Real estate investing is not easy, but there is a huge amount of real estate investors who never buy a house or lose money when they buy a rental. Many investors are scared to fail when they hear so many nightmares about bad tenants, and investors who lost money. That fear of failure prevents them from ever investing in real estate and seeing the wonderful benefits rental properties can have.
It is okay to be a little scared when investing large sums of money into a rental property. Being scared is good if you use that emotion to your benefit. You want to make sure you have done your research on your market, on your returns and what kind of property you want. Once you have educated yourself about what a good deal is, you have to be able to pull the trigger when you find that good deal. But why do so many real estate investors never buy a house and why do you hear so many stories about bad rental properties?
How do real estate investors fail?
I hate the word fail! I don’t like to ever use it, because fail means you gave up. Many people have set backs, they lose money, things don’t go as planned or they change course. That doesn’t meant they failed. I have many goals that I set every year and I don’t reach all of them. In fact I set my goals so high that it is likely I will not reach many of them. Setting goals high helps me achieve more and keep working hard to accomplish them. Do I consider myself a failure because I didn’t reach those goals? No. I look at how much farther I got because I had goals and how I can improve things to reach those goals in the future. Sometimes I realize a goal was unrealistic or wasn’t worth my time and effort so I change it.
My point is that you can only fail at investing in real estate if you never try or you give up once you do try. Most people don’t do things perfectly the first time they try and it takes experience and practice to become proficient. A lot of real estate investors get stuck in the education phase and never buy a property. You can’t succeed if you never play the game. Other investors end up accidentally owning a rental property or lose money on their first flip and give up. They proclaim real estate is a horrible investment and they will never do it again. If you gave up at everything that you weren’t successful at right away you wouldn’t be able to walk, talk, read, drive or basically do anything.
In this article I am going to talk about why real estate investors never end up buying and why some investors lose money on properties. If you are one of those investors who lost money, learned how to do it better and kept going, you are not a failure. That is how many of the most successful people made it big. When they hit roadblocks they kept going or looked for another route until they made it.
Why are there so many stories about people losing money on rental properties?
I think most of us who have ever expressed interest in buying rentals to our friends or family have encountered negativity. Someone always seems to know a cousin, uncle or long-lost friend that lost their entire life savings on rental properties. I am a real estate agent and I even had other Realtors tell me how bad of an investment real estate was when I started in the business.
The number one reason most people tell you real estate investing is a bad idea is they don’t understand it. Don’t assume real estate agents, your lender know about real estate investing either. Most agents never invest in real estate and don’t understand what is a good investment. Before you base major financial decisions on advice you get, make sure the advice you are getting is good. Think about this when someone tells you how bad real estate investing is.
- The person telling you how bad real estate is has probably never invested themselves and are re-telling stories of people they know, which may or may not be accurate.
- There are many types of real estate investing. Someone hears a bad story about a flip, or a partnership and they associate that story with every type of investment even though the two are completely unrelated.
- If you hear a story directly from someone who lost a lot money investing get the entire story. Most people who lose money in real estate did not know what they were doing or they took on huge risks to try to get rich quick. If you educate yourself about investing in real estate and follow certain guidelines it is hard to lose money.
- If you hear how horrible real estate investing is from people who are currently investing, why are they still doing it if it is so bad? There are a number of people who own rentals who will tell you they are a pain and not worth the trouble. So why do they still own them? Usually they are making money from them and they aren’t a big enough pain to give that up. Or they don’t want more competition and discourage others from buying.
I am not saying everyone who loses money in real estate did not know what they were doing or is trying to discourage the competition. It is entirely possible to lose money investing in real estate, even if you know what you are doing. I have lost money on fix and flips recently and I have flipped over 100 houses. If you are going to take the advice of people about your future, at least make sure you get the whole story and that it applies to your situation.
How can you fail to make money investing in real estate?
There are a lot of ways to lose money when you invest in real estate. The more education you get and the more work you do, the more likely you will be to make money instead of lose it. I have listed the most common reasons investors lose money on real estate.
- They don’t know the numbers: Real estate is all about the numbers. You have to know what your cash flow will be, how much money you need to invest and what your returns will be. You need to know how much in reserves to keep and how much you can afford. Most investors who lose money don’t look at the numbers close enough. They don’t consider all the costs when figuring returns on rentals and they don’t figure all the costs on flips. They also underestimate the time it takes to flip a house or make repairs. My biggest pet peeve is when people ask me if this is a good deal and they have not calculated any of the numbers yet. I had a blueprint student (we have mutually agreed to part ways) who was unhappy with my answers when he asked me if a rental property was a good deal. I asked him what the house would be worth after repairs, what the repairs would cost and what the rent would be. He didn’t know any of those numbers and was mad that I could not tell him if the house was a good deal! No one can do the work for you, you have to be able to run the numbers to be a successful real estate investor, although my cash flow calculator helps.
- They try to save money by doing work themselves: A lot of investors try to save money by managing properties themselves or repairing houses. They assume they will save money by renting homes, making repairs or managing the entire process. The biggest problem is most first time investors don’t know how to manage a property, they have full-time jobs and aren’t contractors. Picking good tenants takes time, you also have to stay on them to pay rent and visit the property to make sure they are taking care of it. Most horror stories come from investors who rented to the same tenant for 7 years and never drove by the house. If you think you can rehab a house by yourself on the weekends in a couple of weeks, think again. It is possible to save money doing things yourself, but make sure you have the time and are qualified to do the work.
- They invest assuming prices will increase: Most investors who lost a lot of money in the last housing crisis were over leveraged and assumed prices would continue to increase. I think we are seeing that same scenario take form in today’s market as well. It is hard to find good deals and houses that will cash flow. It is hard to find flips that will make money. When you start fudging the numbers to buy houses you are asking for trouble. When I buy rentals I make sure they have plenty of cash flow no matter what the market is doing and when I buy flips I assume I will sell it for what it is worth today, not what it might be worth in six months.
- They start investing on accident: Many people get their first rental property by turning a house they lived in, into a rental. They never intended to rent the house, they didn’t look at rental numbers before they bought, but circumstances caused them to move and rent the house out. Surprise the house was not a good rental, which should be no surprise because it was not intended to be a rental.
There are many more ways to lose money investing in real estate. But I only consider it a failure if you gave up and didn’t learn anything from your experience.
Why do people fail to ever invest in real estate?
Many people will lose money investing in real estate from the reasons listed above. Many more people will never invest in real estate at all, even though they know it is a great way to build wealth and they have every intention of doing it. What are the reasons people never get the ball rolling?
- No money: It takes money to invest in real estate, even with no money down loans. If you have no money it is very hard to invest in real estate or anything. If you have no money that doesn’t mean you can’t invest that means you need to get money! Either learn to save more money or make more money. I can pretty much guarantee there is someone out there is a much worse financial situation than you, who was able to save money and buy a house. It will take sacrifice and hard work, but believe me it is better than having no money the rest of your life.
- Analysis paralysis: Many investors educate themselves about everything, yet they never buy a property. Education is important, but after a certain point you will have enough knowledge and information to invest. Here is a great article I wrote on how to overcome analysis paralysis.
- Too much work: Most people aren’t willing to do the work it takes to successfully invest in real estate. It takes time to learn your market, find deals, get a team of professionals to help you and save money. Most people simply give up when they realize it won’t be easy.
- They get talked out of it: We have already discussed this, but many people listen to the naysayers and don’t invest because they think it is a bad investment. Don’t let someone else tell you the best way to invest your money. Figure it out for yourself.
Most aspiring investors never buy a property. They talk themselves out of it, it is too hard or they can’t get the money together. There are ways to invest with little money, there are many great people online talking about investing in real estate and if you aren’t willing to work hard at life you won’t get very far. If you want to invest in real estate, don’t let someone else decide you shouldn’t or a lack of money be an excuse. Get out there and do it.