In my 25 years as a property investor, I’ve come to realise there are some common mistakes that people make. I’ve made each of the below myself! So I thought it important to share them with you and hopefully spare you some of the trouble I’ve had in the past. Some of them might seem totally obvious but I’m including them because they can creep in unnoticed if you’re not paying attention.
1. Making assumptions
There are several mistakes you can run into purely by making assumptions. One of the most common ones is assuming that a deal will happen just because the buyer, the seller or the tenant (whoever the counter-party is) has said they’re going to go ahead with something, and then they don’t follow through. Take it from me – unless you have a signed contract in your hand the deal is not done.
In the past I’ve assumed a deal will go ahead because of the other party’s promises, and then they’ve pulled out at the 11th hour. People have sat down with me, signed a memorandum of understanding, said they’ll be back next week to sign the final agreement… and disappeared into the wind!
Sorry to say you can never really take someone’s word for something, the deal is only complete when it’s on paper and fully executed.
2. Not stress testing your financial analysis
This can be tied into my point above about assumptions, but in this case it’s more to do with your financial assessment. An investment starts with an analysis based on a number of assumptions: on the rent you’re going to get, the price you’re paying, the market strength, the interest rate, the length of time it’s going to take. Once you’ve put those figures together it’s vital that you stress test the numbers.
Let’s take a pessimistic view of things. What happens if your costs increase by 8-10%? What happens if interest rates jump by 10 to 25%? What happens if a tenant doesn’t sign the agreement for six months? A lot of things can go wrong in a deal, and it’s very important that you cover these possibilities in your initial analysis.
There’s an old saying in carpentry – ‘Measure twice, cut once’, and that’s something you should do on paper at the analysis stage of any deal. Make sure you’ve looked at and tested every variable that could fluctuate – you can’t expect the deal to follow exactly as per your financial analysis so you have to check those numbers, and then check them again.
3. Paying too much
This is an easy one. It sounds obvious but when you’re stuck in a bubble or a very hot market, it’s easy to overpay for a property. You can get over-enthusiastic about a deal or get caught up in the hype and heat of the market. A mistake I made in the past was doing a comparison with property prices in the area, not realising that they had all overpaid as well.
Have a good idea how much your property can rent for, and that will give you an indication of how much you should pay for it. Look at the deal from first principles: if you’re buying for a certain price you need to have a certain yield in order to make it financially work for you. What does that amount of rent look like per year? Is that affordable? Will a tenant be willing to pay that amount in a downward market?
After the 2008 financial crisis there was a huge retraction in the market – people stopped spending money, and suddenly shops owners realised they were expected to pay huge rents that were no longer affordable. You’ve got to make sure that whatever the rent is, there’s some comfort level that if the market falls off a bit that there’s still a buffer in place to cover the rent.
4. Falling in love
Another easy one to get caught up in – falling in love with a deal or opportunity. You will often see something special in a property and get swept up in the possibilities. You should never allow yourself to get too emotional: you have to be prepared to walk away if the numbers don’t stack up. Take time to reflect on whether the deal is actually a good one – if you’re too emotionally involved in the deal it’s going to be hard to say goodbye.
I’ve talked about this in my video 4 Reasons Why Real Estate Investors FAIL – it’s a common trap to fall into, so do take a look.
5. Poor due diligence.
Never underestimate how easy it is for potential tenants to put on a bit of a show and impress you with how great they are and how strong their business is. Just because someone says it, doesn’t mean it’s true!
Believe me, I can understand if you’re struggling to find a tenant it can be very tempting to take the first person who comes along and get your rent flowing. But it can lead to so much grief and hassle down the line, for example if a tenant stops paying rent or just becomes problematic.
You’ve really got to dig into their financial accounts – make sure the statements they provide are up to date. I’ve had people giving me paperwork that looked great but was three years old and a lot had changed in that time. The documents are legally required to be filed at the companies office, so you should be able to get hold of the most recent set of accounts.
You also have to check their references thoroughly. Talk to former landlords and read between the lines in their communication. Better yet, pick up the phone and speak to someone. If you’re reading between the lines you can sometimes see that the letter from their previous landlord is not a recommendation.
There are some really good, honest tenants out there but sadly there are also people who just want to mess you around and play games. So do your due diligence.
I hope you’ve found this useful. If you did, or you have any questions, leave me a comment.