This is my favorite Warren Buffet quote, and he’s absolutely right. There’s no doubt about it – investing is exciting. Few things in life compare to the thrill of real estate investing.
But it’s important to know that there are always, and always will be, an abundance of investment opportunities. Knowing when to invest isn’t the important part – you’ll find investment opportunities all over. The most important part is to know when not to invest. Avoid bad real estate investments is an extremely important aspect of being an investor.
Over the past few weeks, I’ve seen a shameful amount of bad investments being masqueraded as much better opportunities than they actually are. While we’re not here to name names, this article will provide you with valuable tips to help protect yourself from these types of bad investments.
Investing requires a cool head. You have to be able to analyze a deal objectively. Emotions can’t affect your judgment.
However, even seasoned investors can get swept away by their emotions. Emotional thinking can sneak up and take you by surprise. Perhaps it’s skewing the facts to make yourself feel better about the deal. Maybe it’s ignoring the fact that the numbers don’t add up perfectly. Maybe it’s when you’re trying to justify the sudden hidden costs that present themselves late into the deal.
Or what I’ve seen most recently, jumping on a deal because you think it’s the only game in town. As Buffet says, you need to know when to sit on the sidelines for a while.
No matter what, you must be a master of your emotions when investing. Success requires you to be cold, calculating, and detached.
If you’re the type of person that falls into these pitfalls, it would be helpful to have a cool-headed friend to talk through a deal with you. Just like it’s good to have a friend that can tell you that your girlfriend or boyfriend is cray-cray and you should break up with them, it’s also good to have a friend who’s not afraid of telling you that you’re getting yourself into a bad deal.
Sometimes unscrupulous developers and salespeople will market rougher areas as “gentrifying” when – in fact – the area is not showing any signs of improvement. Beware of those using a loose and liberal definition of the word gentrification, unless they plan on having you gentrify the area for them!
You want to make sure crime rates (and especially violent crime rates!) in the area are decreasing. You want to ensure that both the city and investors alike are pouring money into the area.
Look for job growth!!! Are there new jobs coming to the area and major infrastructure by any level of government? If not where are your tenants coming from?
As we spoke about in the last point, location is a make-or-break key to a successful investment. Just like some areas are mislabeled as “gentrifying”, there is a similar problem with areas that are not downtown being marketed as downtown.
Fortunately, the antidote to this is quite simple. All you need is Google Maps and the right mindset. Start by looking up the address. Is it actually downtown? You should check the walking distance between the new development and downtown amenities.
If it’s not as close as you anticipated, we’d like to reiterate: don’t fall for the old trick of convincing yourself that the condo “isn’t that far” from things, or trying to tell yourself that the distance is worth the price. Stop right there. No, it isn’t.
We don’t intend this to be a scare-tactic article. However, we do mean it to be a word of warning. There are a lot of sub-par investments out there that could end up costing you a fortune. As a good real estate investor you need to know how to avoid bad real estate investments
Let’s be clear – there’s nothing worse than the sinking feeling in the pit of your stomach after you realize you made a mistake. And let us tell you, the worst kinds of mistakes are the $400,000 ones.
And now, to conclude here is my second favorite Buffet quote: “Doing nothing is often the right thing to do.”
Good luck and safe investing!
Ryan Coyle, CoFounder CONNECT Asset Management