The 7 Deadly Sins of Real Estate You Must Avoid ⚠️

In todays download, I am sharing 7 deadly sins to avoid at all costs as a real estate operator

As observed over the past few years, many issues stem from these mistakes.

If you can learn about these mistakes and ultimately avoid them, your chance of success increases.

So lets get into it!

The 7 deadly sins of real estate you should learn about so you can avoid them at all costs:

1. Asset / Liability Term Mismatch

Assets generally have a term on their investment life (investors expect their hard earned money to be returned at some point in time, usually communicated at the time of investment).

Liabilities have a defined maturity date (the lender wants their money back on a specific date).

If you create an investment where these two dates do not mesh, you erase hard earned value while also increasing the risk of the investment.

Think long and hard about what an exit would look like, even in an asset you desire to hold forever.

2. Overpaying For Anything But An Excellent Asset

Here's what happens when you overpay:

👉 The returns become slimmer

👉 You limit your ability for disposition/refi

👉 Dead capital

👉 Reputational risk

You've only got one shot to get the basis right.

So that means, stick to the fundamentals of intelligent investing.

Weigh each investment across all requisite metrics and ensure if you are paying more, that it is excellent real estate.

3. Losing Other People's Money

Enough said...

Losing capital is a sin itself, but losing other peoples money is a deadly sin

It's critical for real estate investors to operate with transparency and honesty

If an unforeseen negative occurence happens, keep investors fully informed about the situation.

With that said, do everything in your power to avoid the situation of losing capital

4. Betting All the Marbles on Appreciation

Hope is not a business strategy

But far too often, people create business plans that are entirely based on appreciation (did someone say cap rate stagnation/compression???)

While it can be tempting to assume market conditions will continue to be rosey, markets change rapidly.

Over-reliance on appreciation, while falling into a bear market, is a recipe for a significant investing mistake.

Make sure to focus your analysis on the yield on cost as well as IRR to ensure an asset can stand on its own, and is not being propped up by aggressive sale assumptions.

5. Selling an Exceptional Asset

Time and time again, we hear people say their biggest regret was selling their "trophy" asset.

More land is not being made folks (unless Elon finds a way to get us to Mars soon 🚀).

The good stuff will continue to be good for longer than any of us are alive.

Exceptional assets are rare.

And rarity rhymes with value (well it actually doesn’t, but you get the point).

These assets are the pillars that provide stability to a portfolio, they provide long term gains and passive income streams.

It may be tempting to realize a large capital event, but if it is truly an exceptional asset, you are sure to regret that decision.

Set the sails and hold on to your good stuff!

6. Insufficient Operational Cash

One of the biggest mistakes amateur investors make is capitalizing a new investment with insufficient operating cash

Real estate is a game of mitigating risk (yep, I said it - its a game)

If you don't have sufficient cash to start, you are playing with fire.

If there are any capital expenditures that you have identified for the ensuing year, be sure to fund that at close (you never know when it could fail, and if it does early on you may have to make a capital call).

As far as determining an appropriate operating expense reserve, take the average total monthly expenses and multiply by 3.

Don't forget to accrue for real estate taxes and insurance if your lender does not require it

7. Excessive Leverage

We all know this one, but people continue to lever up when they are offered the ability to do so.

Leverage amplifies everything, including negative returns.

5% value decrease of an asset?

Thats a 20% decrease in your equity value on a 75% LTV loan

Consider the range of potential scenarios when assessing the amount of leverage you employ on an investment

If the vacancy falls to 10%, what happens?

If rents don’t grow, what happens?

Real estate is a long term game, singles and doubles compound.

It's all about getting back up to bat, and the quickest way to lose that opportunity is to dabble with excessive leverage.

That's all for today friends.

If you continue to find value in this newsletter, I would appreciate if continued to share it with a few more friends.

Thanks again for joining me this week,

Jake