AVOID these Top 10 Stupid Mistakes | Real Estate | Buying a Home or Investment.

hey everyone me kevin here with 10 really stupid mistakes that almost everybody makes when they buy real estate and if there's anything we can get out of this video it's that you should consider trying not to make these mistakes if you get into real estate or you're thinking about adding more to your real estate portfolio all of these things and many many many more are obviously things that i cover in my amazing real estate investing course which has over 400 lecture style videos just like this over 400 of them it comes with live streams and that's in addition to the real estate sales course the real estate property management and rental renovations course check those out link down below you'll save a lot of money but at a time folks when the wall street journal says the national association of realtors finds that prices are up 12 year over year nationwide and some areas like crestview florida and bridgeport connecticut are seeing home prices jump 27 we need to talk about the big 10 mistakes that people consistently make when it comes to real estate and what i encourage you to do is consider taking out a notepad and writing down things that the pros do and avoiding the things that the newbies do alright folks with that said let's get started first thing that i like to talk about people walk into a house noobs usually walk in and the first thing they do is okay let's rip out the bathrooms let's rip out the kitchen let's open up the walls and let's take out all the light fixtures and everything and let's take out all the doors while we're at it and if we're gonna take out the doors we may as well put in new door casings and let's do everything brand new flooring gone new baseboards you got it perfect get rid of everything this is a very very newbie mistake now this is it's one thing if you're gonna go in and you're a professional flipper and you have a formula and you've done this many times before it's quite another to be a novice and go into a rental property and say take everything out and they'll then we'll come up with a plan why is that so dangerous it's dangerous because real estate is so easy to overspend on people have all these sayings like when in doubt take it out and it basically means you walk into a renovation and no matter what you buy you end up ripping out more than you actually think you need to this is a big problem a pro goes from a completely different angle or takes a completely different approach for creating rental property investments now this is different obviously if you're building your dream home you're not going to follow this step but for 99 of us watching this video we're trying to build our wealth we're trying to make money so even if this means we're moving into our first home you should follow the same steps a pro walks into a project and says okay instead of when in doubt take it out what can i do on a sort of marginal basis to spend as little money as possible to make something safe and beautiful and so here are just a couple of classic examples noob walks into kitchen let's rip everything out pro walks into a kitchen and says okay we haven't had any major water damage in this kitchen there's no mildew behind the cabinets which we could see oftentimes by looking under the kitchen sink to see if there's been water damage we can remove the kick plates from under the cabinets and inspect cabinets for any kind of warping or mildew the kitchen appears to be in excellent condition in terms of its structure i mean wood cabinets generally don't decay unless they've rotted why instead of tearing everything out don't we just do a light sand on the cabinets and paint the cabinets same thing with the bathroom vanities what do we save now will we save redoing the drywall on the uh all the drywall work that's behind the cabinets which would get damaged if you took out the cabinets a lot of people damage all the drywall and then they say well while i'm putting in new cabinets let's just put in new drywall while i'm doing that let's put in new under cabinet lights and you know what since we're doing drywall working we're doing electrical let's do can lights in the kitchen and while we're doing that why don't we add usb outlets and while we're doing that why don't we go put a refrigerator water line in and while we're doing that why don't we put in a second dishwasher because who wouldn't want a second dishwasher now obviously i'm getting a little extreme there going down this sort of slippery slope but that's the problem with real estate is when you do one thing you usually end up doing another thing a pro walks in saying what are the least amount of decisions that i can make up front to minimize the odds of me having to do more and more and more you go into a bathroom you paint the cabinet you change the little knobs you put in a light fixture and you change the fart fan boom you're pretty much done you want to change the toilet fine do that don't like the color of the shower well let's see if i rip out the whole shower now i get a flood and you know float a new shower pan somebody's got to come and frame it out they're going to want to make sure the walls are level and square which that means the walls have to be furred out then you've got to put up the hearty backer or the installation panel system that you use then you got to tile it you got to grout it you got to cure the grout what about the plumbing valves all of that could freaking be avoided if you go in and just do what the pro does we're not gonna do when in doubt take it out i'm just gonna clean it up and make it look beautiful now this is very very quickly confused by many people with well i don't want to cheap out or i don't want to do unsafe work but notice nothing that i said was unsafe work in fact when i go into a property and there is no bathroom vent fan and we add a new bathroom vent fan that is adding to the health and safety of the property when we put gfci outlets or tamper resistant outlets in that adds to the health and safety of the property but i'm not going in running a ton of new circuits so there's that difference between upgrading which noobs like to do and updating which pros like to do pros update noobs upgrade huge difference upgrade costs lots of money update is inexpensive and both can be safe big mistake number two that people make they get themselves a tenant and they don't screen credit yes i get people who roll their eyes every single day about this they're like oh but kevin come on they have a good job or they've got you know money in the bank or you know i like the look of their family or i saw them on facebook and they look great or or look they showed me all this cash that they have right now that they can give me flash in the cache the amount of people that end up getting screwed because they highly highly undervalue proper credit screening which can be done very very easily you can go to mysmartmove.com you can run credit through zillow as a landlord super easy to do the amount of people that don't actually consider reading a credit report which evidences somebody's actual payment history for the last seven to ten years is shocking and when we look at a credit report we have to realize that somebody's capacity for paying their bills over the last seven to ten years is an indicator as to how they will pay when it comes to paying you on time for rent on-time payments matter how they take care of their finances sometimes can translate over to how they take care of a property now not always not always i do not want to say that there are not good people with horrible credit i personally know people with 550 credit scores that are the cleanest people that take the best care of property properties that they're ever in and they are wonderful they will for free upgrade properties for landlords they're great people and i get that that exists but credit is a measure of risk and a noob says ah credit score shmedit score a pro says credit is a statistically proven method of increasing my odds of having no evictions and no problems and so pros use credit noobs use facebook all right let's keep moving on to the next one cash mistake number three is cash flow over location so this is what commonly happens when people start getting the real estate bug and they start going hunting for rental properties and what they like to do is they look they do kind of do a little map search and they go all right here's all the real estate sort by cheapest and then all of a sudden they end up in the most developing neighborhoods and for some reason they're buying properties in areas that they would not live in themselves this is what noobs do they go oh this is in a really bad part of town but i'm gonna buy it anyway because the cash flow is good the pro looks at this and says yeah what about the most three and the three most important rules when it comes to real estate location location location there's a reason location is so important location is so important because location attracts high quality tenants high quality tenants create less damage less headache are more likely to pay rent on time are more likely to stay longer are more likely to reduce management intensiveness over maybe a lower quality area with slightly higher cash flow and noobs don't recognize all of the extra extra sort of extra issues that come up when you own rental property pros look at how can i build my wealth in a safe and secure way with minimal headache and that is a big difference between noobs and pros we hear location location location and everybody's like yeah yeah yeah then you start looking at cash flow and oftentimes you get noobs going location just doesn't matter i want that cash flow and then five years later there are those people giving you all the anecdotes in the comments section of youtube or elsewhere going oh my gosh tenants and toilets screw that why would i bother here's another one number four well you don't know what's behind the walls when you're buying a place so you may as well take down all the walls yeah people literally say that when they're doing renovations now this is similar to the first one but you will literally have noobs come in and say let's just strip everything take a house down to the studs and they'll hire contractors to get give them estimates and the contractors will say well we're you know we're going to be best positioned to know what to do in this property if we just strip the house let's just start over on the inside and we'll do all the cosmetics correctly and perfectly that's a pretty newbie mistake because pros come into a property and they say hey look i don't know what's behind the walls but i know the neighborhood and i know how to inspect a property and the cool thing is usually if you've got mildew and mold or water damage behind the walls guess what happens you see evidence of that on the inside of the walls the side that we can see what if there are termites usually you see kickouts somewhere around the property this is why we have termite inspections what if there are electrical issues usually you see those just by even sometimes operating electrical devices but even using a multimeter to verify you've got the correct voltages to verify your voltage drop isn't insane to make sure you've got receptacles that are grounded and if they're not grounded or they're are they gfci protected so all of a sudden before you rip open the walls as a pro you can start diagnosing electrical and plumbing issues you could run a camera from the roof through the vent stack to get into the plumbing arteries of the house and go out to the stream and determine what is the aging condition of our sewer line and all of a sudden you look and go well gee maybe i don't need to rip open all the walls to just notice that there's kind of what i expected in the walls usually it's not as bad as you think and the whole what's behind the walls being so concerning and we should remove all the walls sales pitch that noobs get suckered into very good way to waste all your money oftentimes we also get questions like hey well what about the foundation there are also red flags you can look at when it comes to foundations inside a property when there's when there are foundation issues you generally see large cracks large enough to fit a pen or pencil in that are around the foundation perimeter of the property sometimes you'll see on the inside of the property large cracks by doors and windows sometimes doors close by themselves or don't stay open when they're when you open them unless of course they're self-closing that's totally different obviously and sometimes you'll see uh total resettlement in in rooms where you'll walk in a room and you feel the house sloping down into a corner or into a different direction those are red flags that you can see without having to tear things open number five big mistake that a lot of newbies make is they look at a roof and they make an assumption and a conclusion about it and most of the time the conclusion is oh my gosh we have to replace the roof generally my recommendation is and this is what pros do is they call a roofer and they get a roof tune-up a roof tune-up can mean a roofer goes up and replaces damaged shingles and seals up protrusions along the property's roof line and uh were there any kind of vent snacks or whatever and solves preventive or preemptively potential issues that could come up roof tune-up is such a great way to save money and noobs will generally call a roofer and go how's the roof and get a response like you need to replace the roof and they replace the roof a pro goes i'd like to hire you do a roof tune up they get a roof tune up so you kind of get what you asked for in real estate newbie mistake number six mortgage insurance oh my gosh noobs think mortgage insurance is the end of the world and they will save up 20 and never get into real estate because they'll never end up getting to that 20 because they're fearful of mortgage insurance the reality is a buyer who buys a good deal in real estate which i teach exactly how to do in my real estate investing course link down below when you get a good deal in real estate mortgage insurance does not matter because even if you put five percent down you end up paying about one percent more in your interest rate you generally only pay mortgage insurance that extra one percent for one to three years because generally in one to three years as long as you build your equity via principal pay down and some modest appreciation you can generally refinance or get rid of your mortgage insurance once you build the equity in the property so this way it's kind of like you're replacing your landlord you're taking control over real estate and while you're building up to that 20 the market is helping you build up to your 10 the or you're 20 down the market is also helping you pay down your principal by owning you pay down your principal every single month your principal and interest payments and your equity in the property grows so now it's almost like you're forced saving your way up to getting rid of mortgage insurance and most people end up getting rid of mortgage insurance well within five years pros know that noobs don't noobs sit down and do a calculation and say oh my gosh if i do mortgage insurance that's going to cost me x thousands of dollars over 30 years dude you ain't gonna have the loan for 30 years let's be real most people refinance within seven years most people get rid of mortgage insurance within five years there are easy ways to get rid of mortgage insurance buy a property because it's a good property and a good deal not because it has or does not have mortgage insurance because of the loan you qualify for and stay away from this pros know this noobs do not stay away from no mortgage insurance loans when you're putting less than 20 down all you're doing is you're building mortgage insurance into your interest rate which you can't get rid of see if you have a mortgage that's at say three percent and you have one percent mortgage insurance you can get rid of that one percent in two years without even having to refinance you could just request it be removed once you get to 20 equity 20 to 22 equity but if you build your mortgage insurance into the rate and let's say you take a 3.75 rate but you're like hey it's no mortgage insurance you can't you can't get rid of that extra 0.75 or 0.1 or that one percent anymore whatever it ends up being you can't get rid of it it's built into the loan big mistake don't take a no mortgage insurance loan uh number let's see five six that now we're on number seven number seven get accurate comps this is not complicated but it is very annoying sometimes to get a real estate agent to provide you the accurate comps and it's so very very important that you ask your agent to provide you accurate comps and sometimes it's very frustrating to use zillow as well to try to find the comps because sometimes zillow's not accurate and the other websites are confusing but here's the thing anytime you buy a property don't hang your hat on what other people say don't rely on an appraiser focus on the comps that you can identify and what you're looking for are properties that are substantially similar to yours and sold substantially recently i would much rather have one or two really good comps that are similar in size age location and timing than 10 good comps from a year ago i got to know what the market is doing today and what helps me do that properties that's sold within the last two to six weeks those are your hotcakes those are your top priorities and if you're buying in an area that doesn't have a lot of recent sales that's a risk factor pros know that that's why pro real estate investors invest in areas where there are a lot of sales and a lot of comps because there's density and there are a lot of properties if you're buying in a very rural space and there aren't a lot of comps you're creating more risk for yourself pros do not like risk noobs don't recognize risk very important differences this is why it's also very important when you shop for properties you look at similar properties you can't compare a 1 000 square foot house to a 2 000 square foot house if you've got a 1 000 square foot property you're buying you've got to look for comps that are between 800 to 1200 square feet you got to find properties that are ideally within the same neighborhood within the same sort of boundaries of main streets and away from funky things like high waves or high tension power lines those things are just going to make your property much more management intensive accurate comps are very key then we get to mistake number eight and that's confusing cash flow for value there are a lot of people who will buy real estate and not understand this they will look at let's say a duplex or triplex and they'll say something like hey well this cash flows yay i'm getting a multi-family building or yay i'm going to house hack this property and it's going to cash flow so well problem is cash flow does not create value what creates value is getting a cheaper deal than what the entire market is uh otherwise consistently offering so here's just an example of this here's what people do regularly they'll say okay i'm gonna buy a let's say 500 000 house in california and it's going to create twenty five hundred dollars of rent which is kind of like the half percent rule right uh and then they'll go out to because you know consistently we keep hearing that oh the one percent rule it's the most godly way to invest where your monthly rent is one percent of the purchase price it depends on the area that you're in and that's where we're gonna go here let's then go and compare to a five hundred thousand dollar house in let's say florida uh and let's just say just for giggles here that this five hundred thousand dollar place in florida rents for oh i don't know five hundred thousand dollars in florida maybe it rents for five thousand dollars okay that's the one percent rule so oftentimes people look at this and they say okay well this deal in california must be a crappy deal because the cash flow over here in florida is much better but remember cash flow does not define value noobs make this mistake they use these generic stupid rules to determine value and it's completely backwards pros understand what creates value it's not cash flow that creates value it's relative cash flow now that's a little more complicated relative cash flow okay so what is relative cash flow means so here's what that might mean let's say you have a 10 unit apartment building and each unit rents for a thousand dollars and this building sells for 1 million that means every single month you are getting 10 000 of income on a million dollars which means annually you have 120 000 of rent coming in 120 000 of rent coming in on a million dollar property let's calculate that out really quick so one million dollars that's all i'm going to do is take one million dollars divided by 120 000 that gives me 8.33 that means i have something known as a gross rent multiplier of 8.33 and so all i did here was take the purchase price and divide it by the gross annual rent and i got 8.33 okay cool so now i have a gross rent multiplier well now let's say there is another 10 unit apartment building that comes up for sale so a totally new listing comes up it's it's 10 units and the rent is ten thousand dollars per month but the price is 1.2 million dollars well this property would have a gross rent multiplier of 10 which is greater than this deal so this deal was a better deal than this deal assuming they're in this in a similar location so now what you're doing is they are actually comparing relative rents to an area and so how do you how does a pro determine that they're getting a good deal ah see that's a good question so now let's say you've got this you got a four unit deal you got a five unit deal you got a three unit deal and you got a 10 unit deal and three of these sold and one is coming up for sale so we'll say three sold and one is for sale okay so here's kind of what we got broken down four unit for uh sold five units sold three units sold and you've got a 10 unit building that's a for sale now great now we're going to say that based on the sold properties data we know that the gross rent multiplier in this area is somewhere between 9 and 10. in fact if we take an average of this we'll have 28 divided by 3 so let's do that really quick 28 divided by 3 is 9.33 so you've got an average of 9.33 for your gross rents and you've got a median which would be nine you've got this median here of nine so we know market value for these units generally you do this on units not single family is somewhere between nine and nine point three three great so 10 unit apartment building comes up for sale and the market's really hot and you're like oh my gosh 10 units look it's gonna have so much cash flow you know what it's gonna have uh you know more than the one percent rule everything about it's gonna be freaking awesome oh my gosh i can house hack it blah blah but the gross rent multiplier is 12. well 12 is bad because the bigger the number is the less value you are getting relative to the other deals so now somebody gets really excited about this 10 unit building but they're actually way over paying compared to what the comps are and you saw how we calculated gross run multiplier now on the flip side if this deal came up and you calculated and you looked at this deal and said wow they're selling this deal based on really low rents i can get these rents up by raising the rents and if i raise the rents to market value and i can buy it at the price they're selling it for and then i do my gross run multiplier math as long as you can actually get those rents up to quality tenants and then let's say your gross rent multiplier comes in at an eight now you're getting a below market value deal now you're buying this 10 unit building below market value and again how do you figure gross rent multiplier you take what the rents are and the purchase price and then you take purchase price divided by gross rents that's it it's so simple and this gives you a relative understanding of value so just so you can see how a pro can kind of bottom line this every area is different a very high quality area where i live buildings will sell with a 22 times gross multiplier extremely expensive very low quality areas where i live will sell with a gross run multiplier of around 16 to 17. so now when a high quality property comes on the market and i say oh my gosh that's a high quality property and it's selling for 18 times gross i know that's actually a very good deal but i'm not going to compare that good deal to wherever this is where you know their average gross rents are you know 9 to 9.3 so it's all relative to the area where you are buying and that is a huge mistake that noobs make that pros understand so understand gross rent multiplier really easy to calculate again you just take sales price divided by gross rents and compare it to what other units are selling for and then you understand the question is not what is the cash flow the question is what is the relative value so this begs the question should you buy real estate out of the area where you're living my answer to this is it depends if you have a really good knowledge of a place like where i grew up i know davey florida really well i could hire a property manager out there and i know i could find a good deal because i know which neighborhoods are good i've got connections out there and i can make that work it's a pain in the butt though because i'd have to fly out there to actually visit the properties and i won't know how well trends are changing so it's possible and i could get more cash for my dollar i can get more bang for my buck in florida than i can here but i personally find that rather than expend that energy to make that happen i'm going to take that energy to find below market value deals where i am which obviously i could find much easier if i'm local and a deal hits the market i can go to it right away and i can see it and i fix it up i can rent it and i can see trends changing that's a lot easier for me next number nine not understanding the three ways that you can make money in real estate there are three ways to make money in real estate number one cash flow which is anything that's left over after you make all of your payments principal interest taxes insurance maintenance management utilities reserves and so on and so forth but there's also principal cade a pay down in some sense because every single month you own real estate you are paying off principal you are building your wealth that way so number one is really cash flow along with principal pay down number two is appreciation that's you control a one million dollar asset the market goes up ten percent cool that's a hundred thousand dollars of value right there's appreciation and then there's number three which is buying below market value most noobs when they analyze real estate they only look at cash flow when the reality is you have to look at all three you balance cash flow appreciation and your ability to buy below market value those are the ways to buy real estate okay as long as you know those three things you can actually go in with with a better and more proper mindset pros know this when they go in and they try to get all three they buy in areas that are going to appreciate in the long term they try to buy below market value and they look for as much cash flow as they can get or you know coupled with the capacity for having as much bonus principal pay down as possible now the biggest noob mistake of all is noobs wait and pros buy noobs will always wait for the next possible opportunity to find a good deal or the next possible market crash or whatever there is no shortage of excuses that people will give to not buy real estate and so noobs will say anything like market crash i gotta get my llc i gotta wait for 20 down pros don't care about any of this stuff pros say get me some decent cash flow get me in a good area get me something below market value and i'm buying and there are opportunities like this dime a dozen every day there are opportunities available in every market how do i know that because if you're watching this video i guarantee you there's somebody in your city who's going around flipping real estate and if you're thinking yourself i can't find a deal how do you think that person would feel if you went up to that person who's flipping real estate and you said i can't find a deal they'd probably laugh because they know how to find deals it's not easy to find deals finding deals is one of the reasons that i've recently partnered with deal machine deal machine is a great way where you can find deals before they hit the market by taking pictures of properties that you see your fixer-uppers and automatically putting them into a system where you follow up and get the owner to know you are ready to buy their property as is if you want or however you want to buy it before it hits the market you now circumvent the entire real estate process and using dual machine makes this ridiculously easy for you to do i highly encourage you check out deal machine in the link down below it's a great software and it's a program that i'm really excited about uh using as well and incorporating into sort of my daily marketing to find more deals just check out deal machine but remember the big bottom line here between noobs and pros prostart they get in they realize that there are going to be mistakes of course you could take advice along the way and you could take suggestions along the way but remember what we've got here we've got a situation where noobs come in they rip out everything without considering what they can save noobs think credit doesn't matter noobs consider only cash flow over location noobs are worried about what's behind the walls without realizing that you can inspect and look for clues without having to do damage noobs look for replacing roofs over roof tune-ups and noobs are worried about mortgage insurance where pros are worried about value noobs don't consider accurate comps where pros do and noobs confuse cash flow for value noobs also don't always understand the three ways to make money in real estate which pros do and the biggest of all pro start and so if you haven't yet hit that subscribe button check out those amazing courses linked down below check out deal machine and folks we'll see in the next video [Music] you

Channel: Meet Kevin

Views: 171,728

Keywords: real estate, buying real estate, investing in real estate, bigger pockets, real estate investing, grant cardone, wealth, money, investing, housing, buying a house, buying a duplex, househacking, buying a triplex, buying a 4plex, multifamily, tenants, rental property, investment property, screening tenants, renovations, construction, matt risinger

Id: 6HmYeM5r8jQ

Length: 30min 12sec (1812 seconds)

Published: Fri Nov 13 2020