenters, plumbers, electricians and more.
Importantly, the general contractor also “guarantees” that the work meets “industry standard” in quality and application.
In event of inadequate or improper work, it is the GC that should be responsible for correcting any problems and delivering the job as specified. It is a very important role, particularly for you as a layman-owner unfamiliar with construction technology and industry norms.
When things go wrong
Unfortunately problems often arise during the course of any construction-related project. Certain sub contractors may fail to perform. There may be unanticipated costs or changes to what is termed the “scope of work” to be performed. Budgets may prove inadequate or simply wrong, and more.
An ill-informed (or bad) choice of GC may result in unexplained delays, cost overruns and more. By any reasonable standard, we have to call it simple incompetence.
While such problems should be sorted out eventually, almost always there will be additional costs to you, the investor-owner, and delays in completion. It is generally not simply a matter of “getting someone else” to complete the work; to do so inevitably costs you more.
Meanwhile, your project may have shut down, or “gone dark”, while disputes are ironed out (hopefully without ending up in court).
There are no simple solutions to challenges relating to working with general contractors. Other than avoiding employing general contractors at all. Successful investors undertaking improvements to real estate will often choose to manage the project themselves. Not as general contractor but as “project manager”.
The Ultimate "DIY" Solution–
This is not as far fetched as it sounds. With rehabilitation (“rehab”) there are generally fewer trades involved than with new construction. The work involved may often be arguably “cosmetic” rather than complicated. Roof repairs, new siding or windows are specialty trades employing specialty contractors who will bid jobs competitively and, with good references, should require little oversight or supervision.
Once the work to be done is specified, plumbers and electricians are specialty trades that will bid their portion of the entire job without regard to the entire project. (Although they may seek to become the “general contractor” if they believe there is that opportunity.)
The point is that by retaining the role of selecting specific tradesmen or individual contractors, you are not passing control of the entire project to any single contracting entity (the so-called general contractor).
In the event of dispute with any single contractor or tradesman, your project as a whole progresses without major interruption while such issues are resolved.
In the end, it is a control issue: Control of your schedule, control over payments made to contractors, and control over the quality of the work. There will be missteps and cost overruns, but let such surprises be little ones, not the entire project budget (and prospect for profit).
There is a bit of a “learning curve” as one steps into the project manager role. But, that said, beginning with relatively simple projects and progressing over time to more complex rehabs, you will master the basics. One project at a time.
No Marketing Plan
Marketing involves communication, planning, networking and more
Finally, the most overlooked requirement for successful investing is need for a Marketing Plan.
For a truly savvy investor it is a truism: A decision to “get into real estate” is in fact a decision to get into "The Marketing Business"–while recognizing real estate is merely your product or service.
Basically, a marketing plan is “everything we will do on a day-to-day basis to promote our business”.
The sale or rental of your real estate is simply an event, hopefully a highlight, in your overall marketing effort. To assume that that important “high point” will take care of itself by assigning that activity to an agent is to once again place your outcomes in the hands of others (as with hiring a general contractor).
While your desired outcome may well happen eventually, will that sale or rental be timely? Will it satisfy your practical, ongoing need for cash flow in the context of your overall investing program?
When do you start marketing?
The day you decide to go into the business! When can you “let up”? Never!
Don’t be bashful!
It is important that you “become famous” in your market niche as soon as possible, to be visible and recognized in appropriate ways as a responsible real estate developer, reseller, investor or landlord. This will get you into the marketplace early on and, over time, bring you the referral business that will assure ongoing timely sales or rentals.
It may be pretty to say “our product or service will speak for us”. But in the real world no one will speak for you with the authority you yourself bring to the table. Your marketing plan is your opportunity to set the tone and quality of your message: That you do good work and that you are here to stay.
5 Strategies To Help You Succeed–
We have looked at five ways many new investors fail early on as real estate investors or as investor-entrepreneur. Indeed there may be more, but these top my list. Deal with these five key areas with positive preparation and action and you will succeed.
1. First of all: Treat real estate investing as a business, with a plan–preferably a written Business Plan–including your “plan of action”, budgets, projections and more.
2. Always be selective in who you consult in the early stages, seeking out true experts who will provide objective–not self-interested–advice.
3. Have your Professional Team and Personal Network in place even as you get underway. Once again, real estate investing, like any entrepreneurial effort, can be a lonely business. You will need an expert “team” on hand to support your efforts, and a personal network you can turn to that both shares your interests and cares about you as well. (You might call this your MasterMind Group.)
4. Be your own Project Manager. To the extent possible, take control of your projects without undue reliance on others to manage your outcomes.
5. And be your own Marketing Director. This is no place for “outsourcing” no matter how popular the concept. You may well hire sales agents, but they will be only one part of your ongoing program.
These five strategic elements are central to the Urban Rehabber Investing System and Investor Training Program. Each is important. In combination they are a powerful Blueprint for Success.
Learn from your missteps and build on your strengths. In the end it is you who will be responsible for your own success. The buck does stop with you.
Keep learning. You will get better.
Urban Rehabber Program™
It is estimated that Urban Rehabber members and investor students have invested in well over 2000 residential properties throughout the Chicago metropolitan area. Many of these homes required substantial rehabilitation (or "rehab").
By fostering entrepreneurship combined with skills unique to savvy real estate investing, the Urban Rehabber Program changes lives while improving communities.