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Overcoming Five Common Investing Mistakes Made by Property Owners & Managers

Mosca: Let's start with the first common investing mistake -- not understanding local market realities. What do you mean by that?

Cain: Not every property in every city is going to make money for you even if people are buying them for pennies on the dollar. Not every deal is a good deal. Pay attention to where the markets are going to continue to be better or continue to improve as opposed to continue to have problems. An interesting story, I got a call about three or four weeks ago from a property manager in Tennessee and he called me and said he thought he should fire the owner he had managing the property. He said he managed two properties for the guy for a couple of years and they have consistently lost money. They are the only properties that he manages that are losing money. The fact is the properties were bad when he bought them. He lives in California and never saw the property.

Mosca: When investing outside of your own local area, is it important to work with professionals you can trust to have your best interest at heart?

Cain: Yes. He bought sight unseen. Why? Well he heard they were a good deal. They were a good price but there is a difference between price and cost. The cost is huge, but the price was right. There is a reason the price was right and it's because those things don't make any money. He did not know the local market. If you can't find somebody in another market who you can trust and you can rely on, then don't buy there unless you can go visit it for yourself. Know your market. Know where the good neighborhoods are. Drive through in the daytime and then drive through about eight o'clock at night. Take a look and see how it looks then. See what comes out from under the rocks and if you don't like the looks of what comes out from under the rocks, you don't want to buy there because it's going to be nothing but trouble.Know where the things are going to be improving, where they're going to build new shopping centers, where they are going to build new freeway interchanges, and where they are going to build new convention centers, hotels and things like that.

Mosca: With all of that building going on somebody must know about jobs coming into the market?

Cain: That's right. Therefore, it's a good place to buy real estate.

Mosca: Can you touch quickly on a couple of other types of due diligence activities that you could do as an investor?

Cain: Get the business newspaper for the area and find out what's going on. You are not going to get something every day or even every week but you are going to find little tidbits here and there. That will tell you things that you might not have known before. Ask yourself every time you read an article how could this possibly affect the real estate market. That way you know what to expect. Another thing is to join your local associations, rental owners or Apartment associations because they will have speakers and information to tell you what's going on in the community, and the affect on the value of property.

Mosca: When you talk about associations, the National REIA, or Real Estate Investment Association, have different regional REIAs across the country, and they are a good group to look into joining. Your second mistake is not having a business plan or goals. Why is it so important to have a business plan and goals when you are a real estate investor?

Cain: If you don't know what you want, how do you know when you have it, which is the key to any goal setting or business planning. What do you want to happen with your real estate investments? It's important that you know in advance. At what point are you going to sell it? Are you going to sell it in five years, are you going to sell it in ten years, or are you going to keep it forever? It doesn't matter what it is or how long you plan to keep the property as long as you know what it is because that's going to determine how you go about buying property. For example, if you were going to sell a property in five years, you are not going to buy one that needs a new roof or a new heating system or a new foundation. If you are going to sell that in five years, then you have a whole different expectation about properties than you do if you are going to keep it forever. There are so many investors out there who brag about how many properties they own but are they making any money? This is not a business to talk about how many properties you own; this is a business to make money. If you are not making money, then you are not doing good business.

Mosca: Even if you say that you'll sell it in five years, the market could change so the business plan must be somewhat flexible, right?

Cain: You can't etch anything in stone. It's not like when I was a kid and the only way we could write was with stone tablets and chisels. It's got to be a real number. This is the important thing about goals and business plans. You have to use real numbers, not pretend numbers. When something specific happens that is the important thing about goals, they have to be specific.

Mosca: The third mistake you mention is not calculating the actual cost of the property. Now this seems pretty cut and dry but I'm sure there is more to it than the actual price to purchase the property. Can you explain all that goes into the cost of a property?

Cain: The actual cost of the property is not only your mortgage payment and your property taxes, which you hopefully would have sorted out before you bought the property, but it's also the maintenance costs. When I do the investment seminars, I take a property that I found on multiple listings with all of the numbers and I hand it to everybody and I say run the numbers and see if they come out the same. It's amazing how often they don't.

Mosca: That leads us to your fourth mistake, which is forgetting due diligence. We talked a little bit about due diligence earlier but I don't think you can talk enough about it. Tell us a little bit more about mistake number four, forgetting due diligence.

Cain: Let's start with rent surveys. You need to do specific rent surveys for the area that the property is in. It requires a considerable amount of work and you can do it yourself. It's not that difficult to do. It just takes work because you not only have to look at all of the ads on Craigslist or the newspapers or wherever else you can find them to find out what's available. You then have to make up a chart to make notes about each of the places that you're driving by. Knowing your market is a big part of due diligence.

Mosca: Should an investor hire a property manager?

Cain: There are a couple of things to think about. Distance is one thing. I live in Tucson and if I bought a property in Vail that's 50 miles away and I'm not driving over there. I don't want to. I'm not really good at fixing stuff either. You have to know your limitations. I don't even like to work on my own house much, much less go someplace else and work on stuff besides the fact that I am not very good at it. It would take me twice or three times as long to fix something and plus the irritation factor because I think that in animate objects are put on this earth to irritate me so I just have to pay somebody else to do it. So to take it one step farther, hire someone to do the work for me to get the phone calls. I don't like phone calls either. I like to have the property. I like to do the research. I like to do the due diligence on it so I can make sure I am getting a deal and it's going to work but I don't like to do the day-to-day management.

Mosca: Common mistake number five is buying emotionally not objectively. What do you mean by that?

Cain: Everybody of course buys emotionally, and that is kind of a misstatement but you buy emotionally for different reasons. What is the reason you are buying is property? If you are thinking it just looks so nice, it's so pretty, it looks like grandma's house, then that's the wrong reason. You need to buy properties on the basis of numbers. The property has to come to certain numbers and it has to meet certain specifications. If it doesn't, what are you buying it for? There is some other reason.

Mosca: What is your golden nugget?

Cain: Number one is not original with me. I think Brian Tracy is where I first heard it; you make your profit when you buy your property and you realize it when you sell it. The other thing is that there are no good surprises in real estate. I just did a seminar in Joplin, Missouri and I said that and a woman raised her hand and said there is a good surprise; I have experienced a good surprise in real estate. She said when I bought this property we were going to put new rugs down in the rooms and I lifted up the wall to wall carpet and it was covered in beautiful hardwood floors. I said that was a good surprise but I was thinking the whole time why was that a surprise?

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