Rich Dad Education Blog

Sin #1 – Lack of Basic Real Estate Investing Education

While most investors realize the importance of learning the basics of real estate investing before jumping into the market, there are many new investors who feel as if reading a book or two should supply them with enough knowledge to make a killing in real estate. Don’t shortchange yourself. Get all the education you can. You should spend at least an hour each day improving yourself and studying the real estate investing business. Learn something new every day. Expand your mind.

Not too long ago, a fledgling investor had to look long and hard to find good information on real estate investing. Today we have easy access to information in virtually every facet of the real estate investing business. The Wealth Intelligence Academy provides some of the best education available anywhere. Its live classes are taught in numerous cities throughout the country, and are even available in your own home via the Internet, leaving no excuse for not getting a proper education.

Sin #2 – Not Taking Action

Although extremely important, education is only part of the success equation. You must take action to make things happen! Simply obtaining an education will not make you successful; rather, it is the application of that education which will put you on the path to success. A good real estate coach can help you apply the education you have obtained through real estate books, classes and seminars. A good coach will keep you focused on your goals and help you keep going when you hit roadblocks on your path to success.

Look at yourself in the mirror and ask yourself, “Am I taking action, or am I just making excuses?” The list of excuses is endless, but none of them produce results. Take action, and do it now. Nothing will help you overcome your fear better than taking action.

Sin #3 – Rushing into the First Deal Just to Get That First Deal

New investors are under an extreme amount of pressure to do that first deal. They often endure numerous disparaging and discouraging comments from family and friends who believe they will fail because real estate investing doesn’t really work. This sort of criticism makes even the most confident rookies anxious to prove to the naysayers—and themselves—that they are capable of success. While this ambition can be a powerful motivator, too much eagerness can make one impatient enough to disregard the rules and jump at the first “deal” that comes along. This can spell disaster. A bad deal is certainly worse than no deal at all. In fact, it is crucial that your first deal be a good deal, so take your time. Make sure the numbers work; if they don’t, go on to the next deal.

Take massive action now! Make a multitude of offers, but remember that every one of those offers will, at a minimum, be contingent upon a final inspection and approval by your associates. Including a provision for an inspection period gives you time to thoroughly inspect the property and meticulously reanalyze the deal to be sure that you will benefit from the transaction. If the deal turns out to not be a good one after all, do not hesitate to walk away. A bad first deal ruins a countless many new investors.

Sin #4 – Not Starting with the End in Mind

Steven Covey said that highly successful people always begin with the end in mind. These are words to live by. While this is of especial importance to the beginning investor, it is an area in which even seasoned investors need to improve. Far too often, investors get so swept away by excitement over the potential profitability of a prospective deal that they fail to think all the way through the process. Many new investors buy a property without having a clear picture of their exit strategy; this is a big mistake! It is of crucial importance to have a plan for a property before you buy it!

Determining whether or not a property suits your purposes is a fairly simple process. For example, if your end goal is to sell, then buy a property that will be easy to sell. If you are in search of a rental property, buy a property that will be easy to rent.

Sin #5 – Not Conducting Your Own Due Diligence

When you encounter a deal that, according to the “experts,” appears to have a considerable potential for profit, keep in mind that the speculations of others are not necessarily factual. Even the opinions of so-called experts are just that—opinions. It is imperative that you always run the numbers yourself. It really doesn’t take that much time, and it is time well-spent. Once you have the property under contract, have the professional inspector on your Power Team do a detailed inspection. Make sure you get good repair estimates based on that inspection and, because it is quite rare to complete all repairs under budget, add several thousand dollars to the estimate to ensure you have a good cushion. Once you have determined the revised amount of the repairs estimate, recheck your numbers to be sure you do have a good deal

One note of caution: there are groups that look for excited, new investors, and try to sell them a “deal.” If you come across a deal in which the real estate agent informs you that he or she has a friend who can get you the financing, and the financer tries to sway you toward using his or her “preferred” appraiser, be very cautious. Double check the property value and analyze the real estate market in that area to ensure you do not get taken to the cleaners.

Sin #6 – Overanalyzing

This is where a lot of new investors get stuck. Because they are so afraid of making a mistake, they overanalyze a property so long that by the time they decide to make an offer, the property is already under contract with another investor. Learn to quickly analyze the data you have and make a fast offer (always subject to a final inspection and approval of your associates, of course). Once the property is under contract, you will have time to gather the specific data you need to perform a more detailed, accurate analysis. If the numbers still look good, buy; if the numbers don’t look good, re-negotiate a lower price or walk away.

Sin #7 – Paying Too Much for a Property

This is the biggest mistake a new investor can make. In order to avoid this common pitfall, you must learn to perform an analysis which takes into account all of the expenses. Remember, the analysis for a “buy, fix, and sell” is completely different from the analysis of a “buy and rent” property, in that your goal for a “buy, fix, and sell” is to make a profit when you sell, while your goal for a rental is to acquire a positive cash flow right from the start.

Sin #8 – Not Having Proper Reserves for Your Rental Properties

As you know, most new businesses fail due to a lack of positive cash flow and sufficient operating capital. Assume that after correctly analyzing a potential rental property, you proceeded to purchase it at a price that produces a positive cash flow. As part of your analysis, you should have included a vacancy factor and a future repair fund, meaning that each and every month, a portion of the rental income should be set aside in your operating account and saved for that rainy day. I assure you, that rainy day will come. No matter how well-managed your property is, at some point, you will have some vacancy and you will need to perform some repairs. If you have money set aside to cover those expenses, you can weather the storm; otherwise, you had better have some deep pockets. In order to keep the property long enough for your equity to grow into a nice nest egg, you must plan for these inevitable occurrences.

Sin #9 – Underestimating Repair Costs

Not much needs be said on this point, save that the importance of becoming adept at making repairs estimates cannot be overstated. Having the ability to perform a cursory evaluation of properties will allow you to make offers expeditiously on suitable properties. Once the property is under contract, get a professional inspection to more accurately assess the cost of repairs. Get several bids on repairs, and interview as many contractors as is necessary to find a contractor you can trust at a price that fits within your budget.

Sin #10 – Overestimating Rental Income

Never take someone else’s word on the price at which a property will rent. Do your own homework. Drive around and get to know the area, and research the amounts at which similar properties are renting. Be sure to compare apples to apples. When in doubt, err on the side of caution when calculating your maximum allowable offer by underestimating the rate of rent and aiming to buy the property at a lower price. If you are then able to charge a higher rent than you allowed for in your calculation, you will have improved your cash flow, which is a much more pleasant surprise than the alternative.

Sin #11 – Trying to Do It All Yourself

While you should strive to learn as much as possible about all aspects of real estate investing, you needn’t—and shouldn’t—attempt to handle every aspect of your business on your own. No matter how educated, talented, skilled, or motivated you may be, there are only 24 hours in a day. Build a team of hand-picked experts, and be willing to delegate a lot of your work to those team members. Doing so will allow you to spend more of your time on finding, analyzing, and negotiating potential deals.

Sin #12 – Quitting Your Day Job Too Soon

Confidence, commitment, and enthusiasm are valuable traits that are vital to the success of any investor. While it’s great to jump in with both feet, unless you have at least a year’s worth of living expenses in savings, you would be wise not to quit your day job just yet. There are many investors who make good money fairly quickly and are tempted to do just that. Although this is a personal decision, it is usually best to hang onto that job until you have a system in place and are consistently generating a steady income from your real estate investing business. Even then, have a good cash reserve set aside for living expenses before you tell your boss good-by for ever, just in case.

Sin #13 – Not Working With a Coach

You have heard it said many times before, “Even an expert needs a coach.” In fact, I would argue that the greater your knowledge and skill, the greater your need for a coach. New investors in particular have a need for proper coaching in order to effectively apply their new knowledge. A good coach can keep the new investor on track and help him or her to avoid committing any of the 13 deadly real estate investor sins.