Become Financially Free By Avoiding These Common Reasons People Fail at Buy and Hold Real Estate!!!

In a previous edition of “The Lund Letters”, I promised a coming attraction… “Common Reasons I See People Fail at Buy and Hold Real Estate, and How to Avoid Them So You Can Become Financially Free!!! Yes, it works, even in this real estate market, if you just do it correctly!” Well, when I make a promise, I make every attempt to deliver, so here is that article.
My experience has been in single family home, buy and hold real estate, so all of this applies to that particular arena; some of it may or may not apply to areas such as multifamily real estate, commercial real estate, etc. Also, I am giving reasons that I have seen and can recall, and this is in no way intended to be a list that includes every possible reason for failure – this list should help someone succeed in buy and hold real estate, but please don’t think that it is an exhaustive list. Above all, use common sense and recognize that you are 100% responsible for your own success or failure in real estate investing. In no particular order, here are common reasons I see people fail at buy and hold real estate, and how to avoid them so you can become financially free…
#1 – People chase the illusion of making a fast million or two, and give up too easily when they find out buy and hold real estate is a long term, work hard, get ahead slowly plan. It happens in years, not days. The solution is to have really big reasons why you want to succeed, to be willing to work hard and do whatever it takes to succeed (within moral, legal, and ethical limits is always a given with me), and to continually learn, improve, and motivate yourself (and it is my intention that ‘The Lund Letters’ be a great tool towards these ends!).
#2 – People start out too fast, and get in over their heads. I have seen many new investors come out of the gate with a ton of excitement, rush in, and start buying anything and everything they are able to buy, just because they can. Often “newbies” learn some great technique for buying houses, and figure that means anything and everything they can buy that way must be a good deal. “It is nothing down, so it must be a good deal.” Not true. “The bank discounted the mortgage, so it must be a good deal.” Not true. The solution is, again, to recognize that building wealth is a long term plan. You must buy properties that make sense, and fit in with a well thought out plan. Properties must have positive cash flow, so you can carry them as long as necessary before selling – that is what gives you the ability to ride out downturns, no matter how long it takes. This leads to several other common reasons…
#3 – People buy properties with no specific plan of how they will make money on them. My solution is that, when I buy a property, I know when I buy it that I will make money on it, and often how much and approximately when. To quote one of Stephen Covey’s ‘7 Habits of Highly Effective People’, begin with the end in mind. More on this in common reason #4. In real estate investing, you make your money when you buy. If you can’t see the profitable exit strategy from the beginning, don’t buy. Look for a better deal.
#4 – People often buy properties that are not flexible in what can be done with them. One example is buying large, expensive single family homes that do not cash flow, so they must be sold to make a profit, or they become alligators (the payments eat you alive). Large, expensive houses are for experienced investors who know the ins and outs of investing in big expensive properties (such as optioning properties, rather than buying)! Another example is buying war zone or dysfunctional properties that may cash flow well, but are nearly impossible to get good tenants for, are management intensive, and do not lend themselves well to selling if and when it makes sense. I always have multiple plans in place when I buy a property. On any new property, my criteria are that I buy well below value, that the property has positive cash flow from day one if I keep it, and that there is a substantial target market for the property (occasionally, when I can really get a great deal, I may step outside of one of my criteria, but I am extremely careful when doing so). Combined, these criteria remove most of the risk of long term buy and hold real estate investing. When I buy, I am hunting for a needle in a haystack… an undiscovered gem… a diamond in the rough. Too many investors get in trouble because they ‘settle’ when they buy. I like to buy properties that lend themselves to a flexible approach, and here is a recent example. I bought a 3 BR concrete block house in a decent North Lakeland neighborhood, for $80K. It comped around $129K (in a declining market), and needed no repairs, though it could stand about $5K in improvements to ‘make it really sparkle’. First, with the sellers approval, I began advertising it for sale “as is” before I even closed (I often do this with fixer uppers, too – sometimes the property “as is” is just what some individual or investor is looking for, and you can make a nice profit without ever having to do a rehab – no reason to avoid easy money!). You might consider this wholesaling instead of long term buy and hold – and I would agree – but I also consider it flexibility and good business sense. I did one property in the Kathleen area of Lakeland in 2006/2007, where a partner and I intended to have about $25K in total profit doing a major rehab, best case scenario, and we made that without touching it because it was exactly the fixer upper some other investor wanted at the time. ‘Nuff said. Back to my 3 BR, which didn’t sell “as is”. Next, I spent the $5K and ‘made it really sparkle’. Then I advertised it FSBO, owner financing possible, rent to own available, and for rent, all simultaneously. At this point I would prefer a cash buyer (now a flip instead of long term buy and hold, but I still make a nice profit, fast, and I can reinvest it back into my long term buy and hold real estate). That didn’t happen. With owner financing, I don’t care about credit, because I get enough cash down to protect myself (if a caller inquires about owner financing, my first question is how much do they have to put down - the more down the better; with this house $10K would be my minimum). That didn’t happen either. What did happen was rent to own (called lease/option to most investors, but I find my target market understands the rent to own terminology easily, and lease/option scares them a little). This is about my fourth choice (after sell before any fix up, sell cash after fix up, sell owner financing with a bunch of cash down), but in a tough market I knew going into this house I was likely to end up at rent to own or, fifth option, straight rental, and I had no intention of waiting around for an empty house to sell for cash. That was fine. I got $3K down, $850/month, with a sell price of $109K, and a great tenant/buyer. The tenant buyer is a nice middle-aged couple that got in over their heads buying too much home at the top of the market, and lost their home to foreclosure, but otherwise their credit is really good; both husband and wife have stable jobs with good income, and their residence looked better than my personal residence – you could eat off their floors. This one won’t make me rich, but I aimed a little low (notice my sell price $20K below comps – a huge selling feature, especially when most lease/option investors want full market value or above) because in a tough market I wanted to sell or fill the house fast – which I did; it was filled before we finished putting the $5K into it to ‘make it really sparkle’. If I fell to my last choice, renting, I was asking the same $850/month, with first, last, and a security deposit, which would have gave me almost as much money down as my rent to own deal did. FYI, when I take a house and ‘really make it sparkle’, I am extremely careful about who I put in it, and how much cash I get before letting them move in – keep in mind, the better the condition of the property, the more exposed you are, so CYA (cover your assets). FYI, I paid cash for this particular property, so the cash flow is solid; I may eventually borrow some money out of it for other deals, but I would still keep it positive cash flow if I did.
#5 – (if you have digested #4 yet – it was a biggie!) – People buy properties that don’t cash flow, and then wonder why they get in trouble. Often, they are completely unrealistic about things such as vacancy and repairs – in fact, nine times out of ten when someone tells me about their cash flow on a property, they don’t factor in vacancy and repairs at all – are they living in la la land? The solution is to figure out a realistic formula for cash flow that works for the type of property you are evaluating, and then stick with it. Here is the formula that I have found well suited to my Lakeland, Florida, buy and hold, single family homes… First, if it passes the sniff test (does it smell like a deal?), here is how I evaluate cash flow. Start with estimated rent (if you don’t KNOW what it will rent for, do some research!). I count 25% of rents as my estimated vacancy and repairs (with this formula, keep in mind that I manage my own properties, and tenants are responsible for yard, utilities, etc.). I adjust my formula as needed – for instance, a brand new block house would require fewer repairs and an older frame house or mobile home would require more; a unique or very small house might have higher vacancy because it is harder to fill and has higher turnover; and a war zone property, which I recommend against for anyone but the experienced war zone investor, will likely have higher vacancy, repairs, and management expense. Many new(er) investors tell me 25% seems high, until I ask them a few questions… Did you factor in that you need a $5K roof every 15 years? Response – No; it won’t need a roof for five years. Right, and then how will it be paid for? Ummmm… Did you factor in new carpet every few years? No, it’s already new. Right, and based on experience how often do you need new carpet in your rental units? Ummmmm… How about changing locks whenever the unit becomes vacant? Did you factor in that a certain percentage of tenants, no matter how good you are at managing property, will fool you, and be slime, and do big damage to your property before you get them out, or never pay another month’s rent after move in, or move out in the night without notifying you? Ummmmmmmm… Does that really happen? All of that and much, much more happens, but those things don’t have to stop you (more on that in common reason #6). Back to our formula; rent, minus 25% of rent for vacancy and repairs (adjusted to suit the property and specific situations), minus PITI (payment, interest, taxes, and insurance), leaves us with cash flow. Especially in a down real estate market, I do not buy property that doesn’t cash flow. It is a recipe for disaster. You want to be able to hold your properties as long as necessary to be able to sell for a price that makes sense/cents, and you want to make good money every month doing it. Trust me on this one – doing all of the work involved with buy and hold real estate for a property that costs you money every month gets old really, really fast, and even more so if you can’t afford it!
#6 – People have a good buy and hold property, with positive cash flow, and everything is going great, but they spend the profits every month. They never build themselves a cushion for problems, and something unexpected comes up (ala a few examples in common reason #5), and they don’t have money for it. Then they throw up their arms and tell the world that buy and hold real estate sucks and it makes you broke and it doesn’t work. The problem here was not the unexpected thing that came up – that happens. The problem was the lack of preparation for it – which is shortsightedness. When, not if, the unexpected big expenses come up, I welcome the opportunity to overcome yet another challenge (as much as that is possible), remind myself that I have a dozen other properties that are doing just fine to ‘average it out’, and thank God that I have funds available to right my ship, because I think long term!
#7 – People don’t properly screen their tenant applicants before putting them in a property. Big mistake! This could end up being way worse than the property being vacant a little longer. My solution is twofold. First, I don’t ‘settle’ on the up front money (meaning first month’s rent plus deposit, rent to own down payment, or whatever). Over and over again I hear about investors that got burned because they put somebody in a property with almost nothing down, and then they either didn’t pay, or did significant damage to the property, or both. The up front money protects you in two ways. It screens out the people that will have a hard time making the payments every month – if they can’t save up initial move in money, they will likely struggle with monthly payments, too – a headache you don’t need or want – and move in money gives you a cushion to cover if they don’t pay, or if they cause damage. Second, after checking applications thoroughly, including references, jobs and sources of income, etc., if everything else looks good, I take the final step, that most investors aren’t willing to take. I go by the place they live now, unannounced, and I find out how they live. Whatever their house looks like now, that is what my house will look like in 1-2 years. This is, IMHO, the ultimate best way to screen applicants.
#8 – People consistently underestimate the carrying cost and/or repairs on properties. I see over and over again people that get into trouble before they even get out of the gates because they either can’t get a property sold or filled quickly, or they underestimated expenses, and the carrying costs eat them up alive. This may apply to rehabbing and flipping, or to long term buy and hold. Are you counting payment, interest, taxes, and insurance for enough months (be realistic)? Are you adding in enough for repairs (and contingencies)? What about the utilities, advertising, upkeep for yard and other while it is empty? How about trips to the property and related expenses? Closing costs and realtor fees if applicable, etc.? Costs of staging the property? I have a few solutions to these problems, some of which we already covered in some detail. First, I have found that even as an experienced investor, I estimate my rehab based on everything I see, and then I add 50% to my estimate for the things I can’t see. Second, my flexible approach to selling/filling a property, mentioned in detail in #4, effectively triples or quadruples my target market. Compared to someone limiting themselves to just one approach, I target people wanting to buy fixer uppers, people that want to buy retail, people that want to rent, and people that want to buy and have cash but damaged credit. I can also find creative ways to help people get financing if they have good credit but little or no money, and sell them a house when someone else might not be able to put that type of deal together. These tools help me to sell or fill houses quickly, thereby reducing my carrying costs to a fraction of what many investors experience. The more you learn, the more you earn. Third, if the house justifies it, I ‘make it sparkle’. I rehab it nice, then I do the little extras that don’t cost much, but make people fall in love with a house. Fancy house numbers are a great example. A nice looking mailbox pays off in spades compared to the cost. Anything that adds curb appeal without adding a lot of expense is good, including keeping the landscaping well groomed and the yard mowed, edged, and weed-eated. I am always amazed at the number of nice houses for sale/rent that have overgrown yards and lawns killing the curb appeal. I almost always do all new outlets/switches and covers throughout. They are cheap, but make a big difference compared to old ones. Get new doorknobs and deadbolts if the old ones show any wear at all. I always put in nice new shower curtains and those toilet decoration rug set things (you can see that top notch terminology is important to me – LOL!). Often I put new blinds in the windows. Most people know to spend a little more in kitchens and bathrooms – they sell houses, and they also rent houses. When you have a choice, always lean towards neutral colors – I have seen many investors and/or homeowners that struggled to sell or fill houses because their colors, ummmm, didn’t appeal to the majority of their target market. For finishing touches, just before show-time, I make sure the house smells right throughout, is as clean as a whistle, the temperature is right, etc. One of the ways I used to know I had it right was, when I finished a house and started showing it, I would bring my wife by to check it out. If she didn’t want to move out of our lived in house and into my showroom special, I wasn’t done, or I didn’t do it right. It always fascinated me that, when we bought, she never liked the houses, but when we sold she usually loved them. See, to me it was the same house, because I knew before I bought what I would do to it, and I could see a mental picture of the finished house (begin with the end in mind). I expected the transition, but she was always amazed by it, even though we did it again and again and again. How do you sell or rent a house fast? Make it the nicest one, with the same price/rent as lesser houses. Alternatively, you could make it the same as the competition, but with price/rent lower than equal houses. If you can, be flexible. Fastest of all – make it the nicest house in the area, with slightly lower price/rent than the others, and be flexible, and it will be filled or sold fast, and a lousy real estate market won’t make a bit of difference. I let someone else be a casualty of carrying costs – not me. If you can’t afford to do the things I just talked about – then evaluate whether or not you are a) managing your money right, and b) buying your properties right (back to an earlier theme – you make your money when you buy)!
#9 – I touched on this briefly in common reason #4; people buy houses that are not aimed at a large enough target market. Roger Salam spoke at our REIA recently, and he said that a buyer’s list is more valuable than a bargain property in this real estate market. I have heard of the buyer’s list approach before, and while I thought Roger did a great job overall, I will have to respectfully disagree with Roger on this point. Just because real estate overall is beat down, doesn’t mean great deals are suddenly a dime a dozen. People that need help are a dime a dozen, but great deals are still like hunting for a needle in a haystack. I make a buyer’s list every time I work on selling/filling a property, and let me tell you my experience. First, buyers are very fickle. When someone buys a house retail, to live in, it has to ‘feel’ right, and what creates that feeling is different for everyone. When I create a buyer’s list, I can find exactly what 30 people say they want, and only two weeks later, 20 of them are no longer looking or interested, and 5 suddenly want something different than what they said they wanted, and 5 say they will go by to check it out, and 3 actually do, and all 3 have reasons it isn’t right for them. A buyer’s list grows old and cold very, very fast. What I have found to be effective, instead of a buyer’s list, is to aim at a large and definite target market. If 30 people all want the same thing, don’t worry about finding those 30 people what they want. Just know that there is a target market for what they want, find a great deal on what they want, follow methods from #8 on selling/filling houses fast, and voila – you have the makings of a great investment. In my early days I heard several investors say they only want 3/2 block houses in decent neighborhoods, and I thought that sounded kind of limiting – but there was a method to their madness. They knew there was a huge target market for that type of house, to rent it or buy it. If you can find a 3/2 block house, and you buy it right, your work is half done for you already. On the other hand, even with a good deal, small 2 bedroom houses can be tough investments, because they are too small for the majority of the population. Personally, I won’t even consider a 1 bedroom house, or a multi-unit property that has many 1 bedroom units. Very few people want a 1 bedroom, and the ones that do are very transient (they move often). One bedroom houses/units are hard to fill, and harder still to keep filled.
#10 – People don’t have enough tools in their tool box. This is similar to #4, where the property lends itself to just one exit strategy, and when it doesn’t work, the investor gets in trouble. However, now instead of the property being the issue, the issue is the investor’s lack of knowledge or creativity. One solution is learning a variety of techniques for selling or filling houses, instead of just one. Another solution is, when you have a problem you can’t figure out alone, get together with a group of investors and brainstorm a bunch of possible solutions.
#11 – Going in the opposite direction, people have too many tools in their tool box, and not enough mastery over each one of them. Each of the tools I mentioned for selling/filling houses has certain specific advantages and disadvantages. Also, there are specific things you want to do, or avoid doing, to limit your risk as much as possible. If you try to use methods you don’t fully understand, it can be like playing with fire - sometimes you get burned.
#12 – People manage their own properties when they don’t have the temperament for it. Managing property is a form of running a business, and you must treat it as a business. You must stay professional at all times. I have seen several situations where investors got into heated arguments or screaming matches with tenants, up to and including vulgar language, and it came back to bite them. They often thought at the time that they “sure did straighten that tenant out”, but not long after they found out what they really did. They brought out the wrath of a tenant without paying attention to the fact that tenants yield a certain amount of power by virtue of the fact that they live in your property. This kind of thing doesn’t happen often, but have you heard about tenants that… Poured concrete into the drains? Smashed up the walls/floors/ceilings? Poured motor oil all over the carpets? Broke all the windows in a house? Sold or stole your appliances, light fixtures, etc., when they left? Ripped all of the wiring out of your house? Helped you avoid vacancies (by moving homeless people into your house when they left)? Personally, I have managed as many as 15-20 properties simultaneously, for about 10 years, and I have never experienced any of those problems. The reason is because I always, always, always treat my tenants with respect (even when they disrespect me). When I have to evict for nonpayment, I notify the tenant that I would like things to work out for them, but I am running a business and I have to get paid. I have to pay the mortgage and support my family (I know many investors present themselves as only being the property manager, and not the owner, and thereby have the ability to make the owner out to be the bad guy when needed). I notify them of what they need to do to remedy the situation, and I try to be understanding. I notify them of what will happen when in the eviction process, so they can take measures to find alternate housing if applicable. When they need to vent, I quietly listen, and calmly and quietly say what I need to say. If something they say or do surprises me, sometimes I notify them that I will have to take some time to get back to them (rather than saying something in the heat of the moment that I might later regret). If possible, when an eviction is apparent, I try to work out the tenant leaving on their own. I have only had to do a handful of evictions in ten years, and most of those tenants, when it was done, actually thanked me for how professional and courteous I was throughout the process. Getting ugly is never the right answer, and if you can’t keep a level head, by all means, get someone to manage your properties for you.
Well, that doesn’t cover everything, but it covers what comes to mind now, and it should give you some ideas to think about. Now, since I gave you a list of all of the things I see people do wrong, let me close by sharing with you some of the advantages of buy and hold real estate, when it is done correctly. First, you should have positive cash flow on your investments. Second, your tenants are essentially buying the properties for you, since your mortgages get paid down a little more every month, and the rents cover the mortgage payments. Third, in the long run, you get appreciation (although I know right now, in this down market, it may not feel that way). Fourth, you get tax advantages such as depreciation, 1031 exchanges, and possibly, if done correctly, the ability to legally write off some of your normal living expenses. Fifth, it is easier than most investments to use leverage to your advantage. Sixth, investing in single family homes is easy to get into compared to many investments such as starting a business. And seventh, compared to having a JOB, it is a relatively passive income (once your properties are up and running, you shouldn’t have to do a lot of work relative to the long term returns you should receive), and that is a beautiful thing! Get enough properties, done correctly, and you will be well on your way to financial freedom!!!

P.S. - I didn't hold anything back - I shared all of the secrets I could think of that I am using to be successful in real estate at a time when many are struggling - hopefully all of you can find something useful in it!

P.P.S. - Further, and I apologize for the sales pitch, but I finally set up an affiliate account with Amazon.com, which is where I buy almost all of my books, CDs, etc., and figured out how to add recommendations to my blog. I have recommended three of the best success/wealth books I have ever read, and I may add more over time. I will never recommend books/products 'just to make money', but only because they are books/products that I have used, that I have got a lot out of personally, and that I believe whole-heartedly can help my readers!