I’m always writing about how to succeed in here. I like to focus on the positive, but there are many ways to fail. Anyone who is successful in this business has failed and some think that you have to notch a few failures to learn how to succeed. The most successful people aren’t inherently great or even lucky, they just put themselves in the path of opportunity. And that means trying multiple times – and running the risk of failure.
The Top 10 Ways to Fail
- Never Get Started. It seems obvious that this one would be first. So many people are out there dreaming of quitting their jobs and retiring with a bunch of passive income, but when they think about making a move, they come up with a bunch of excuses and reasons to wait. They never get started and never give themselves the chance to succeed.
- Trying to Time the Market. The market is cyclical – we just don’t know when the ups and downs will come. We’ve had a big long up since 2012 or so. Many are waiting for the eventual fall, planning to snatch up cheap properties. What they are missing is that the market adapts to any scenario and deals are to be found at any time. Interest rates too high? That drives prices down and you can buy cheaper. Houses are cheap? Rents will be down in that scenario, so you’ll pay less but make less money. The trick is not in timing the market, but finding the deals which hide in any market cycle. Trying to time the market mostly means missing out on deals but sometimes means making a bad deal because of missing the important points and buying or selling just because ‘the time is right’.
- Not Saving Enough Money First. You need to have money for the down payment. Generally, you’ll need to come up with 20% of the purchase price. If you don’t get your affairs straight (minimize expenses, maximize income) right now, you’ll never get that downpayment going and fail to get started.
- Cheating the System. Low money down loans are a great way to purchase a property, but they usually have a requirement that you live in the property for a few years. Some investors surmise that the government isn’t watching this very closely and instantly start renting their place out. This is a great way to get the mortgage called due and jeopardizes your ability to get loans in the future. Further, this method only works once or twice and it is hard to do a lot of investing with it.
- Retrading. Retrading is changing the terms of the deal in a significant way to get a better price. It usually happens during the due diligence period. If your inspection finds something in need of repair, it is customary to ask the seller for a credit. If there was something obvious, like the front sidewalk is full of cracks, this should have been discussed prior to the initial offer. That offer should have been based on your initial walkthrough. Trying to get money for an obvious defect later at best makes you look like you don’t know anything and at worst, like you were high-ball offering to tie up the property with no intention of ever paying that amount. Even in a big city, word gets around about your retrading efforts and potential owners/buyers will be wary.
- Not Getting Proper Insurance. We’ve all seen where a seller reports insurance expense and it seems too low to be true. We call our insurance broker and the quote is much higher than the seller’s reported insurance. Are we just bad at finding insurance and need to shop around more? More likely, the seller has purchased bare-bones insurance to save on costs and has gotten lucky in not having a major loss. Do not bank on that. Get commercial insurance for replacement cost. Yes, it costs more; yes, factor it into your purchase price.
- Not Monitoring the Health of Properties. Once purchased, it is tempting to just turn them over to the property manager and get started on that next acquisition. Managers are not all great and some start good but turn bad. Have regular meetings with your managers and randomly drive by and walkthrough your properties to help prevent bad things from happening and not knowing they exist.
- Not Performing Regular Maintenance. We know this happens often, because these are the properties we look for to purchase and turn around. It’s easy to skip the furnace filter or the roof that looks old but isn’t leaking (yet). Or the pest infestation or wet spot under the sink. All of these will build to much larger problems later. They lead to inability to bring on good tenants. They are why these properties are on the market – the seller didn’t do the maintenance and now wants out.
- Not Paying the Bills in a Timely Fashion. Having outstanding bills can cause a major headache when selling. They will result in having to pay them all off prior to closing. That big amount could be difficult or impossible to pay. These are discovered by the title company when they check for liens on the property. They can be placed by the government (tax leins) or workers (mechanic’s leins). Either way, the buyer is not going to want to inherit these and usually will demand they are settled before purchase. Additionally, if you are not paying your contractors back timely, word will get around about this and you won’t be able to find quality contractors anymore. Pro tip: pay your contractor immediately when you get the bill and watch how quickly they will get the next job done for you.
- Selling. This is a little bit of a joke. Most of us who have done this for a while regret the sales we have made. The more properties we could have held onto, the more we could be bringing in right now. Think hard about selling. Sometimes it is the right thing, but mostly it just cuts down that apple tree and forces you to start over.
That’s my top ten reasons you can fail. There are many more. Let me know your favorites.
