Losing sucks. The pain of loss is such a universal experience that it has launched dozens of infamous songs. The Clash fought the law, and the law won. Beck taught us that “un perdedor” is Spanish for “a Loser,” baby. The Beatles bemoaned being losers because they failed to keep the love of someone dear to them.
Unfortunately, some real estate investments can fail if the investor doesn’t know and follow some basic rules. Understanding why some investment properties struggle can help prevent you from singing the blues. Here are some of the most common reasons real estate investments don’t succeed:
In the end, time is the only factor that can cause a real estate investment to fail. If you stick with it long enough, you will succeed. Because inflation pushes up both property values and rents, with sufficient time, your investment property will always make money. Of course, you want to do everything you can to minimize the time needed to make a profit and maximize the money earned, and the other factors on our list will determine whether you do that.
Let’s look at other factors that speed up success or cause people to walk away from an investment property before it becomes profitable.
The whole point of owning real estate is to make money. And as long as you make informed decisions, over time, that’s what’s going to happen. But your path to riches won’t be a straight line. You may collect money hand-over-fist for months. Then the roof fails during a storm, and the garage door needs replacing.
You need to have sufficient capital to cover those expenses to avoid trouble. “Sorry, I’m out of money” won’t cut it when it’s raining in your tenant’s living room. Make sure you have sufficient capital in a readily accessible fund so that you can keep up with repairs and maintenance. You may also need to tap your reserves during vacancies between tenants when the mortgage still needs to be paid even though you are temporarily not collecting rent.
Just because you are collecting piles of money doesn’t mean you can or should spend all of it. Set aside enough of an emergency fund to meet whatever needs arise. Having sufficient capital to weather storms–literally or figuratively–allows you to keep your property healthy. It takes money to make money, so make sure you have some working capital.
Picking the Wrong Deal
Buying the wrong property is one of the most common reasons people give up before seeing success. If you purchase an unprofitable house, you start off behind. You will have to work harder and wait longer to see growing profits.
You may find a great deal on a rundown property. You buy it, fix it up, and advertise your new rental. It’s a beautiful home now and should rent quickly, right? Except that beautiful home is surrounded by properties that still need to be fixed up, so many people won’t want to live on that street. It could also be the type of home that attracts families with children, but it’s in a terrible school district.
These issues could mean that with the money you’ve invested in the purchase and renovation, it will take a while to see positive cash flow. You chose the wrong deal. That same money invested in a turn-key property in a desirable area could net you 35% more rent. It’s all about what house you buy.
Not understanding how to find money-making properties is why many people turn to residential real estate investment companies for assistance. They have the experience and industry knowledge to steer you toward the most profitable properties.
Whether you turn to experts for help or decide to go it alone, take your time when selecting your rentals. Research property values, locations, rent-to-value ratios, and zoning, or rely on a property investment company to understand those things for you. Hiring an expert can prevent you from buying the wrong home in the wrong location, which may cause you to struggle even if you do everything else right.
Not Dedicating Necessary Time
One of the many attractive things about investing in real estate is that it is a mostly passive investment. That’s especially true if you work with a property manager who can handle most of the regular workload for your rentals. However, you do still need to have some time available to make decisions about your properties.
As we’ve mentioned, you must research properties to ensure you get the most profitable properties available. You also need to be able to take the occasional call from your manager. If you choose to self-manage, there may be many months that your only contact with your tenants is their monthly rent payments. But you need to be available if the water heater floods the basement at 2 am. You’ll also spend time handling cleanings, inspections, advertising, and tenant screening each time you have a tenant turnover.
If your time is at a premium, your best bet is to work with a property manager who takes most of that off your plate.
Giving Up Too Soon
We are back to our first point: time is the only factor that can cause a real estate investment to fail. Impatient investors sometimes own a property for a short time, fail to see the massive profits they were imagining, and sell their property, locking in the losses. When you begin your real estate investing journey, remember that while it sometimes happens, this isn’t usually a get-rich-quick proposition. You start with modest cash flow, or sometimes even a slightly negative cash flow, and watch it grow over time. The real estate produces impressive long-term returns, but you must stick it out to see them.
When writing about their failure, The Beatles asked what they’d done to deserve their fate as losers. In the case of real estate, the answer to that is “not giving it enough time.” Other factors can cause you to struggle or increase the time needed to see success. Pay attention to those. That can help you avoid making your real estate investing journey more difficult than it needs to be. You don’t want to create situations that tempt you to abandon your project and lock in the failures.