Why Real Estate Investors Fail
Dozens of books have been written to explain why real estate investors fail to make money on their investments and suggest specific ways in which they supposedly can make their investments more profitable. But the reality is that success in real estate investment depends not simply on certain investment techniques, but rather on business acumen, management skills and money-smart psychology. Here are six reasons why investors struggle and some sound advice even the most savvy might want to consider:
1. Cash Crunch. The most common and insidious management mistakes in any business naturally involve money. In real estate investment, money troubles can include over-paying for the property, taking on too much debt, ignoring the true cost of such major expenditures as property taxes and capital improvements, failing to increase rents to reasonable market rates, and trying to operate a property with inadequate cash flow.
All the worse, these money-management mistakes tend to be interconnected and tend to strike in combination and trigger one another. For example, taking on too much debt, underestimating capital expenditures or not raising rents when possible can result in a severe cash crunch, and that can be the start of a downward spiral.
2. Troublesome Tenants. While most businesses can turn away non-paying or otherwise disruptive customers, real estate investors need solid long-term tenants who pay their rent consistently and obey the house rules on the property. Major mistakes include inadequately screening prospective tenants and failing to take immediate action against those whose behavior warrants eviction.
Moreover, the investor's (or his or her property manager's) relationships with tenants should be based on business considerations, not emotional ties or concerns. Examples of poor landlord-tenant psychology include renting to tenants because they "seem nice" without running a credit check and opting out of sheer stubbornness for an expensive eviction rather than negotiating a bad tenant's exit from the property.
3. Lousy Location. Another pitfall that's specific to real estate (and retail outlets) is a poor location. A property that can't generate adequate income or is too costly to operate on account of its location can easily become unprofitable. A "good" location doesn't necessary mean an upscale neighborhood; rather, it concerns the balance between supply and demand for similar rental properties in a given market. If the market has too much supply, rents will be competitive or worse, making it more difficult for the investor to earn a return on his or her investment. A poor location can be a nearly incurable defect.
4. Problematic Property. A related problem is owning a type of property that is not matched to the needs of the marketplace. For example, a very small house in a family-oriented neighborhood of much larger homes, an overly large house in a community of moderate residences or a student-friendly house that's too far from campus might be less attractive as an investment than a property that is typical for the area and in high demand as a rental.
5. Management Missteps. A guaranteed path to investment failure is to treat real estate ownership as a passive activity or a hobby rather than an active business. Too many investors fail to adopt a business mindset and thus are exposed to faulty or lax decision-making, improper accounting and bookkeeping, overpriced or shoddy contractors' workmanship and the like. Moreover, inadequate financial controls can be an open invitation to embezzlement or other fraud, a sad cause of failure that occurs far more often than honest people like to recognize.
6. Excessive Expectations. Some entrepreneurs experience emotions that feel sickeningly like failure simply because they've set themselves up with lofty pie-in-the-sky objectives and unrealistic goals. Successful businesses typically consume much more time, energy and capital than their owners ever imagined would be required, and even those investors who are highly dedicated and professional encounter serious obstacles and setbacks along the way. Investors can and indeed should think big and have high hopes, but they also need to temper their expectations with a realistic vision of what they're likely to achieve. That's a good path to greater success.
Copyright 2006. Marcie Geffner. All rights reserved.
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