5 Reasons Your Business Isn’t BoomingBy Paul Esajian on November 10, 2018
Not every real estate deal you get involved in is going to be a home run. As shocking as this is for some investors to believe, it is true. The home run deals in real estate are much more the exception than the rule. Like any other form of investing there is no guarantee to generate a significant return. If you work on twelve rehab deals a year, only one may net above average returns. The other eleven deals can still generate revenue, but maybe not at the level you anticipate. If you are disappointed in your returns there are a handful of reasons why. For example, you may be making some of the most common rookie investor mistakes, like these. Fortunately, most of these are easy changes, either in your mentality or how you run your business. Here are five reasons why you may be disappointed in your returns, and what you can do about it.
- Unrealistic expectations. As we stated, investing in real estate is not a lottery ticket. Simply because you are flipping a house it doesn’t mean you will make 30% on your money. Where many investors get in trouble is setting unrealistic expectations for their business and their investments. The way the real estate business has been shown on TV over the past few years makes it appear that every deal has limitless upside. What you don’t see are the deals of investors struggling to scratch out a profit, or even take a loss. The home run deals you see on TV are truly the exception and often the case of being in the right place at the right time. It is not hyperbole to say that those same investors have been pounding the pavement in their market for years cultivating contacts and growing their network. Any leads they get are a byproduct of their hard work and persistence. Real estate is full of opportunities, but not every deal is going to be a life changing score.
- Unstructured goals. Investing in real estate should be run like a business. Even if you do it part time, you still need structure and organization. Where many investors run into trouble is not having a clear vision for what they want out of real estate. Simply stating that you want to make a lot of money is not a structured goal. What ultimately happens is that you will get pulled from deal to deal wasting time or committing to deals you don’t really want. On the flip side, if you keep in mind that the goal is to make a profit and not just close transactions you will see increased returns. Instead of closing ten deals a year, you may close half as many but make the same profit. Focus only on deals and opportunities you really want. This takes a good degree of patience, but in the end, it is the best thing you can do for your business.
- Poor accounting. There is a lot that goes into a profitable fix and flip rehab deal. It starts by getting the property at a number you are comfortable with that allows you to do what you want without stretching your budget. Many investors are afraid to submit a below market offer in fears of ending negotiation or ruining their credibility. You will be surprised at just how many sellers would be open to an offer with a quick closing and secured transaction. Once you get the property you need to watch every penny of expenses. This doesn’t mean you need to be cheap, but you need to realize that all expenses directly impact your bottom line. Going over budget has a trickle-down effect on everything else you do in the property. You may change the work you planned based on trying to recoup the losses. If you try to go cheap, buyers will notice and may not want the home at your price. If you overcompensate and over-improved the property buyers may not be willing to pay a premium based on the market or other factors. Always know, and understand, the expenses and stay on top of your budget.
- Lack of management. As an investor you are the leader of your team. You stand to benefit the most from the transaction, but you also have the greatest responsibility. It is up to you to get everyone in line and performing at their best. You need to toe the line between knowing when to be stern and when to connect on a human level. If you don’t have control over your team, they will not feel the same urgency you do and ultimately delays will happen. Every day you work on the property directly costs you money. Furthermore, you need to surround yourself with people who you know, and trust can do the job you anticipate. It is not enough to get the property done, you need it to be perfect. How you manage the project and the people in it has a huge impact on your returns.
- No due diligence. It is up to you to verify all the information provided on a transaction. If you find out something after the fact about the property it is not on the wholesaler, seller or real estate agent…it is on you. You need to put the time in to research every aspect of the property and the deal. The minute you get lazy in this regard is when you will run into trouble and your returns will be impacted.
There is a fine line in maximizing your bottom line. The little things you do, or don’t do, often have a tremendous impact.