17 Dec 14 Mistakes New Real Estate Investors Make: Part 6
Lately, we’ve been covering the 14 most common mistakes that new real estate investors make. You can catch up on the entire series on my Youtube channel! Today we’ll cover mistakes #8 and #9.
Mistake #8: Not Holding Property Long Enough
You receive appreciation on the entire property. If you hold property long enough, that’s where the greatest wealth is built. Remember, you always make money when you buy not when you sell. So you always want to buy property in a correct way—that means you buy it for less than it’s worth. But if you buy it well, and hold it long enough, then you can build real wealth.
Most people make their wealth in real estate by using a down payment. So when it appreciates, it goes up on the entire amount on the property—not just on your down payment! This means that your return can be awesome. As I always say, if you put $10,000 down on a $100,000 property and get a 10% return, then you get $10,000. That’s a 100% return on your investment!
So how long should you hold property? Well, I like to tell a lot of investors to get a 30-year loan and try to pay it off in ten years. If you can do that, then you hold that property for 25 years, what can happen with the increase is amazing. That $100,000 investment that you only have $10,000 in will double every 10-12 years. So if you hold it for 25 years, that house is worth $400,000! Your $10,000 down payment really grew there.
Also remember that the tenant is paying for the house. That’s what’s amazing. You put $10,000 down and the tenant is paying for everything else. Your positive cash flow is working. Not only is the tenant covering your cost, but when they make a payment they are actually buying down the equity in your home. So if you had a $100,000 house and you put $10,000 in, then your initial debt is $90,000. Every month, when you make that payment, a portion goes to paying down the principle. Now granted when it’s the first couple of years, a lot of it goes to interest. But a small portion of it still goes to principle so that you get equity buy down.
Your equity buy down in ten years is pretty substantial. That’s the idea of holding property long enough to let appreciation happen and your equity buy down happen. This allows your wealth to increase and build, and your net worth increases every month. So make sure that you’re holding property long enough.
Mistake #9: Becoming Emotionally Tied to a Property Instead of the Numbers
Always make decisions on properties based on the numbers. It’s always funny to me when I see people who go in and don’t like the colors of the walls. Or sometimes when you’re making a good deal, the carpet smells like cat urine. Well, carpet can be replaced and houses can be cleaned up. We’re not trying to make the prettiest, little house on the block. We’re going to function by the numbers.
That means, firstly, that we’re not going to overpay for the property. We’re going to make a good deal on the property. We’re not going to get so emotionally attached that we say we have to have it. We’re going to say, “Okay, this property is worth X amount. That’s it.” You either get it for that amount or you don’t.
Secondly, make sure you don’t over-rehab the property. Don’t spend too much money on rehab. Don’t doll it up to the point that you can’t make your money back.
Lastly, make sure you stick with your formulas. And if the amount of money you would have to spend doesn’t work with the amount of return you’re getting, you have to walk away.
It’s important to stick to the numbers and not get suckered in by your own emotions!
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