You're about to discover the 7 ways real estate investors fail. These are the most common ways that investors fall apart in real estate. They (1) quit too early, (2) run out of money, (3) do bad deals, (4) get into bad partnerships, (5) get sidetracked on "bigger and better" deals, (6) get lucky on the first deal, or (7) just truly have no idea what their doing. Here is a detailed discussion each of those 7 ways real estate investors fail. You can listen to my podcast version (7 Ways Real Estate Investors Fail [PODCAST]) or if you like video better, here's the YouTube version:
I want to share with you the 7 most common ways that I see real estate investors fail miserably. Why am I qualified to be able to provide you such information? It's because I've been a part of so much and I’ve experienced so much. I’ve been a part of thousands of real estate deals. I coach people all across America, Canada, and I get so much feedback, people send me e-mails, they make comments, “Hey I'm in this situation. I'm stuck.” I deal with all these motivated sellers that they get stuck. I’ve seen where things fall apart. In the real world where there are great opportunities to make money there are great ways to lose money and fail miserably.
What I’m sharing with you is what I call the signal. It’s the accurate most truthful information on how it really works, as opposed to the noise. I’ll talk a little bit more about the signal versus the noise. I do it in some of my videos as well on the very last one.
Number 1: Quitting
- If you quit, I’m about to sound simple and it’s somewhat cliché this idea that if you work at it long enough, you’ll be successful.
Here's the bottom line
- In real estate, first of all, a lot of people they quit too soon. I see it where they get some momentum, they get things going.
- But there's an epidemic these days in this country, where people see what's happening with companies like Groupon that in 2 years went from zero to 6 billion, they see things like Facebook and they see the kind of money that can be created with some of these technology companies, and they think that translates to every other small business in America, and it just doesn't.
- What ends up happening is they don't make money in the first 3 months and they quit, they give up.
Now they may not say they're quitting or giving up. They may use certain excuses like, “Well, I didn't see results,” or this is a good one, “Well, this is not a good use of my time because I've got a new opportunity that’s even better.” I call that the grass is always greener syndrome where people are always looking for something new and different after a couple of months it doesn't work. You’ve seen this when people go on diets or people try to get healthy and those kind of things. It's very similar. A lot of people quit too early.
Stick to It
I submit to you that if you get active in your marketplace and you start to find out who the other competitors are in your local area that are also real estate investing, that the majority of them in 2 years will no longer be there, in 5 years you'll probably be the only one if you're still sticking it out, and hopefully you're extremely successful. Most people are so transient, whether it's real estate or anything. So few people can just stick to it long-term. That's where the power play is. The longer you’re in, the more success are. If you don't … If you fall victim to any of the other 7 I’m about to share with you, if you just do this one, you'll succeed. I mean if takes you 25 years, if you stick to it long enough, you'll eventually figure it out. The number 1 way that people fail in real estate is they quit.
Number 2: Run Out of Money
- This one seems pretty obvious. Well, running out of money is not just not having access to money for a deal.
- It's literally not being able to feed yourself and you have to go on and move on to something else. It’s getting excited about an opportunity but then not having the ability to stick it out long enough for things to really start to make sense.
- I made this mistake in the beginning. I actually quit my job and started real estate full time. I didn't have any money. I literally run out of money. I was living out of my truck, eating on beans. Bad idea.
Running out of money is very, very, very common. That's why you’ll see in another video I say should you quit your job, the answer is no. Stick it out. You need to have a little bit of money coming in. A little bit of money goes a long way in real estate. It keeps you in the game long enough to be successful. A phrase we like to use in my coaching team and I, stay in power. If you're in there long enough great things are going to happen. Running out of money is an easy way for people to fail. They just don't have enough or they’re not making enough at it, so they literally move on to different pursuits and they fail because they quit. Does that make sense?
Number 3: Doing Bad Deals
This one obviously sounds simple enough. “Okay, yeah, I get it Phil, so I failed because I did a bad deal.” Wait a minute. This is what I mean by this.
- It’s a lot more difficult to say no to a deal than it is to say yes, especially if you're in a situation where you have to make a deal work because maybe you got started in this and make your spouse, significant other, parent, friend, family member, somebody is riding your heart and they're saying, “Well, you're not making anything happen. I haven’t even seen you do a deal yet.” So you get anxious and you start jumping on deals that aren't that good a deals.
- Typically, the reason why bad deals happen is either a) you don't know what you’re doing, or b) even worse, you're anxious, you have to have a deal happen. Maybe you’re in this full time and you need a deal to work so that you can actually keep your rehab crew active. I’ve seen that one before. That’s just ridiculous.
- Just to keep your guys working you go get a marginal deal. So simple for people to take on a marginal deal.
- What takes real discipline is being able to say no, especially when the deal is kind of close. If you're really active and maybe you’ve got some competitors in the area and maybe you're looking at a deal and some other competitors are, I’ve seen where people bid up just to compete and beat their competitors. Stupid. Every deal has to stand on its own 2 feet. Doing bad deals very, very easy way to fail and fail miserably.
Number 4: Bad Partnership
This is surprisingly common. There are some wonderful benefits of being in a partnership, or a partnership like arrangement where you’ve got more than one party involved in the deal and they both bring tremendous amounts of value. The problem is what most people do is they go out, especially if they’re brand new, because they're nervous and they’re new, and it’s brand new in the industry, it’s got somewhat of a bad name. I mean, think about it, when you tell friends or family at a cocktail party, “Hey, I’m going to be a real estate investor.” “Oh, one of those we buy houses people.” It doesn't sound all that attractive and exciting. What happens is to buffer someone’s confidence a lot of time they’ll go grab a partner, friend, somebody else to bring in, just so that they can both be doing it together. Well, that’s typically a terrible idea. I have seen so many good friendships, lifelong relationships bust-up over one bad real estate deal, one.
The 2 guys that invented big wave surfing. I won’t use their names, but these 2 guys they invented what’s now this incredibly popular sport. Those 2 guys did a real estate deal together to buy some land near one of these waves breaks, one of these big breaks, and it went bad, and so they don’t talk anymore.
Another example, the people I used to spend the holidays with, with my family will be 3 families. 3 different families would spend together on the holidays. Well, not my family, but the other 2 families, they did a real estate together. Went bad. Boom, they no longer talk. These people, we spent holidays together for 20 years, no longer talk, boom. 2 friends of mine from college. They graduated from college, they started doing deals. One was an attorney. One was a contractor. The attorney brought the money. The contractor did the renovation work. One deal went bad, they never talked again. They have been friends since they were kids. I mean, I can go on and on and on. Bad partnership is such a toxic thing. It happens all the time.
What's the Solution?
Only do a partnership if the partner is bringing a tremendous amount of value, either extraordinary knowledge, money, or both, or just something that you don't have. That's critical. Then you also need to know exactly what is going on with the partnership, when’s it going to end. I know a lot of people don't get married thinking about how they're going to get divorced. But in a business partnership you need to know how things end.
Because what most people do is they grab somebody that knows as little or less about real estate as they do and they do it for an indefinite period of time partnership and things fall apart. This happens so common I can’t even tell you. It’s probably happening to you right now, some of you watching. I'm sorry. Now you just learned bad idea. I'm not laughing at you. I'm simply making light to the fact this is a very serious situation that you may be going through.
Number 5: Bigger and Better Deals
You quit, ran out of money, you do bad deals, bad partnership. Oh but there’s more. I call it bigger and better things. I’ll say bigger and better deals.
What do I mean by this?
Well, another funny thing that happens is that sometimes people are successful. Then they go, “Well, if I’m successful at this I can do bigger deals and I can do bigger deals.” So what they do is they leave their bread and butter that’s making great money and that’s killing it and doing terrific and they go up and they try bigger and better deals, and they go into something that they know little or nothing about, and in the end the whole thing falls apart.
I can tell you all kinds of business stories, both real estate and in the business world where somebody has a cash cow, something that’s extremely successful, but they get bored with it or whatever and they want to do something even bigger and they go onto that and they lose everything. You may know somebody that’s gone through. There's a phrase that's been used in some business books called stick to your knitting, stick to your knitting, where you stick to what's working.
As you notice I stick to my knitting, I practice what I preach. I'm a residential real estate. I am doing the simple single-family home condo, and duplex triplex quad, simple residential stuff I've been doing for years and years and years and years. People ask me all the time, “Phil, do you do these big commercial deals now?” No, I stick to my knitting, because I know it brings in the dough.
Number Six: Getting Lucky
Here's an interesting one. You get lucky. This is going to follow up with the last one too.
This can be very toxic because what can happen is you can do your first deal and make a killing. You may think you know what was the reason for the success, but you may be completely wrong about that. What ends up happening is you getting lucky gave you a false sense of security and you end up in falling apart in the next couple of deals. I actually like it if somebody has to struggle a little bit in the beginning, because it helps them understand what produced the success so you don’t have a miss-association, so you don't think to yourself, “Well, it’s because I'm so awesome. I’m such a genius,” when it might have been just because the market was booming in that area for a short period of time.
Getting lucky is a very, very big reason why people fail. It’s because they get this false sense of reality where they think they were the ones in charge of that success, when it had nothing to do with them. It may have been some external factor, and then 2 years later they go completely kaput and they all fall apart and they realize, “Oh, maybe I wasn’t such a genius.” Getting lucky can definitely be a very, very common reason for people failing in this business.
Number 7: You Don’t Know What You're Doing
Don't know what you’re doing. If you were just getting started in real estate hopefully you are trying to amass some level of education. But you have a problem. You actually have 2 problems. The first problem is this. You may have difficulty with intelligence absorption. What does that mean? That means the ability for you to retain the information you're learning.
In fact, what happens to a lot of people is as they distance themselves away from school year after year after year, they put their brain on auto pilot in a lot of ways, and their brain doesn't get exercised. The brain is like a muscle. The more you use it, the better it gets, the stronger it gets, the better it gets at being quick, at absorbing things. It also has to do with your diet, your exercise, all sorts of things play a role in your ability to absorb information, especially intelligent information, the stuff that's going to make you productive in life.
The first problem
Even if you have access to good information, if you’ve ever been in a situation where you feel like people have to tell you something 30 times for it to stick in that brain, it means you got to start exercising this thing some more. Now outside of having a legitimate medical issue the biggest thing you can do is exercise your brain by using it. That will make a big difference. So intelligence absorption.
An Even Bigger Problem
What is signal which is truth and what is the noise? What’s going to lead you astray? I submit to you that the majority of stuff that you're going to watch, you're going to read, you're going to listen to, a lot of it is lousy. Now, you don't know it's lousy, but it is. It's because in a lot of ways, in a lot of situations there are different, first of all,
- there are different angles that the information provider has.
- Maybe they sell turnkey properties, and so their angle is to tell you about a certain city and why now is the perfect time to buy in that city because of the jobs and bla-bla-bla. Well, that may be because they're selling turnkey properties.
- Maybe it's a real estate like educator trainer guru that really hasn't been involved in the real estate business in a long time, but they’ve gotten really good at selling. So maybe they’re just selling their information.
- Maybe they're just rehashing old stuff.
- This is the worst, maybe they have all of the best intentions but they just are wrong.
- Maybe they're really good at their local area for investing, but there's still inaccurate. You need to be able to find the signal.
Now, whether or not you think I’m the signal, that’s going to be up for you to decide. I've been doing this thing a very long time. What is my angle? Well, what I do is I teach people, I train them. I hope they watch videos like this. I hope it helps them be more successful. For a select few what some of them do is they go, “Gosh, I can learn more about Phil.” So they watch my videos, they read my books, they do … Then some of them apply for my apprentice program. My angle, if you will, is that I out of the thousands and thousands of people who want to be in real estate investing, I select just the top ones that I want to work with that are going to fit for my program, and then we do deals together. That’s part of my apprentice program. That’s my angle.
If you're watching this and you become an apprentice I need to make sure that all my videos are accurate and they have just the absolute signal in here, because you may become one of my apprentices. I want to make sure you're doing it right, you’ve got your head on straight, you know exactly what you're supposed to be doing. Again, that's up to you to decide, whether or not I’m providing signal or noise.
Find Your Signal, Absorb Their Knowledge
Not knowing what you're doing is obviously a huge problem in any endeavor you move into, but especially in this business, because there is a lot of noise, a lot of smoke signals, a lot of rabbit trails you can go down that are just going to end up and you just feeling like, “Well, I'm more lost than I was before.” I can’t tell you the number of people I talk to, and after they really dig into this industry and they try to learn more and more about it, they get a year or 2 down the road and they’re like, “Phil, I'm more confused than when I was started.”
It's very easy for that to happen because there's so much information out there coming at you from so many different angles. It’s easy for me to say to you, “Okay, one of the best ways to not fail is to know what you're doing.” That's easier said than done because that means, number 1 you’ve got to find the signal, the absolute truth, the best information out there, number 2, you’ve got to be able to absorb it.
These 7 right here, these are what I've seen are the most likely places where people fail. Let's talk about it. Number 1, don't quit. Number 2, keep your day job. Number 3, have the discipline to say no to bad deals. Now, if you don't know what a bad deal is, that’s another problem altogether. I would avoid partnerships unless you're working with the right people that are providing a tremendous amount of value and you know the terms of that partnership, in other words, you know when it’s going to end, those sorts of things.
Bigger and better deals. As you've probably learned from technology upgrades are not always upgrades. Stick to your knitting. In your knitting you might end up going on to bigger deals. I’m not saying you don't graduate maybe from single-family to apartment buildings and all that sort of great stuff. Maybe you end up building the tallest building in the world one day. But do it in a calculated fashion, whereby you don't get rid of your cash cow. Keep your cash cow going and then go try something new. But don't give up what was working so well to go try something new.
I would hope that you don't get lucky on your first deal, where you think you know it all and then you start making moves that put you in a potential precarious situation, but you're so confident from the luck, the deal you did to begin with that got you lucky that’ll put you in a bind.
Lastly, you’ve got to figure out what you're doing. I am a huge believer in mentors. I do believe that there are some geniuses out there. They can read a book, watch a video, listen to an audio, and bang, go out and do it and they don't need any more help. But I have discovered with real estate there's only so much I can share with you from an easel board, there's only so much I can share with you in a video.
Some of the greatest knowledge in real estate happens in the real world with you doing deals. I discovered that I couldn’t move forward and become successful without a mentor. You might be able to do that, but probably not. You're going to need coaches or mentors around you, some people that have been through this, to really walk you through this if you truly want to learn exactly what to do.
Choosing a Mentor
Now, I do have a great video on that called “Choosing a real estate mentor,” because I’m not a good option for you by the way if you're just going to be a traditional investor, you got a bunch of money in the bank, you're to buy some properties locally, you may rent them out, you may fix them up, sell them. I'm not a good fit for everybody. I’m only a good fit for those that want to be in the creative style of the business. I'm obviously not going to be a fit for everybody either. We’re not a very big company.
What happens is you’ve also got the added task of being able to locate the right mentor. You can check out the video “Choosing the right real estate mentor.” It’s in one of my videos. I’ve got some other great videos that go into more depth on these subject matters. I got a great video called “The worst way to invest in real estate,” which if you look at the comments you hear all these stories, the terrible deals that people did. That teaches you some bad deals not to do.