22 Real Estate Investing experts reveal the most common mistakes rookies investors make
Think you’re ready to get started on investing in real estate or house flipping? Think again. I asked 15 Real Estate and Home Flipping experts 3 simple questions.
1) What is the most common mistake home flippers make when they just start out?
2) What is the best way to ensure asset protection should anything happen (natural disaster, flood)?
3) What’s your best tip to maximize ROI on each property?
While we deal in insurance, it’s not the only important thing new investors and house flippers need to know. Dealing in insurance, I knew that insurance would come up quite often, but I was interested in the specific lines that the experts felt were most needed, or helped them out of a jam.
Responses listed in the order they were received in:
Nick Ruiz – Alpha Home Flipping
1. They think it’s just like the TV shows. Most of it is BS. Also, they start thinking about quitting their job and ‘making millions’. They need to stop, and just do their first deal in the right strategic sequence. This business is beautiful, because to scale it big, you don’t need to add tons more skills to grow. You do one deal, and you simply rinse and repeat as often as you can.
Lex Levinrad – LexLevinrad.com
1) The biggest mistake that new investors make when trying to do a fix and flip is paying too much for the house and underestimating the cost of repairs. A prudent investor waits for the right house that they can purchase at a price that makes sense. Be conservative in your estimates. Always assume the house might sell for less than originally estimated and that your repairs might be substantially more than anticipated. If the numbers work out then go for it. If not then wait for a better deal.
2) Get property Insurance and keeps some money in reserves for an event like this. You are still liable for your mortgage payment while you wait to get your insurance money.
3) For fixing and flipping go the extra mile and pay for upgraded kitchens and bathrooms. You will get it back on resale. Keep your property presentable at all times while showing it and check up on your property frequently. Make sure your property is clean and bright and hire a cleaning service to keep it clean once a week. Use a professional photographer for pictures to make your property look as good as possible. Price your property right. Do not list it too high. Price it to sell quick.
William Bronchick – LegalWiz
1. Not knowing what the house will sell for (not just appraise for). In other words, “marketability”. Not properly estimating for being overbudget on repairs; round off all estimates to the nearest 10k factor (ie, 22k bid = $30k). Not prenegotiating change orders with their contractor; changes = big money when you have no agreement!
2. Proper insurance Always use a corporate entity Use a land trust to hold title.
3. Figure out what you need to do to your property not to make it the best one of the bunch for sale, but the best VALUE for the money, so it sells quickly. That means attending open houses of other properties to see what your competition looks like before tackling the rehab project. Try and use a line of credit or HELOC for funding vs. a hard money loan.
Jilliene Helman – RealtyMogul.com
- Trying to tackle a project too big. When it comes to fixing-and-flipping, if you are just getting started, consider doing a transaction where you can add paint and carpet and not have to deal with the headaches of new electrical or plumbing.
- Ensure your insurance house is in order. Especially for areas prone to environmental issues, make sure you have insurance coverage for the life of your rehab until you can re–sell the property.
- If it’s a high end, expensive flip, consider staging the property with furniture before you go to re-sell it. Properties that are staged allow the potential homeowner to dream about the property as if it’s their own.
Todd Hutcheson – iBuyHomes[/x_text][x_text]1. Biggest mistake new investors make is stopping marketing when they are doing a rehab. When the flip is done, then they have to start over again. Continuous marketing is a must. If you are too busy and find a great deal, then you just wholesale the home.
2. I think the best way to protect yourself is to buy your property in a land trust (for anonymity) and have the beneficial interest be an llc. Make sure you do not have more than 5 properties in any one llc and get a blanket policy to cover all your properties for slip and fall type claims.
3. Learn to be a great landlord, but let your tenants think you are the manager. Be strict. Do everything to pick the right tenant and then make them happy so they do not leave. Turnover is the hidden cash flow killer that needs to be managed effectively to maximize ROI.
Todd Hutcheson is the owner of www.ibuyhomes.com and a full time investor in the Orlando Florida market.
Dyches Boddiford – Assets101
1) Beginning flippers don’t spend the effort and time to do proper due diligence. They often just go on what those with a vested interest in the property say, such as real estate agents, contractors, sellers. It is important to understand values and the current market to make good decisions in doing a flip.
2) Good property insurance is absolutely necessary.
Sharon Vornholt – Louisville Gals Real Estate Blog
1. The most common mistakes folks make when they are just starting out is they pay too much for the property and they underestimate repairs. I always advise new investors to use conservative comps and estimate repairs on the high side to allow for “surprises” when they get into the rehab (there are always surprises).
2. Always buy property in a trust. If you have rental property it’s important to also have your personal home in a trust for asset protection.
3. Be sure your repair estimates are correct and stay on schedule. Repairs that exceed your estimates can cost you a lot of money. Holding costs increase dramatically when you don’t meet your deadlines and can quickly eat up any potential profit in the deal.
David Tilney – DavidTilney.com
- Underestimating costs.
- Don’t sign personally.
- Eliminate transaction costs – buy, hold and collect rent.[x_subscribe form=”883″]
Justin Williams – House Flipping HQ
1) Biggest mistake people make is not get educated. They see a house flipping show or think they are handy so they can flip houses but they don’t understand all of the numbers involved like holding and closing costs, and it often get’s them in trouble.
2) Well you absolutely want to get insurance on all of the houses you purchase. We have had 2 fires in the past year and insurance saved us BIG time. Things like flood insurance depend on the area but if you are in a flood zone that is something you may want to consider.
Erik Korondy – Jax Flips
1) Mistakes in valuation of the property or estimating the rehab costs
2) Insurance, specifically a Builders Risk Policy.
Marco Santarelli –Norada Real Estate
1. The most common mistake is buying to high; followed my underestimating the Scope of Work.
2. Always have property insurance to cover your “assets”!
3. Again, control your costs by buying at the right price to get the right margins.
Randy Hughes – Mr. Land Trust
1) Under estimating the costs of fix up and the length of time to complete the flip (holding costs).
2) Insurance is your first line of defense, but don’t rely on it! Read your policy. There are many exceptions to the coverage, large deductibles and often the
legal fees for defending a lawsuit are not covered. Therefore, privacy of ownership is your next line of defense. Real estate investors are BIG targets for lawsuits because they own “hard assets” that are easy to lien. The first rule of asset protection is Privacy and the easiest form of privacy for the r.e. investor is to NOT OWN REAL ESTATE IN THEIR PERSONAL NAME! There are absolutely NO benefits to owning real estate personally…only risks and negatives! Hold title to your investments in Trusts. Each property should be held in a separate trust for privacy of ownership and asset protection (this insulates each property from the other).
Shaun McCloskey – Lifeonaire
1) The most common mistakes I see are actually two-fold. First, people act without having a vision in place. This means they chase whatever shiny object they see that they think will make them money this week. Second, is that many people think they need to know everything on earth before taking any kind of action whatsoever. That’s the exact opposite of how this works. They must take action from day one, knowing and being ok with the fact that they’re going to screw it all up along the way.
2) Get insurance. (How’s that for a simple answer.)
Sensei Gilliland – Black Belt Investors
1. Mistake? This should be plural. As an entrepreneur in a start up business we make many mistakes. As a business coach I see many entrepreneurs allowing fear to conquer their passion. Fear is a good thing as it alerts your senses but bad if you allow it to paralyze. The biggest mistake for real estate flippers is trying to do everything on their own. If they lack the experience than they should seek help by qualified professionals and have a master coach. This will help the flipper to plan, process and profit.
2. As a business owner with assets the best asset protection is having a structured entity such as a corporation or limited liability company coupled with the proper insurance. Let’s imagine A kingdom and inside this kingdom is all of your assets such as your castle, jewelry, livestock, etc. around your castle are great walls tall and thick with a moat going around your walls. The walls and your moat represent your entity. Outside of your entity are watch towers with archers. The archer’s job is to pick off any liability coming towards the castle; this represents your insurance.
3. Great question! As a wholesale real estate investor I make money on my purchase not at the re-sale.
Gary Johnston – GaryJohnston.com
1) Not being willing to make offers.
2) Depends on what you are doing. Entities, Insurance and not going on title.
Patti Robertson – Homevesters
- Under estimating repairs and over estimating ARV.
- Have insurance. A business liability policy will generally cover up to three flips at a time, which avoids having to buy expensive vacant property insurance.
- Buy low!!
David Krulac – How I Started With Nothing and Made $12 Million
1. Not knowing “value”. That is key to all forms of real estate investing, but I always say that the shorter time you plan on owning the property the lower your acquisition cost needs to be. If you own a property for 20 years, you can pay market value, as long as there is positive cash flow and appreciation, you’ll do fine. But if you only own the property for 20 days, you need to get a much bigger discount off market price to have a deal. Knowing value is a key. Many beginner wholesalers tell me they have all these deals but when I look at their deals, there’s not one deal in the bunch.
2. Full insurance plus an umbrella policy would be the first step. I won’t buy flood zone property, though there can be money made because the prices are depressed because of high flood insurance rates which is common knowledge.
3. Buy right, have tenants pay certain expenses like heat, electric, water, minor maintenance and sometimes sewer & trash if not municipal lienable.
Tim Herriage – Dwell Finance
- One of those most common mistakes that I see with flippers is that they do not develop a concrete renovation plan – including timeline and costs – and stick to it. Without a plan it’s easy to deviate, which adds expense and quickly eats through your contingency and discretionary budgets. When the inevitable unexpected expense occurs, there are no contingency funds available to help keep the project on time and within budget. As a result, many investors then skimp in the final stages of the renovation, which are the most important. These final stages are where you “tie the bow” and make it look pretty. At the end of the day, buyers notice these small details the most.
- Strongly consider getting full replacement cost insurance for the full value of the asset as opposed to cash value insurance (which only insures the current value of the component of the property you are repairing). Insurance companies utilize depreciation, so with a replacement cost policy, if you need to make a repair to a covered item, the policy will cover the cost of that replacement. Further, if your property is in an area that is commonly affected by wind, flooding or other natural disasters, it’s important to have coverage against those occurrences as well. This is a great blog post on this topic: https://www.b2rfinance.com/ins-outs-property-insurance-coverage-rental-properties/ Finally, be sure to get a policy from a solvent, rated insurer.
- Don’t skip the last 5 percent of the project, or the “make-ready” piece, and enlist someone who has not been part of the renovations to do the final punch list. This person can look at the project with a fresh set of eyes and ensure those final details are in place. Staging the property is also important and can help ensure a successful sale, as it can be challenging for buyers to envision their furniture in an empty house. Investor-friendly realtors or local investment clubs are good resources for finding a staging partner that understands working with investors.
Brian Kline – Realty Biz News
- Flipping is about making a fast sale so that you can quickly move on to the next deal. Beginning investors often look for the deepest discount but not the reason it is deeply discounted. That reasoning often leads them to investing in neighborhoods where properties aren’t selling. They buy at great prices but can’t sell because serious buyers aren’t interested.
- Understand your property insurance policy. Events like floods and earthquakes are typucally separate from basic insurance policies. Unusual events such as the flooding in Texas do happen and need to be planned for.
- Have an exit strategy and a plan “B”. If you don’t know how fast and at what price houses are selling in a particular neighborhood, you don’t an exit strategy. You can easily become “asset rich” but cash poor when it comes to flipping houses. Get in and get out fast.
David Campbell – Hassle Free Cash Flow Investing
- The most common mistake home flippers make is thinking that flipping houses is an investment when it is actually a job. The person who passively put up the money for the purchase and rehab of the property is making an investment. The property owner who coordinates the purchase, rehab, and resale of the property is not an investor; they are a real estate trader. Trading real estate means running a small business which takes a considerable amount of time and skill and it is definitely not a passive investment.
- One of the simplest forms of asset protection on your real estate flips is buying each property with bank financing or a hard money loan. Even if you plan on paying cash for the property, create and record a note and deed of trust / mortgage against the property from one of your closely held affiliated companies. That lien will strip equity out of your property making it less attractive for potential creditors to sue you or file mechanics liens on your property.
- The best way to maximize ROI on each property is to invest as little of your personal TIME as possible into each deal. There is an unlimited amount of capital in the world looking for a profit, but each of us only gets 24 hours a day. Time is the most precious investment resource of all. Invest your time wisely by building a strong team who you can leverage into multiple deals. The investor who is successful completing a steady stream of repeatable / duplicatable base hit investments will out perform the investor who fritters his life away chasing that elusive needle in the haystack. Learn more about hassle-free investing versus trading https://www.hasslefreecashflowinvesting.com/investing-versus-trading/
Mark Ferguson – investfourmore.com
- Underestimating the costs. They forget about carrying costs, buying costs and selling costs. The carrying costs will include maintenance on the home while it is being worked on like mowing the grass, snow removal and possibly HOA dues. There will also be utility bills that have to be paid; electric, water, gas. There are financing costs and every day you own a flip the interest costs will add up. The buying costs include inspections, appraisals, transfer fees, title insurance, closing company fees and more. These costs can add up to 1 percent or more of the purchase price.Selling costs will include the real estate agent commissions, but that is not all. The seller will pay for title insurance in many cases which can be $1,000 or more. The seller will pay for part of the closing company or attorney fees. When flipping a house you are typically selling to owner occupied buyers who need a loan and want their closing costs paid. Paying for the buyers closing costs can be 3 percent or more of the selling price.These costs are aside from the repair costs which most buyers almost always under estimate. I always add about 20 percent to my repair costs estimate for unknowns.
- The best thing to do is pay attention to what is going on where your flip is. If there is flooding in the area, a lot of rain or something else happening don’t forget about your flip! Check out the house constantly if it is not being worked on to make sure there is no flooding or damage from a natural disaster. Of course you should always have insurance while flipping a house in case something does happen.
- Sell the houses quickly. Don’t try to do the work yourself if you are not a contractor because it will take too long and not be good work. It will cost you more money in the long run than hiring a professional to begin with. Hiring that contractor will take time and you have to keep on them, but it will be worth it. If it takes you 9 months to sell a flip it not only costs you more money in interest and carrying costs, but it costs you the ability to buy more flips and make more money on the next deal.
Mike Hambright – FlipNerd
- Fear. Fear causes most to sit on the sidelines and wait for opportunity to show up. There’s not a single real estate investor in existence that sat around and waited for opportunity to fall in their lap…they went out and made it happen!
- Most that own rental properties are doing it to accumulate wealth, and provide for their families. Speaking from someone that has had a couple of rentals burn to the ground…you don’t want to let your hard earned assets go up on smoke. Make sure you’re properly insured, and make sure you’re not under insured.
- Buy each property right. “units” don’t matter…cash flow does. I’m a firm believer that it’s possible to make more money with a portfolio 1/2 the size if you bought each property right and manage it properly. BTW – we have hundreds of wholesale deals available right now at https://flipnerd.com/