Real Estate Investors Are Making These 6 Costly Mistakes. Don’t Be One of Them.

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When real estate investors think about mistakes, they often focus on things like choosing the wrong market or not doing enough research. However, I recently read an article on CNBC that listed the top seven mistakes investors are currently making in the stock market. This made me wonder how these mistakes might apply to real estate, especially considering how challenging the past two years have been for investors trying to profit in a market with low cash flow and high asset prices. 

Let’s explore these six key mistakes and how you can fix them—many of which can be addressed in just a weekend.

1. Following the Crowd

Many investors are chasing multiple trends like stock options, short-term rentals, buy-and-hold rentals, and flipping properties—sometimes all at the same time. 

However, this approach can lead to two critical mistakes. First, jumping into trendy investments without a solid strategy can be risky. Second, dividing your focus among multiple pursuits can result in achieving success in none of them—similar to the saying, “he who chases two rabbits catches none.”

To avoid these pitfalls, it’s crucial to choose a single, well-defined strategy and master it. Start by assessing how much time you can dedicate to your strategy. Evaluate your financial situation to determine your initial investment capacity. Finally, consider your willingness to commit effort—the “hustle” factor.

Understanding your investment approach helps prevent mistakes like scaling an inappropriate portfolio, creating an unsustainable business, or facing financial losses.

2. Following Social Media’s Often-Bad Advice

Social media is useful for promoting brands and raising awareness, but it’s not reliable for news or advice. As a mentor once wisely told me, if you can’t figure out what’s being sold, then you’re likely the product. This applies to social media too—your actions are driven by algorithms designed to keep you engaged.

To avoid falling into this trap, don’t blindly trust everything that appears in your feed as some kind of divine message—it’s often just the algorithm leveraging your browsing history. Consider removing social media apps from your phone or blocking them on your computer; you’ll appreciate the extra time and focus.

If you come across something intriguing on your feed, take the time to research it thoroughly. Verify the information by reading the original source or finding multiple supporting and opposing viewpoints. This approach not only saves time but also reduces stress and uncertainty.

3. Being Impatient With Investment Growth

This is a significant issue! Investors often anticipate quick returns and feel frustrated when their investments, particularly in real estate, don’t meet expectations immediately. Everyone hopes their investments will start strong and continue growing steadily. However, asset values can fluctuate, and rental incomes may vary due to market conditions.

Impatience often arises from closely monitoring the markets, leading to rushed decisions driven by emotions and unnecessary stress. To counter this, it’s crucial not to fixate on short-term fluctuations in the real estate market, such as checking your Zillow asset value daily. 

Instead, consider these three steps to alleviate anxiety:

1. After conducting thorough upfront research, trust your strategy and establish a regular quarterly or semiannual review schedule for your assets. Allow your investments to grow steadily over time without frequent adjustments.
2. Avoid the temptation to hastily sell an asset during a market downturn just because it hasn’t met your initial expectations yet.
3. Resist the urge to cash out prematurely if your investment’s business plan still holds potential for growth. Success may seem straightforward in favorable market conditions, but true resilience is demonstrated during challenging times.

Ultimately, prioritize investing in assets you’re comfortable holding for the long term, adjusting your timeline if necessary. Patience enables your investments to fully develop and achieve significant gains over time.

4. Risking Funds You’ll Soon Need

Investing funds that you’ll need back within a specific time frame can be risky. I’ve heard horror stories of investors investing their teenager’s college tuition fund into a deal since 2019, only to be hampered by losses or illiquidity when the market went sideways these last two years and not being able to cover the bills coming due. 

To mitigate this, create tiers of money for different time horizons. Properly tiered funds ensure you have liquidity when needed and growth for the future.

Start with tier 1 for emergency savings, covering three to nine months’ worth of expenses, and place this money in high-yield savings accounts, CD ladders, or money market accounts. Tier 2 should consist of short-term investment funds for upcoming expenses like vehicle replacements, college tuition, or weddings, using note funds with 6-18-month durations. Lastly, tier 3 should include mid-to-long-term investment funds such as real estate, passive investments, or longer-term stock holdings. 

5. Having Unclear Investment Goals

Lack of clarity on investment goals often leads to mistakes. To address this, define your investing goals and an overall investing thesis. Start by identifying what you want to achieve with your investments—like capital preservation, cash flow, equity growth, and diversification. 

Next, assess your risk tolerance to understand how much risk you are willing to take. Then, determine your timeline for when you need your investments to pay off. This will help lay the groundwork for your base investor thesis—then build upon this. 

Clear goals and a solid thesis will guide your investment decisions, ensuring they align with your long-term objectives.

6. Hoarding Cash

Sticking your head in the sand and holding cash is a losing proposition. To avoid this, develop a clear investing thesis—something I love helping my clients build so they can invest from a position of strength and clarity.

Start by knowing your goals, risk tolerance, and timeline. Allocate your portfolio by diversifying based on operator, market, deal, and asset class. Understand your comfort level to identify which investments might cause anxiety. Be prepared to adapt your strategy as the market and your time horizon change. 

This approach will result in a well-rounded portfolio with allocations in cash alternatives, stocks, real estate, and passive investments, ensuring you’re not just sitting on the sidelines.

Final Thoughts

Avoiding these six common mistakes can significantly improve your investment outcomes. By adopting a clear strategy, avoiding the pitfalls of social media, being patient, properly tiering your funds, clarifying your goals, and staying engaged with the market, you can set yourself up for long-term success. Start making these changes and watch your investment portfolio grow.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.