In my 25 years as a property investor, I’ve realised that there are some common mistakes that people continuously make. I don’t mind admitting that I’ve made each of the below myself!
I think it’s really 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 if you’re not paying attention, you might find you’ve let yourself make an easily avoidable mistake!
Letting your emotions get the better of you
The minute you let your emotions take over in any kind of deal, you may as well say it’s Game Over.
You have to stay detached when it comes to real estate, otherwise you could find yourself getting into trouble. If you’ve looking for a new property and have very obviously fallen in love with something, you’re a sitting duck for the vendor to pump up the price. Remember to keep your cards close to your chest.
I can remember one of my first ever property deals – an old house in Dublin. I really loved this house when I went to view it and could see so much potential in it, and especially in its garden. I hacked my way through this completely overgrown jungle – brambles coming out right into the middle of the garden, lots of apple trees – it was so thick, I felt like I needed a machete to get through it! I eventually managed to make my way to the back after I found a stick to beat the stuff back, turned around and looked and the house and garden and remember thinking, wow this is a huge garden. I think it was over a hundred foot long.
I was the only person at the viewing who went to the trouble of getting to the back garden because it was so difficult to reach, and had to keep the exciting discovery to myself, otherwise I would have had a lot more competition to actually buy it!
If you’re selling a property, letting your emotions take over can bite you in the behind in a different way. If you’re emotionally locked in to getting a particular price, but receive a lower offer than you were expecting, it can feel like an insult: I‘ve been in this situation before and really had to sit back and think it all through, whether I was actually receiving a fair offer but was letting emotion cloud my better judgement.
Putting all your eggs in one basket
All financial deals come with an element of risk attached to it, but you should avoid putting all your eggs in one basket.
You have to weigh up whether or not a return is worth the risk it takes to get you there. What you should be looking for are deals where it’s possible to make 20 times your money, but you only risk one time your money in the event that it goes wrong – like a 20-1 kind of chance. That’s much better than a one-to-one chance where there’s as much chance of you losing everything as there is of you doubling your money. Again, it can be emotion sweeping you away there.
I’ve spoken before about my disastrous Spanish deal back in the 2000s (have a listen to Episode 144 of the podcast for all the gory details), but basically, I put everything into one deal, and it took me down,.. a mistake I won’t make again!
When you ASSUME…
Well, we all know the saying.
There are several mistakes you can run into purely by making assumptions. One of the most common ones I’ve seen is someone 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, but then don’t follow through. Take it from me – unless you have a signed contract in your hand a deal is not done.
In the past I’ve assumed that something 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!
I’m sorry to say it, but you can never really take someone’s word for something. A deal is only ever complete when it’s on paper and fully executed.
Bad financial analysis
An investment starts with an analysis based on a number of assumptions, and failing to properly stress test those figures can cause you some serious problems.
Say you’re buying a property to rent out. Your financial analysis will be based on the rent you think 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 to renovate or find a tenant. Once you’ve put those numbers on paper it’s vital take a pessimistic view of things and test them again. What happens if your costs increase? What happens if interest rates jump? What happens if it takes you 6 months longer than planned to find a tenant? 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.
Paying too much
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.
If you’re planning to rent a property, 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?
During the Pandemic the property market stalled, but the number of people who wanted to buy didn’t change, so as we came out of lockdown there was a huge pent-up demand: suddenly you had two or three times more buyers looking for the same property, and of course, that pushed up prices.
Big price jumps make new buyers (who are trying to get into the market) panic: they’re outbid every time. After that happens a couple of times they start to get desperate, and not wanting to get outbid again, they start to bid more than everyone else. With 40 – 50 people bidding on a single property, after the Pandemic homes were going for way over the asking price (in some cases double).
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. Just because someone says it doesn’t mean it’s true! Believe me, I understand that if you’re struggling to find a tenant it’s tempting to take the first person who comes along, so you can start getting that rent in. But you can get into so much grief and hassle down the line if a tenant stops paying rent or becomes otherwise 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. A lot of these documents are legally required to be filed at the tax office, so you should be able to get hold of the most recent set of accounts, if you’re renting a commercial asset. If I was given anything older than that, I’d be nervous.
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. Sometimes a letter from the previous landlord is not a recommendation! There are really good, honest tenants out there but sadly there are also people out there who just want to mess you around and play games. So do your due diligence.
I hope you’ve found this useful and that it helps you to avoid some pitfalls! If you’re thinking about really making a career in the property industry, it can be a daunting experience, so why not invest in my FOUNDATIONS course? This course will take you through the fundamentals in simple, jargon-free language, explaining how the market functions, what you need to watch out for, and giving you the steps to help you avoid costly mistakes!