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Oct. 18, 2022

71: 7 Mistakes To Avoid When Buying Your First Investment Property

71: 7 Mistakes To Avoid When Buying Your First Investment Property

As someone who has 20+ years of real estate experience, Alan Corey has made and seen every mistake imaginable. Real estate can change your financial future, but don't let these 7 common mistakes slow you down on your investing path.  In today's...


As someone who has 20+ years of real estate experience, Alan Corey has made and seen every mistake imagineable. Real estate can change your financial future, but don't let these 7 common mistakes slow you down on your investing path. 

In today's episode, you'll hear about the most common mistakes new real estate investors make and how to avoid them. After listening to this episode, you'll have the tools you need to become a Real Estate Maximalist. 

Follow me on Twitter! https://twitter.com/RealEstateMaxi

Join the community and send your questions to Alan Corey at https://www.facebook.com/groups/realestatemaxi 

Learn more about leaving your 9-5 through real estate at www.realestatemaxi.com  

Download my free e-book at realestatemaxi.com/mistakes 

 

Read the transcript here:

Welcome, Real Estate Maxis. This episode we're gonna cover seven big mistakes that real estate investors make on their first property. If you're a long time listener, you probably heard me talk about these things before. I wanted to highlight the seven mistakes that most people make their first time investing.

Things that I've learned by making these mistakes, and I wanna share them with you. It's also a free ebook right now for anyone who goes to realestatemaxi.com, which is my Twitter profile. In the link, you can download this free ebook or go to realestatemaxi.com/mistakes. Let's get started.

Welcome to Real Estate Maximalist. I'm your host, Alan Corey. I have published three books and an ebook all about real estate investing and how to maximize your money and change your financial future. I have over 300 doors. I started with a $99,000 one bedroom condo, and I've turned that into over 50 million dollars assets under management, and I am constantly buying more.

And as a realtor, I've sold over 400 homes. But I just find it easier to call myself a real estate maximalist. All right, so let's get into this. Seven Mistakes to avoid when buying your first investment property to set you up for long term success. Number one, buying a house you wanna live in. This is a constant reframe on my podcast

I know, but it's super important. This is where all newbies get stuck. They wanna buy a house, they wanna live. They don't wanna buy a house that is a spreadsheet decision. It's a lifestyle decision for them. So don't spend extra money knocking out the ceiling so that you can have a pitched ceiling because it looks nicer.

Your tenants aren't gonna pay you extra for that, right? Don't spend extra for a high end hot tub that you're never gonna use. Your tenants don't expect to be renting in a place that has a hot tub, right? Things like that is really the differentiator. I know you want those things, but you're not gonna be living in this house.

Instead, budget for the tenant base, the rental price, the neighborhood, and make it all a spreadsheet decision. I will all day put in an upgrade. Let's say a property doesn't have laundry, all day I'd spend $3,000 to put in laundry if it's gonna make me an extra 300 bucks a month, right? Like it's that sort of math.

What do I need to put in this property and what sort of return? Can I charge higher rent to pay for that upgrade? If the answer is yes, then I do it. The answer is no, and I can't justify it. Then I don't do it. And it could come down to timing, possibly in the future, making that upgrade makes sense when rental incomes in the neighborhoods have bumped up or the demand is there for something, but I'm not just gonna do it because I would've wanted that in the house. So that's number one mistake to avoid. Don't buy a house you wanna live in. Buy a house that is a home run on a spreadsheet. All right? Not a home run in your heart and in your lifestyle decisions. Number two, not having a pivot or backup plan. I never buy a property where the only way I'm gonna make money is if Plan A works for me.

 If Plan A is a short term rental, what if they change the laws on me? Right? I know the money's really good right now. But the money's good because there's a risk associated. Everything that's riskier typically means you're gonna make more money. So you have to have a pivot backup plan. So get the money while you can, go get it,

I support that short term, but if things change, what is your pivot? So if I'm buying a short term rental, can I pivot into a long term rental? If so, does that long term rental tenant cover all my expenses still makes a cash flow? I understand it's not gonna cash flow as much, but at least I'm not gonna be losing money if something out of my control, some regulation, some rule, maybe I get kicked off an Airbnb platform because a tenant made something up bad about me, whatever.

I wanna make sure that I can pivot and still make money on this property and you can keep going here, right? So let's say after the long term tenant situation works out and plays its way out where I don't wanna be a long term rental landlord. Can I renovate this property and sell it for more? Can I instantly sell the property and I've made a profit on it?

In the meantime, can I add an addition to it? Can I reconfigure it? I, I want to have at least one backup plan or pivot, but it sometimes a lot of my properties will have 2, 3, 4 pivots, just so I know. Hey, worst, worst case scenario, if I have to do option D, I can get out and not lose any money. If you're buying in a high interest rate market right now, you know, one of my pivots could be, Hey, in three years if interest rates are lower,

I could refinance it and then it would make sense for a long term tenant. Right? Or if the interest rates are higher. I can't refinance it, but would I be able to sell this in a certain market? Could I live here? Could I house hack? Could I rent it out as office space or an event space? Is there some other pivot that I could do to cover me in case the situations change?

So that's number two mistake is not having a backup plan. What's important is if you have a backup plan, that means you have a plan A, you know, you should never buy a house without any plan. So if I'm telling you, you have to have a backup plan first. You gotta have a plan A, and then have a plan B. So that'll make sure that you stay out of some hot water.

Three, trying to time the market. This is a mistake every new investor makes. I talk to them every single day, and this is the conversation I have with them. Hey, are you looking to buy real estate? Uh, I'm going to, Yeah. Yeah. I, I know I need to invest real estate and I'm going to do it. But I'm just gonna wait until the interest rates go back down.

And I'm like, Okay, what if they don't go back down? Right? What's gonna happen? Well then it's, it's good that I didn't buy real estate and that's not the way I look at it cuz I'm saying, Hey, go buy real estate now if it's cash flowing now in today's interest rate market, then you can refinance and make it cash flow even better, right?

Marry the property date the rate. Let's say the interest rates never come back down. You're locking in right now at 7% and it's making you money. And then the interest rates go to 8%, 9%, 10%, 11%, 12%, and you can never refinance. Guess what? Congratulations. You bought in and locked in at 7%, which was now a low for the next five years you got in at 7%.

You look like a genius. Right? Either way, you're trying to time the market and I'm just saying you buy now, if the rates go down, great. You made extra money. If the rates go up, great, you locked in before the rates got even worse. So I don't care what the interest rates are, I don't monitor it. I care cuz I wanna know what my payments are and I will make an offer based on my interest rate right?

And how much it's gonna cost me as long as it's cash flowing positively, I'll move forward with my investments. I can always hopefully have an interest rate that's lower and refinance in the future. I'm not banking on it cause interest rates could get worse and then at least I locked in while things were low and still profiting.

So that's mistake number three. 

Number four, not being optimistic. I've had so many investors not pull a trigger on the property cuz they worried about, obsessed about every worst case scenario that could possibly happen instead of obsessing and worrying about every upside that could happen that they're gonna miss out on by not buying this property.

So I've had a client say, Hey, it's near a creek. What if it floods? Okay, let's walk down that path. It's not in a flood zone. So it would have to be a historic flood that FEMA didn't recognize. And yes, that has happened before and you can also get flood insurance in this situation. So if you really, really wanna pay flood insurance, it's really not that expensive, go ahead and get it.

And I just couldn't get 'em over that hump because there was a creek there and someone put in their head it could flood and you're gonna lose all your money. And that's what insurance for is protect you against these major things. I've had a situation where someone was worried that it had gas appliances and what if the tenant starts a fire because they don't know how to use it.

And you can't avest around people, Right? When I worked in software, um, you would try to make your software idiot-proof, and no matter what you did, they always built a better idiot, right? You so it, it's the same sort of thing, even if you had all electric appliances. A tenant could light fireworks in your property.

They could still start a fire or they could try to bring firewood logs and put 'em on the couch and think that it's a fireplace. It shouldn't even be a worry, but I understand it's a worry. But again, it comes back to insurance. Most worries are covered by insurance and get extra insurance if you, if these are sort of worries that you have.

And that comes to being optimistic. Let's assume, let's be optimistic that glass is half full, Your tenants are gonna have more common sense than they don't, that they are not gonna start fires and it's going to be completely fine. Okay? Another worry for a lot of new investors is, Hey, I'm buying a property and the appliances are old and need to be replaced soon.

And I remind them, I say, Well, how, What's your plan with this property? And they'll tell me, Hey, I wanna hold this for 30 years. So if that's your answer, you're gonna hold something for 30 years and the lifespan of appliances is 15 years, no matter what, you're gonna have to replace them twice. So I don't care if I've gotta replace them in year one or year two because my goal is to hold this for 30 years and I've already budgeted that I'm gonna have to replace them twice over the next 30 years.

That's part of my 10% maintenance, right? You can actually add a 5% CapEx or 10% expense fee each month on your properties that you just put in for these purchases, but you're gonna have to replace 'em anyway. I really don't care whether I replace 'em in year one or year 15 or year seven. I've already budgeted to replace these things.

I just wanna be optimistic, Hey, I think I'll get extra five years from 'em, right? I've had properties where I bought an AC and they've been three years old and I've had to replace them. They still can fall apart, and I've had to replace those before. I've worked with new investors who were not optimistic about the neighbors.

They didn't like the neighbor's barking dog or the condition of the neighbor's yard where they had a bunch of, burned out cars in the backyard and they didn't wanna buy the property here. And again, that, that sort of, uh, problem number one, is this a house you wanna live in or not? Like, who knows? Your tenants might be coming from a worse situation and two, Any house you buy, you have no control over the neighbors.

So I could go find you a home that it's the exact same number, it's exact same metrics, and there's a nice neighbor next door. But what if he moves out the next day and that same neighbor sells his house and moves into this house? Like you can't control these things. You just have to be optimistic. Hey, this is life.

This is what happens. You own this property. I don't own the next door neighbor's property. Good for them. They get to do what with their property that they want to do and you should be able to do with yours. But I can't ever control who's gonna be moving in next door, so I don't even let it bother me. You gotta be optimistic.

So that list goes on and on, but that's, that's number four issue I see quite frequently with, uh, newer investors. Number five, not using an investor-minded real estate agent. So a lot of new investors will say, I wanna buy real estate. And they think every real estate agent knows everything about real estate.

One size fits all. And if you're listening to this podcast, you probably assume that is not true, hopefully, and you would know that I'm a realtor. And also I, I would think that you would think me being a realtor that teaches real estate, I would probably be a realtor that you would want to use if you're trying to buy in the Atlanta market.

Right? You, so you wanna find your local Alan Corey, someone who else invests in real estate because everyone has specialties. You wouldn't have your general pediatrician who's a doctor who also has a medical degree perform your open heart surgery, right? It's the same degrees. They just have different specialties.

So if you're gonna be hiring an agent, which I highly recommend, you should do one that has a specialty in real estate investing, and it's quite simple to figure that out. You just call a real estate agent and say, Hey, do you own any real estate investments? If they say, Yes, there you go. That person probably knows 80% more than an agent who doesn't

own their own investment property. That's as simple as it is. You might as well have an agent that's like-minded and can find you deals. And I'll tell you, being an investment-minded agent myself, I've got access to a lot of deals that are off-market because I work with a lot of investors, a lot of investors know I buy stuff myself.

And so I'll shop things off market that either I buy myself or I pass 'em onto my clients, and you will probably have that sort of same situation by using an investor-minded real estate agent Don't go through this thinking, Hey, I've listened to Alan's podcast, I've read his books. I don't need a real estate agent.

I think that's also a bad move, and that's how I got started until I became an agent myself. But being an agent that does 50 transactions a year, there's, there's nuances to a contract. There's trends that I'm seeing. I know the best closing attorneys, mortgage lenders, and the ones who can get it done the fastest and the quickest and the safest.

And so you're protected the most. These sort of reps that I've put in will transfer to you if you are my client. So you want that out of your real estate agent. Someone who does a lot of reps, not someone who just got their license. Don't help out a family friend cuz their first week in the business and you're teaching them real estate. A deal can get done that way,

yes. But I don't see any benefit to you. So that leads me to two more issues that new investors always make. Number six, comparing apples with oranges I get a lot of investors who, um, want to invest, they don't know what to invest in, and I give them a bunch of advice and maybe flips, multi-families, single families, vacation rentals.

And they'll come back to me and they say, Okay, Alan, I've narrowed it down. Here's my top 10 properties. I'll say, Okay, listen, if you've got top 10, you haven't done enough homework. I want you to come back with me to me with your top 3. And then they'll go back and do some more work. They come back and they've got their top three properties, Which one should I offer on?

And then we'll walk through it. And property number one is a short term rental outta state. Property number two is a quadplex in their hometown. And number three is a long distance single family. And these are all profitable. They all make money, but they get frozen right there. Analysis paralysis, first timers, freeze, whatever you want to call it.

Because you can't compare these three, these, these are not comparing apples to apples. You found the best short term vacation rental, right? That's made it to this list here. You found the best quad in your hometown cuz it made the list here and you found your best long distance single family, and it made the list here.

If you pick of any of those three, you're gonna be okay because you've found the best of that product, but you can't compare. Coca-Cola with orange juice, right? You can compare Coca-Cola with Pepsi because they're the same product category, but you're trying to compare three different things in three different product categories, and you'll never be able to say which one's better.

But congratulations, you found the best of three different product categories, whatever one you want to invest in. So really that decision comes down to and will save you a lot of time. Figure out what you wanna invest in first, and then it'll save you a lot of research. And then you can narrow your focus and only buy the best of that product type.

All right, So that's six of the seven mistakes, things that I've made in the past, things that I've learned from, things I've worked with, clients, I teach these, these things. We've got one more to go and before I get to number seven, just wanna tell you, I am now teaching classes. At realestatemaxi.com, you can do phone consulting from me,

you can buy my real estate calculators. I am now trying to bring to fruition things that people are telling me that they want. They want access to me, they want to me to help you. And so now I have a coaching program. So go. Please check that out. This is all to make you a better investor. If you succeed, I succeed.

I want to teach you about real estate, so if you do want some one on one advice, please know that that ability is now available to you and it's out there. All right, number seven of the seven Mistakes to Avoid when you're becoming a new investor is not getting started earlier. If you have any real estate investor in your life, I want you to ask them, "Do you wish you would've started real estate investing later?"

I've never met a real estate investor that says, I wish I got into this later, or I wish my timing was better. Start right now. Real estate is always a game of buy real estate and wait, and the longer you hold real estate, the lower your risk, the higher your chances of success and your investments are just gonna compound over time.

Get that clock started right now. You could be holding yourself back by saying, I need to read five more books. I need to listen to 20 more podcasts before you take action. You're gonna learn the most by doing. Then reading. You can read all the books on swimming, watch all the YouTube videos on swimming and

until you jump into a lake and do it yourself, you're not gonna learn how to swim. Same goes with real estate investing. You have a good base if you've gotten to the point that somehow you're listening to this podcast right now, your base is strong enough to invest in real estate. I meet people all the time.

Hey, I'm a real estate agent for 10 years. I'm a property manager for two years. I work as a handyman. And I say, All your experience, was more than I ever had when I got started. I had no experience when I got started at 22, buying a one bedroom apartment, right? And I still have no skills. I'm not a handyman.

I've never tried to fix anything myself. Okay, my skillset is putting things in my spreadsheet calculator at realestatemaxi.com, and if the numbers look good, I buy. That's my skillset. And if you happen to work in the real estate industry in any fashion, for any amount of time, you have more than most real estate investors have when it comes to knowledge and experience.

So use that as an asset and don't feel like "I don't know enough." Cause you'll never know enough until you get started. That's number seven. Not getting started earlier. So there you have it. That's my free ebook. If you want it, if you wanna refer back to it again, go to @RealEstateMaxi on Twitter, it's in my profile, and just click on the link and it'll automatically email it to you.

Thanks for tuning in to Real Estate Maximalist and join the Real Estate Maximalist Facebook group. Please tell a friend if you've learned anything about this podcast or send them this book if you'd like this free ebook, and thanks for tuning in. I'll see you next time. I'm your host, Alan Corey.