10 Biggest Mistakes When Buying Real Estate
I’ve done $750 million of real estate, and yes, some of those were homes. The first home I got was $78,000, my next home was $178,000, then I moved up to $800,000, then $3,000,000, then $8,300,000, and finally a $10,000,000 home.
I’m here to tell you today buying a home is stupid.
Here are 10 more of the biggest mistakes you can possibly make while buying real estate:
10) Not Buying—If you don’t buy real estate, it’s because you’re broke, you don’t know where to start, or it’s because you don’t know what you’re doing. If you never get into real estate, that is a mistake! Too many people retreat from the real estate game believing it’s too expensive, too complicated, too much work—the excuses are endless. Just know this: not buying is a mistake. If you think you might want in the real estate game someday, start watching my weekly Real Estate Show.
9) Buying Too Small—This is part of why I don’t recommend you buy a house, there is no payoff big enough to make it worth the risk. Your return on investment may seem high but 10% of a small amount is a small amount. When you buy a duplex, a 4-plex, or even 8 units it’s still too small. You need more doors to make it worthwhile. Think about it, do you want a headache and a distraction that takes your attention off your main job to chase a couple grand a year? Don’t become scared thinking that big deals are riskier. This is false, small deals are riskier.
8) Buying on a Budget—Don’t be confined to what you can “afford”. Don’t have a budget when you buy, have a budget when you own. Too many people think they can only buy small because they only look at what they have, not at what they can raise. Remember, smaller deals are riskier, if you have 4 units and 2 people move out, you’ve got a big problem. Have 50 units and 2 people move out and you’re still good. This is why renting out a single family home is a terrible idea—when I did that my tenant left and I couldn’t replace them and just had to sell the place to escape the problem.
7) Believing the Pro Forma—Don’t put significance on a fairy tale. The pro forma is a lie; It’s made up based upon wishful thinking. The problem is that it’s too optimistic. I’m all for being optimistic in life—I’m a very positive thinking person—but when it comes to real estate investing you need to be thinking worst case scenarios. Oftentimes, if you buy right, a property will even outperform a pro forma, but you should never assume this.
6) Underestimating Expenses—This usually happens when taxes and insurance aren’t fully understood. It’s a big mistake not to calculate exactly what all your expenditures will be. Really, as I mentioned above, you want to overestimate your expenses and assume worst case scenarios. Only if you could still make money under a worst-case scenario should you continue forward with a deal. This is how I roll because I don’t lose money on deals, ever.
5) Not Funding Future Capital Costs—Roofs, carpets, etc. need to be funded, so set some aside for when you will need it. You don’t want to be caught off guard needing to do something with the property and not having the funds in place for it. This is a huge mistake many investors make. Listen to my Real Estate Podcast for much more on this stuff.
4) Over Leveraging—This is borrowing too much money. I have hundreds of millions of dollars of debt, so don’t get me wrong, I’m all in favor of using debt to your advantage. But there is a thing as too much, folks. If you can’t afford it, you can’t afford it. When you’re over-leveraged you have no room for error. This is not a good place to be because, as mentioned, sometimes things go wrong. Assume worst-case scenarios!
3) Under Leveraging—The opposite of over-leveraged is when you don’t borrow enough. Look, if money is cheap, borrow! Why have equity sitting in a $600,000 house that could be earning you more money? Cash is great, but it doesn’t pay you. When interest rates are low, get yourself some leverage!
2) Buying on CAP Rates— The capitalization rate is the NOI/ the purchase price. If you’re only looking at 8% cap rates, you’ll miss out on good deals that don’t fit your criteria. Don’t judge a deal just on CAP rate.
1) Not Knowing Market—Ignorance is not bliss. When it comes to investing real estate, the biggest mistake you can make is not knowing. If you knew everything, you’d avoid mistakes, right? Don’t buy in a market that you haven’t done the research in. I’m not talking about just doing a little research here, you need to go deep.
I want cash flow from day one with my real estate. If it doesn’t pay me today, then no way do I want to be a part of it. I’ve opened up my fund with Cardone Capital to let accredited investors invest with me in deals. I’m avoiding the 10 biggest mistakes in real estate, are you?
Grant Cardone is a New York Times bestselling author, the #1 sales trainer in the world, and an internationally renowned speaker on leadership, real estate investing, entrepreneurship, social media, and finance. His 5 privately held companies have annual revenues exceeding $100 million. Forbes named Mr. Cardone #1 of the “25 Marketing Influencers to Watch in 2017”. Grant’s straight-shooting viewpoints on the economy, the middle class, and business have made him a valuable resource for media seeking commentary and insights on real topics that matter. He regularly appears on Fox News, Fox Business, CNBC, and MSNBC, and writes for Forbes, Success Magazine, Business Insider, Entrepreneur.com, and the Huffington Post. He urges his followers and clients to make success their duty, responsibility, and obligation. He currently resides in South Florida with his wife and two daughters.