Why Real Estate investors Fail
A. TO REACH THEIR GOALS.
B. TO PRODUCE ADEQUATE RETURNS FOR THE AMOUNT OF TIME AND MONEY INVESTED
1. Concentration on technique (lease option, subject to, foreclosure, etc.) rather than on property
Most investors new to real estate get mesmerized by a technique for acquiring control of real property and or a technique for turning a quick profit. These "techniques", often taught by "gurus" at $5,000 - $10,000 for training, workshops and tapes, emphasize no need for extended time and financial commitment (lease option, subject to) or emphasize quick turn profitability (foreclosures, flips, over financing). These are analogous to the technical or chart reading aspect of stock market investing; it doesn’t matter what property you find, just apply the technique.
The truth is that any of these techniques can be successfully utilized given the right set of circumstances. However, they are applicable in only a very small percentage of cases, and usually after an extended negotiation or as an afterthought to the property acquisition process. Successful real estate investors concentrate on the property itself rather than on a specific technique. This not only allows the investor to concentrate directly on where most profitability resides, but also opens a much wider array of potential "deals" for the investor to consider. Further, the investor can concentrate on the much more reliable profitability formula of "adding value", rather than on the more suspect and ethically questionable formula of finding a naïve individual to work the other side of the real property transaction.
2. Plan on doing many deals each with a small amount of profit rather than a few deals each with substantial profit
Many investors both experienced as well as new are thrilled with a small (under $10,000) profit on each deal. Since unexpected expenses always seem to creep up when least expected in real estate investing, the actual profitability of these transactions range from half the expected profit to no profit. In order for the investor to earn enough income to warrant the time commitment, monetary commitment and risk involved, he would have to participate in a large number of deals annually. And since it always takes many negotiations to produce a single deal, and many property inspections to find a single property worth negotiating on, real estate investment will become a full time real estate business. To be sure, there are people who successfully play the low profit high numbers game; most Homevestor franchisees come to mind. But if working 70 plus hour weeks and buying, rehabbing and selling 50 plus properties per year sounds like a worse life than the corporate world you’re trying to leave, you probably want to find a different approach.
In my many years investing in real estate, financing real estate ventures, and observing successful real estate investors, I have come to the conclusion that participating in a small number of highly profitable transactions no only produces more monetary success but also leads to a much more leisurely, less stressful and more satisfying experience. I personally don’t believe any serious investor need look at any transaction with less than a $50,000 profit, with the goal of eventually only considering deals with a $100,000 plus profitability. If you don’t think these kind of deals are available, then read 3. Below.
3. Working in a crowded arena (single family homes) rather than an area with less competition and more opportunity (commercial)
From real estate investment seminars to real estate investment clubs to the proliferation of how to real estate books for sale, one would think that the single family home is the only property type available. And with the tens of thousands of new real estate investors as well as the invent and expansion of the franchised rehab businesses, the single family home as a real estate investment has become a very competitive and crowded field. Whereas just five years ago a homeowner needing to sell his home had very few and limited options if the home needed major repair, he now has a much larger market demand to sell into. The homeowner can sell to a much larger choice of investors interested in purchasing his home, he can obtain refinancing money to repair his home even with credit scores so low they would not have even been considered five years ago, or he can auction his property and probably receive a cash offer at fair market value. All this has made finding a below market priced single family home investment like finding the proverbial needle in a haystack.
Rather than competing in the crowded and overly competitive single family home residential market, with its limited profit potential and heavy time commitment, real estate investors would have geometrically increased chances for success if they spent the same time and energy learning about the various areas of commercial real estate. Not only is this field significantly less crowded and significantly less competitive, but the real estate investor is able to earn significant returns on far fewer transactions. To be sure, there are tens if not hundreds of types of commercial properties and transactions; the successful real estate investor will educate himself with a good overview and then decide on a area of concentration. Rather than waste time fighting for the left over scraps in the single family residential market, the investor can be breathing the rarefied of the commercial real estate market.
4. Having no sustainable plan
"I want to make a lot of money" is not a sustainable business plan. "I want to specialize in foreclosures, lease options, and subject to" is not a sustainable business plan. "I buy property for cash or terms" is not a sustainable business plan. Enough said. If you don’t know how to develop a workable plan for real estate investing buy a book on business plans, take a small business administration course, or better yet attend my seminars and workshops.
5. Trying to do deals with no equity contribution
Yes it’s possible to purchase real estate with no money. Yes it’s possible to flip properties for large profit with no investment. Yes it’s possible to option property for $100. That being said, it’s infinitely easier to successfully participate in real estate transactions when you as a real estate investor have an equity contribution in the deal. When you put some money in a deal three great things begin to happen. Conventional lenders become interested in financing your transaction and 20 % hard money or 30 % equity share becomes 6 % conventional financing. Sellers, especially institutional sellers, take you seriously and are willing to sell their property at large discounts. And outside investors become attracted to your deal syndication and limited partnerships. Life becomes easier and much more profitable.
I think I should point out that this is one person's business plan and that this plan is not necessarily for you. There are many ways to make money in real estate and many ways to be sucessful.
Many RE investors fail but many also suceed. GOOD LUCK
Don,
Your conventional way of thinking is not the only answer to making big money investing if you know how to do it creatively. What I teach using the Subject To method is you average $25K a deal, with using U-Haul money, which is $10 -$1000 dollars out of your pocket to purchase a property.
If you spend time reading some of the posts here you will find that the majority of the members here do not have the money available or high credit scores to pursue commercial properties the way you suggest. Even if they did why use your own money and credit when they do not have to.
I have students doing 1 deal a month and some doing up to 10 deals a month, using a no credit check and very little money out of their pocket philosophy. You can multiply the number of deals times $25K to figure what creative real estate investing can and does offer to the creative investor.
I have purchased motels, apartment complexes, commercial buildings, etc. using the Subject To method. It is not something I recommend to someone just starting out the creative investing way, but as they become familiar with the method, they can purchase any type of property creatively.
In other words you don’t need a hard money lender or any lender as a matter of fact to do high rate of return real estate investing deals, that is if you know how to do it.
John $Cash$ Locke
Creative Private Investor
Don, I'm a loan officer looking into becoming an investor on the side and I've always wanted to get into commercial. You've mentioned you had seminars and workshops. Do you have any coming up and how much does it cost. Also I'm happy with the company I work for so please don't try to recruit me as a loan officer for your company. P. S. What state are you in and have you heard of Interbay Funding?
John
Speaks a truth. The most important thing after learning the various methods is to really get into the semi art form called "Transaction." That is the essence.
I fail about once out of five. Having failed at a recent transaction thru failure to fully document a lease option extending back some ten years, I am rather sensitive at the present time to proper execution of supportve documentation. As a licensed Real Estate Broker I should have known better Therefore: Study the tech and then into Transaction.
Cheers Lucius
I'd love to learn the creative method that you refer to in your article. How can I?
Frank
Don, how are you defining "commercial" and "single family residential" real estate, respectively?
Nancy
Don, what state are you in and also you've mentioned you are have seminars and workshops (how much and when)
Susan,
Glad to meet you.
Take a deep breath and relax, I realize how excited you are over this article, as it prompted you to mention the workshops and seminars each time in your first two posts at this site.
John $Cash$ Locke
When, where, and how much are your workshops that educate about commercial real estate investing?
Dear Don,
I enjoyed your article very much. You make good sense and the games played in Commercial and Manufacturing properties are not so personal and present. I much prefer dealing in this type of property. I think one of the most fun things I ever did was purchase a newly erected industrial mini park that was suffering the usual birthing pains which seem to accompany all such constructions where there is not proper pre leasing.
In that instant the nice developers had fallen into the hands of heavy money investors, who in exchange for cash at end of project stuck the preverbal oar into and beyond the oarlock.
We purchased by creating a rather large PMTD which we helped the Seller apothicate at his bank. We converted the deveopment into what it should have been to begin with a full Latino mini market with small businesses in full residence and supportive to the central market activity. I think this was the first such business which offered to send a mini bus to your residenc if you wanted to shop.
The colors were garish, the people wonderful and the the food out of this world. Best Tapias anywhere. Of course in the smaller business operated out of stands we collected rents on a weekly basis.
Best part is we eliminated the high interest goniff type lending created at time of completion. Learned a great lesson. Yes you can operate with limited capital but you must properly evaluate the social and ethic realities. It taught me a lot.
As I have said before I work on the theory of five wins to every failure. I have made booboos and I still do. You must ascept the fact that you are not perfect or all seeing. I do not asume to compete with the deities but then I hate being nailed up just to prove a point.
Cheers Lucius
I would like to know about the classes that you teach on commercial real estate investing.
Frank
John,
i was hoping that maybe you could email me i would love to talk with you more about option purchasing homes...
you can email me @ **Please See My Profile** />
Thanks
Kristian
I am an architectural intern ready to start taking my licensing exam here pretty soon. Naturally, I would be more interested in the commercial side of things, but have started my creative financing endeavors with residential properties. Any suggestions on how I could get up to speed on the commercial properties.
Regards,
Gene
Great article:
You must be willing to work!
You should take action and learn through a guru or program in an area of investing you have interest in, as knowledge will give you more results.
If you bought a book, course or program and have results, yet another program, course or book will give you more success.
The bottom line is YOU! Not a program, courses or book but YOU!
Investing in real estate is not nearly as easy as it looks
“Make sure you have the time to do it”
There has never been a cookie-cutter method in real estate. What works is getting out into the market, investing the time to learn about the business, not neglecting your family or day job, learning from your mistakes or better yet from others, getting advice from other investors as you move forward. Slowly, steadily and not particularly wealthy.
I got some bad news for you Real Estate is not get rich overnight, but it can build long-term wealth if you work at it.