Find out why real estate rental investors fail before you invest.
Thirty years ago, a young married couple began investing in rental properties. Their rental portfolio made other investors envious. They managed their properties without professional help. A few years ago, both of them retired from their day jobs. Easing into retirement thinking their rental income and social security would keep them comfortable for the rest of their lives.
Recently, they filed for bankruptcy and lost most of their properties to foreclosure.
Sadly, this is a true story according to a BiggerPockets newsletter. The author bought 95% of his rental units at foreclosures from landlords who lost their rental portfolios to the banks. Years of hard work as rental investors crashed down upon them destroying their accumulated wealth.
How did this happen to so many real estate rental investors?
A better question begs, how do rental investors avoid such a tragic ending?
What Makes Some Real Estate Rental Investors Successful While Others Fail?
Knowing what makes some real estate rental investors successful while others fail provides the key to success.
Here are some answers to this question:
Real Estate Rental Risky Investments
Every investment takes on some type of risk.
The Financial Dictionary defines a risky investment as “An investment with a return that is not guaranteed”. Sadly, no rental investment is guaranteed. Risk lurks in every investment.
The reasons for bankruptcy often include taking on too many risks. Perhaps taking on too many “low down payment” deals created too much overleveraging? Or, buying too many rentals too quickly?
Continually refinancing properties creates less equity and more debt. Likewise, taking out all of the equity in order to invest in additional rentals may create more debt than income.
Whichever reason caused the bankruptcy, the risk simply became too great making the investors lose everything.
How can you prevent this? Avoid all risks? Only make 100% safe investments? Impossible as entrepreneurs always take risks.
Look at rental investing as white-water rafting. When braving the wild waves, you don’t see what risks lie ahead. Rocks hidden just below the surface. A waterfall might suddenly appear. Therefore, team up with the right riders who watch for potential dangers to warn you of pending disaster.
While risk is inherent in every investment, remember that taking precautions reduces risk.
Lack of Education of the Real Estate Rental Industry
Too many beginners jump into buying rental properties without understanding what they are getting into.
Some looking for a new home to live in see a duplex or a triplex and think only of the potential rental income and jump in. Maybe this rental property is in the wrong neighborhood offering the wrong financing?
Education Solves Many of these Problems
Forget about the “no money down” and “become a millionaire overnight” seminar schemes.
Take the time to educate yourself about how to reduce the risks of rental investments. Read real estate investing books offering sound advice. Attend webinars and forums and watch podcasts and read informative blogs from industry experts.
You don’t have to spend a lot of money on educating yourself. Join real estate professional associations, groups, and organizations to meet savvy experts to learn about the industry.
95% Failure Rate for Real Estate Rental Investors
Yet, another BiggerPockets blog post explains why 95% of all real estate rental investors fail.
One reason is that too many real estate rental investors treat it like a hobby or a part-time job. Instead, you must treat real estate investments as a “real business”. That’s because it takes a lot of work for a successful investor. Especially for rental investments.
A real business requires investment capital. Don’t get tricked into those “no money down” scams. It takes money to make money in real estate. A money source (whether you’re own or other people’s money or a lender) allows you to purchase good investment properties.
A real business requires an experienced mentor. Don’t jump into rental investments because you look at a duplex or a fixer-upper and think, “That looks like a good deal”. As mentioned above, join real estate professional groups and find a savvy expert to mentor you. Learn from his or her mistakes and experience with successful investments.
Rentals require an advertising budget to find renters, and a follow-up process to answer all inquiries and screen potential tenants.
Experienced Real Estate Rental Investors Recommendations
Of all the comments posted after this blog post published, six stood out as excellent follow-ups. All of them from experienced and savvy investors.
Here’s some of the best reasons why 95% of rental investors fail and how to correct them:
1. Discouragement Leads to Quitting. Their first failure results in quitting. Nothing learned from initial failures means nothing gained.
2. Unrealistic Expectations. Too many gurus pitch no money down, get rich quick schemes to create unrealistic expectations. The only ones getting rich quick are the gurus.
3. It Takes Money to Make Money. Most rental investments require buying and holding along with reserves. Unless your real estate market experiences a fast spike, expect to buy, rent, and hold until the market rises and you are ready to sell.
4. Expect Market Downturns. Prepare when the market softens. Rent to classy tenants staying for long periods of time who always pay rent on time.
5. Learn Patience as Investing Takes Time. Rental investments take years of sacrifice and savings while waiting for the right time to sell.
6. Lack of Business Organization. Buying a fixer home, rehabbing it, renting it, and selling it requires good business organization. This commenter recommends:
a) Find the Right Deal. Unless you are plugged into a community filled with opportunities or really good at marketing, finding the right deal takes work.
b) Evaluating Deals. Utilize professional guidance and research tools to evaluate deals.
c) Manage the Timeline. After finding a fixer-upper, who rehabs it in a timely manner? Holding onto properties while rehabbing them costs you money (financing, insurance, taxes, utilities, etc.). You need to line up all of the professionals necessary to rehab properties within a deadline.
d) Selling for Profit. How much will it cost to sell the property? How long will it take? Will the appraisal meet your expectations? Will buyer inspections reveal new issues? Did you figure out the real estate commissions? Have a good idea about the closing costs?
Conclusion
Why do real estate rental investors fail? Because many failed to take precautions to reduce the risks. Most never educated themselves about rental investments.
The following list describes how to succeed as real estate rental investors:
- Success depends on treating real estate rental investments like a real business;
- Start with sufficient capital;
- Find an experienced mentor;
- Learn how to recognize and evaluate potential deals;
- It takes money to advertise rentals;
- Fixers require time to rehab which requires reserves to pay holding costs;
- Patience and effort pay off;
- Expect market downturns and survive them with good long-term tenants;
- The business organization manages timelines from purchase to rehab to renting and selling; and
- Sell for profit.
Rental investments are not passive investments. If you don’t have the time or expertise to manage your rentals, hire a professional rental property management company.
Steven Rich, MBA – Guest Blogger
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