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Ways You Can LOSE Money Investing in Real Estate
Joe: Ways you can lose money investing in real estate. There’s a lot of them. I created a list. Borrowing money is at the top of my list. If you borrow money you leverage yourself. The more leverage you have the more at risk your business is going to be. If you can’t make those payments you’re going to lost that property and they’re going to come after you for your assets as well. So be careful about borrowing money.
Joe: Now the way you borrow money makes a difference. So if you’re going to borrow money, borrow it from a seller rather than from a bank. And if you’re going to borrow it from an institution borrow it from a bank rather than from a hard money lender. A bank will have a lower interest rate. A hard money lender will loan on things that are a little bit more difficult. I’m not a fan of hard money lenders. They typically charge too much, they charge points, they charge too high of an interest. Banks are a little bit better than that and then sellers I can get deals where they don’t charge me at all.
Joe: When you borrow money you’re paying interest. Interest is an expense that’s just not necessary if you structure your deals properly. You can get rid of interest entirely if you do seller financing that is a no interest loan. And that means that you’ll pay off your mortgages in a third the time it would take to pay off a bank mortgage. So when you borrow money to buy your properties which, if you don’t have a ton of cash you’re going to need to do that, borrow it from the seller. Which means that they’re not actually giving you money, they’re just giving you their equity that you’re paying off over time.
Joe: Another way to lose money in real estate is by not valuing the property properly. Which means that you may go into it thinking that it’s worth $200,000 when it’s only worth $170,000. That is a big mistake. Make sure you understand how to value your property. And make sure you understand how to price the repairs that need to be done in order to get it to the value that you want it to be if you’re doing rehabs on a property, which is the next way to lose the most money.
Joe: Spending too much money on your rehab. This is a rookie mistake that I see a lot of brand new investors make over and over and over again. They’ll go into a property thinking it’s going to cost them $10,000 or $20,000 to fix up a property but it ends up being twice what they thought it was going to be and it takes twice as long to make it happen. So they’ve got all the carrying costs of holding it during that time, they’ve got all the headaches of dealing with the contractors that are overcharging them because they don’t have good relationships with the builders they’re working with or they don’t know how to weed out builders that don’t do a good job or take advantage of them.
Joe: And that cost spirals out of control and suddenly the profit that they had built in disappears completely. And sometimes they go upside down and actually lose money on a deal that took them months and months of effort to put together. So be very careful about how much are you going to spend on the rehab of the property.
Joe: The next way to lose money in real estate is by not properly monitoring the people who are working for you, or not having a system that monitors those people. What I do is, we systematize every task, every repeating task that we have in our business. So when, let’s say we get a new lease option memo signed and we know we have to go out there and we have to find a buyer, lease option buyer for that property. We’re just flipping that property and making some cash on it. What we have to do is, we have to put a sign in the yard, we have to put lock box on the front door. We have to get the signatures on the documents, we have to get photos taken, we have to get them up on Craigslist and on Zillow and on Facebook and there’s a list of things that have to happen every time we get a new lease option. Every time we get a new property a blast has to go out to our buyers list.
Joe: And in order to get those things done I have different people in my business that do each task. Boots on the ground. He’s going to be taking the pictures. The buyer finder, he’s going to be talking to any buyer leads that come in through the sign or through the advertising. The admin person is going to be posting them on Craigslist and Zillow and she’s going to be taking care of monitoring the whole process to make sure it’s all getting done. So what I’ve done is I’ve created a system inside the Automarketer, I call it the Task Follow-up System. And what you can do is create a follow-up campaign that is a list of tasks and it will send out – and I’ll be able to take this template and I’ll be able to attach it to that particular lead in the Automarketer which is a CRM, it’s a contact relationship management software.
Joe: So I can attach it to that particular lead and it will send out an email or a text or a voice blast to the members of my team that I assign it to. So if I want it to go out to Jenny, she gets the admin stuff. Or I send it out to Fred and he gets the buyer finder information. Or the boots on the ground. It goes out to Jim and he gets that information. He’ll get an email with the task that he has to do. And it’ll attach it to that particular lead. So when we attach that follow-up campaign to that particular lead with one click it automatically sends out all the emails to everybody telling them what they need to do to get that ball rolling. So they’ll all know the tasks they need to do because they’ll get an email saying here’s the name of the lead, here’s the property address. All that stuff is merged into that lead and it tells them exactly what they need to get done. So that makes it possible for you to monitor what’s going on because they’re actually following through with a template.
Joe: And then we’ve got the admin person who checks to make sure that they’re doing all that work. And the way we have them looking over their shoulder is not by saying hey, did you do your work? We have them look over their shoulder by saying you haven’t sent me the photos yet. That way she knows that that has to be done. So we have one person do part of the job, another person do another part of the job. That means there’s always a checks and balance in the process. And if something doesn’t get done we find out about it really quickly because this person can’t do their job if this person doesn’t do their job. So make sure that you build checks and balances into your real estate system and use automation to help you follow through with that process.
Joe: The next biggest way that you can lose money in real estate is negative cash flow. Negative cash flow kills businesses. You have to be very careful with negative cash flow. And sometimes I’ll skirt an edge on a property thinking that, look, this is going to be a good long term investment and if I take, you know, $100 negative cash flow I’ll be able to have this property and in ten years it’s going to be worth a ton of money for me. And I’ll sometimes do that. But if you do that with a lot of properties suddenly you’ve got a few thousand dollars a month that’s negative cash flow. That’s pretty painful. And it eats into your living expenses. It eats into your other profit centers. Even though you’re building it for the long term you’re taking a negative cash flow now.
Joe: You’ve got to be able to keep your business alive and negative cash flow will eat that business up really quickly. It is the thing that destroys most businesses – too much debt. So be careful about your debt and especially careful about negative cash flow.
Joe: The next thing that can eat your business alive is not having proper reserves. I always talk about keeping reserves on your deals. If you’re going to keep a property long term you know that there’s – let’s say you buy it subject to. And you know that you have to make that monthly mortgage payment every month. And you have to make that payment even if your buyer doesn’t pay you. Let’s say their a lease optioning it from you and they’re making payments to you. They have to make those payments. If they don’t make them you still have to make the payments to the bank because that’s what you promised the seller that you bought it from.
Joe: So make sure you have a reserve. So what I suggest if you’re buying a property subject to and you get, let’s say $10,000 as a lease option fee, you take that $10,000 and you put it into an escrow account. That way if you have vacancies you’ll be able to make those payments on that property or make any repairs that might be necessary. Don’t use that money to live on because you won’t have that money when you need it. So have a reserve for the properties that you have so you don’t have to worry about losing properties in that situation.
Joe: Also having a reserve gives you the opportunity to buy properties if you see a really great deal and you want to flip a property so you can buy that property and you can make a great chunk of money by buying it wholesale.
Joe: Now a lot of you may be saying, well, I don’t have a lot of money in reserve to keep. That’s the whole reason I’m into this business and I’ve got to pay my bills. So if you’re just flipping properties, if you’re doing the For Rent Method for example, and you’re flipping properties, you’re not keeping them for your portfolio, that’s absolutely okay and you’re going to make chunks of money and that’s going to give you income. But as you start to systematize that process and you start doing them on a regular basis, then you’re going to start building a surplus of cash. And you’re going to start thinking about keeping properties after that.
Joe: nd once you start keeping those properties then you want to make sure you have that surplus or you keep that lease option fee or whatever cash you make at closing because most of the deals we do we make money at closing rather than pay out money to buy them. Keep that money and keep it in reserve so you always have a cushion to be able to keep your portfolio safe.
Joe: The next one is partnering with others without a clear exit strategy or a written agreement. Always have a clear exit strategy with each property. When you’re partnering with people it’s one of the best ways to make a friend your enemy because you didn’t communicate properly about how you’re going to split the money. And you may say to yourself, well, we’re best friends. We’re going to work this out, you know, we’re not going to be upset with each other. But I’ll tell you, when it starts coming down to money and one person feels like they’re putting in more effort than the other and then they’re not getting the amount of money that they think that they are entitled to it creates hard feelings. And you don’t want that to happen. So make sure you explicitly write out exactly, you know, how you’re going go through this process together, how much money each of you are putting into it, how much your percentage is, who gets their money out first, what the exit strategy is for this particular property and who gets to decide whether or not it gets sold and doesn’t get sold.
Joe: You know, I think that you need to have somebody who’s making those decisions and has control of it and the other partner can say, okay, I agree to that, or I don’t agree to that. But one person should be able to make the final decision. Make one person the 51% partner. The one who makes the decision on these deals.
Joe: Another way to lose money in real estate is by not understanding it’s not what the seller wants for the property that really matters. It’s what you can pay to be profitable. So many investors put together deals that are not viable. They come to me and say I’m having a hard time selling my property. I’m saying, well, what’s the deal look like? And they tell me what the deal is and the deal doesn’t make any sense. Nobody’s going to buy that property. They’re not going to be able to sell that property because they didn’t buy it right. You have to know your exit strategy. Your exit strategy determines the way you purchase the property.
Joe: So make sure that you know what your exit strategy is before you buy it. And preferably you have more than one exit strategy. You have more than one possibility. But you want to have a pretty good idea of what that exit strategy’s going to be before you buy the property. And so when you make the offer on that property you’re going to be able to look at that exit strategy and say okay, I know what I can sell it for. Here’s how much money I think I need to make on this property. This is the offer that I can make. And then that seller has to decide whether or not they can accept that offer or not. And if they don’t accept it then you go on to the next property. You don’t buy properties that don’t make sense.
Joe: I’m just scratching the surface here. There’s lots of other ways to lose money in real estate. Almost as many ways as there are to make money. One of the things that I would strongly recommend you don’t use your credit, you don’t use your cash, especially when you’re getting started. Later on when you have money and you’ve done a lot of deals and you have money to invest then you can start using your cash. But at the beginning it’s easier to buy a property if you have cash to give them. There’s a lot of people that will take cash for their properties. But it’s not any easier to make money in real estate if you don’t know what you’re doing even though you’re using cash. It’s just easier to buy. But it’s easier to lose your money if you have cash.
Joe: If you don’t use your cash, you don’t use your credit, you can’t lose your cash, you can’t lose your credit. It’s pretty straightforward.
Joe: All right. I hope that helps. Good luck. If you like this channel hit the subscribe button, hit the like button. I appreciate it.