“You can easily go broke buying good deals.”
As a real estate investor, I’m all about finding the “good deal.” However, for the amount of times the phrase “good deal” is thrown around in real estate investing discussions – many people fail to understand just what constitutes a good deal and end up making mistakes that turn a good deal into a bad deal.
I believe a good deal is one that produces either great positive cash flow and/or a good increase in value (and equity) but many good deals fail to deliver on either due to mistakes on the part of the buyer. This post is going to look at three common mistakes to avoid when finding a good deal.
Location, Location, Location
Often times a deal will look amazing – until you drive by the property and realize your chance for making money is lower than your chance for getting shot or your car stolen. I’ve yet to see a real estate broker write a nice description such as “Great 3-bedroom home located on a loud, gang infested street.” Those details are often left out, making the numbers seem much better than they are. As a result of the bad neighborhood, tenant turnover will be much more common (and costly) adding to the strain on your cash flow and your ability to sell the property again.
Lesson: always scope out the neighborhood (both during the day and at night) and ask others about the neighborhood. Know what you are getting into.
Buying Real Estate Based on “Pro Forma” Numbers
Many “good deals” are only good deals on paper, due to what is known as “pro forma” numbers. In other words, the financials for the property are listed as what they could be not what they are. Many agents, especially on commercial or multifamily properties, will list some very optimistic pro forma numbers rather than the actual costs. They may conveniently leave off repair costs, vacancy rates, legal charges, and other expenses that could turn your asset into a liability.
Lesson: always verify the financial information independently.
No Exit Strategy
Finally, investors often snatch up “good deals” but quickly find that those deals are duds when it comes time to sell. This is especially common for house flippers, who have a very short window of which to sell a home. When the market turns, they are left holding a “good deal” that can’t be sold.
Lesson: always have multiple exit strategies in backup in case your first choice for unloading a property doesn’t work out.
Can you think of any more mistakes that can turn a deal into a dud? Share them below in the comments!
About the author: Brandon Turner is an active real estate investor and Senior Editor at BiggerPockets.com, the real estate investing social network. While not investing, Brandon enjoys writing epic posts such as his 6000+ word Tenant Screening Ultimate Guide or the Ultimate Beginner’s Guide to Real Estate Investing.