Why Most Real Estate Investors Fail
by Don Konipol
A. To Reach Their Goals.
B. To Produce Adequate Returns for the Amount of Time and Money Invested
1. Concentration on Technique (Lease Option, Subject To, Foreclosure, etc.)
Rather Than on Property
Most investors new to real estate get mesmerized by a technique for acquiring
control of real property and or a technique for turning a quick profit. These
"techniques", often taught by "gurus" at $5,000 - $10,000 for training,
workshops and tapes, emphasize no need for extended time and financial
commitment (lease option, subject to) or emphasize quick turn profitability
(foreclosures, flips, over financing). These are analogous to the technical or
chart reading aspect of stock market investing; it doesn’t matter what property
you find, just apply the technique.
The truth is that any of these techniques can be successfully utilized given the
right set of circumstances. However, they are applicable in only a very small
percentage of cases, and usually after an extended negotiation or as an
afterthought to the property acquisition process. Successful real estate
investors concentrate on the property itself rather than on a specific
technique. This not only allows the investor to concentrate directly on where
most profitability resides, but also opens a much wider array of potential
"deals" for the investor to consider. Further, the investor can concentrate on
the much more reliable profitability formula of "adding value", rather than on
the more suspect and ethically questionable formula of finding a naïve
individual to work the other side of the real property transaction.
2. Plan on Doing Many Deals Each With a Small Amount of Profit Rather Than a
Few Deals Each with Substantial Profit
Many investors both experienced as well as new are thrilled with a small (under
$10,000) profit on each deal. Since unexpected expenses always seem to creep up
when least expected in real estate investing, the actual profitability of these
transactions range from half the expected profit to no profit. In order for the
investor to earn enough income to warrant the time commitment, monetary
commitment and risk involved, he would have to participate in a large number of
deals annually. And since it always takes many negotiations to produce a single
deal, and many property inspections to find a single property worth negotiating
on, real estate investment will become a full time real estate business. To be
sure, there are people who successfully play the low profit high numbers game;
most Homevestor franchisees come to mind. But if working 70 plus hour weeks and
buying, rehabbing and selling 50 plus properties per year sounds like a worse
life than the corporate world you’re trying to leave, you probably want to find
a different approach.
In my many years investing in real estate, financing real estate ventures, and
observing successful real estate investors, I have come to the conclusion that
participating in a small number of highly profitable transactions no only
produces more monetary success but also leads to a much more leisurely, less
stressful and more satisfying experience. I personally don’t believe any serious
investor need look at any transaction with less than a $50,000 profit, with the
goal of eventually only considering deals with a $100,000 plus profitability. If
you don’t think these kind of deals are available, then read 3. Below.
3. Working in a Crowded Arena (Single Family Homes) Rather Than an Area with
Less Competition and More Opportunity (Commercial)
From real estate investment seminars to real estate investment clubs to the
proliferation of how to real estate books for sale, one would think that the
single family home is the only property type available. And with the tens of
thousands of new real estate investors as well as the invent and expansion of
the franchised rehab businesses, the single family home as a real estate
investment has become a very competitive and crowded field. Whereas just five
years ago a homeowner needing to sell his home had very few and limited options
if the home needed major repair, he now has a much larger market demand to sell
into. The homeowner can sell to a much larger choice of investors interested in
purchasing his home, he can obtain refinancing money to repair his home even
with credit scores so low they would not have even been considered five years
ago, or he can auction his property and probably receive a cash offer at fair
market value. All this has made finding a below market priced single family home
investment like finding the proverbial needle in a haystack.
Rather than competing in the crowded and overly competitive single family home
residential market, with its limited profit potential and heavy time commitment,
real estate investors would have geometrically increased chances for success if
they spent the same time and energy learning about the various areas of
commercial real estate. Not only is this field significantly less crowded and
significantly less competitive, but the real estate investor is able to earn
significant returns on far fewer transactions. To be sure, there are tens if not
hundreds of types of commercial properties and transactions; the successful real
estate investor will educate himself with a good overview and then decide on a
area of concentration. Rather than waste time fighting for the left over scraps
in the single family residential market, the investor can be breathing the
rarefied of the commercial real estate market.
4. Having No Sustainable Plan
"I want to make a lot of money" is not a sustainable business plan. "I want to
specialize in foreclosures, lease options, and subject to" is not a sustainable
business plan. "I buy property for cash or terms" is not a sustainable business
plan. Enough said. If you don’t know how to develop a workable plan for real
estate investing buy a book on business plans, take a small business
administration course, or better yet attend my seminars and workshops.
5. Trying to Do Deals with No Equity Contribution
Yes it’s possible to purchase real estate with no money. Yes it’s possible to
flip properties for large profit with no investment. Yes it’s possible to option
property for $100. That being said, it’s infinitely easier to successfully
participate in real estate transactions when you as a real estate investor have
an equity contribution in the deal. When you put some money in a deal three
great things begin to happen. Conventional lenders become interested in
financing your transaction and 20 % hard money or 30 % equity share becomes 6 %
conventional financing. Sellers. Especially institutional sellers, take you
seriously and are willing to sell their property at large discounts. And outside
investors become attracted to your deal syndication and limited partnerships.
Life becomes easier and much more profitable.
Bio:
Don H Konipol has a BS in Economics and an MBA in Finance from the University of
Michigan and is a licensed Texas Real Estate Broker and Mortgage Broker. Mr.
Konipol is General Partner of the Managed Mortgage Investment Fund LP, a private
limited partnership that invests in short term, high yield private mortgage
notes. He can be reached at 832.577.8838 or by email at dkonipol@yahoo.com.