Real estate shows like Flip or Flop, Million Dollar Listing, and Flip This House can make it seem like there’s no way to lose the game. You invest a certain amount of cash in a property, update and renovate with care, then list for an almost-immediate sale. The stars of these shows may wind up earning less than they expect, but they never seem to lose their shirts.
But according to Mindy Jensen, community manager for real estate investing website Bigger Pockets, there are a ton of issues these shows never portray. They don’t show all the problems you encounter when you first start out, for example. They don’t show just how easy it is to underestimate rehab costs, or to forget about all the smaller expenses you’ll face along the way.
When you replace the tile in a kitchen, for example, it’s far too easy to estimate only the cost of the tile, and forget about things like tile adhesive, grout, tile sealer, sponges, and the value of your own time. “While these items aren’t super expensive, they still need to be accounted for,” said Jensen.
Then there are the big issues investors encounter that throw their budgets off track — things like foundation problems, zoning issues, and black mold. Somehow most real estate shows never delve into these murky areas where investors can wind up losing money on a deal.
The reality is, real estate investing isn’t always as rosy or predictable as the TV shows make it out to be. This is true whether you invest in homes to “flip” them for new buyers, or whether you invest in rental properties to build long-term, passive income.
If you’re thinking about investing in real estate with the goal of flipping it for a profit or becoming a landlord, here are some of the rookie mistakes you’ll want to avoid:
Jensen says some buyers might be willing to forgo a professional home inspection to get a deal to go through. This is always a mistake, she says, since a home inspection can reveal all the repairs you’ll need to make and plan for. How can real estate investors properly run the numbers if they aren’t sure how much they’ll need to spend on repairs? The answer: They can’t.
Not only that, but it’s possible you could get the seller to cover some of the repair costs during the negotiation process. However, this is only possible if you know what’s wrong to begin with.
Jensen suggests walking through the home with the inspector to ask questions as they move from room to room. “Continue asking until you’re satisfied that you understand what they’re saying,” she said. While a home inspector won’t be able to give you estimates for repairs, they can often let you know approximately how much you’ll pay.
You can use this information to determine whether a property is worth investing in, or whether you should cut your losses and run.
This leads us to another common mistake rookie real estate investors make. Sometimes would-be investors get so excited about buying a property they forget to formally vet the deal.
Not every property will make a good investment, says Jensen, and some properties don’t make sense at any price. For that reason, you have to sit down and run all the numbers to decide if a property is worth investing in.
At the bare minimum, you have to estimate mortgage payments, taxes, insurance, upfront repair costs, ongoing maintenance costs, and other expenses and compare them to the estimated market rent or sale price you’ll receive for the property.
And don’t forget to tally up and consider every expense you’re likely to encounter. “Not accounting for all expenses is the most frequent problem,” said Jensen. “Excluding vacancies and capital expenditures are the worst offenders.”
You will have a vacancy at some point, and not accounting for a month of lost rent every year (or every few years) can blow your entire profit. The same is true for big expenditures like a new roof, a new HVAC system, or a water heater.
#3: Failing to Properly Screen Tenants
If you’re investing in real estate to become a landlord, you’ll want to have a plan in place to vet and screen tenants who apply for your rental. Jensen says it can be difficult to spot potential problem tenants since bad renters won’t tell you their shortcomings upfront.
“No one is going to approach you as a tenant and say, ‘I’m not going to pay rent after the first month, and I’ll throw diapers in the toilet and punch holes in the walls,’ yet this happens far more often than you’d think when you don’t screen your tenants.”
Jensen says you should run credit checks as well as criminal background checks on prospective tenants. In addition, you should watch out for “red flags” that could signal you may have a problem. Some things to watch out for include:
While vetting tenants is a crucial component of any landlord business, real estate investor Shawn Breyer of Sell My House Fast Atlanta says it’s also important you don’t unknowingly discriminate against tenants.
“To avoid lawsuits from the Federal Housing Administration (FHA), you will need to tread carefully when managing a rental property so that you don’t unknowingly discriminate against tenants,” he said. “There are the obvious protected classes; race, color, religion, sex, and national origin. The two that new landlords accidentally discriminate against are age, family, and disabilities.”
If you have questions about when you can deny an application from a potential renter, Breyer says to seek out an attorney in your state.
We mentioned how you should always run the numbers when you invest in real estate, but it’s also important to make sure you have cash on hand to pay for big expenses you anticipate (e.g., a new roof or HVAC system) — and the surprise expenses you couldn’t predict if you tried (e.g., renters destroying your property).
According to Breyer, even if you recently renovated the property and you haven’t had any issues in a year, you should still be setting money aside. He also says this is one lesson he learned the hard way. He and his wife purchased a duplex as their first rental property and renovated it from top to bottom. Since everything was new, they thought they could relax and avoid pricey repairs for a few years. Boy, were they wrong.
“A year into the ownership, we were notified that the city was coming out to do a routine inspection to check out the property condition,” he says. “After the inspection, they sent us a three-page list of items that needed to be addressed, ranging from rewiring and replacing the roof down to replacing outlets and fixtures.”
In one month, they had to replace half of the roof, replace a furnace, install a new water heater, install a sump pump, and rewire the whole garage. The grand total turned out to be $13,357.
The important lesson here is that you should always set aside money for vacancies, repairs, upgrades, and surprise expenses. While there isn’t a hard and fast rule that dictates how much you should save, some landlords say setting aside 10% of the annual rent could be sufficient. Obviously, you may need to save more if you have larger expenses and component replacements coming up in the near future.
When you first start out in real estate investing, it can seem like everyone has an opinion. Cornelius Charles of Dream Home Property Solutions in Ventura County, Calif., says one of the biggest rookie real estate mistakes you can make is taking these random opinions to heart.
“As we all know, people are more than willing to give their advice, no matter how good or bad it might be,” he says. “The last thing you want to do is to buy a rental property because your real estate agent says it will make the perfect rental without running the numbers and doing your own due diligence.”
When it comes to taking advice from people who have never invested in real estate before, take any “words of wisdom” with a grain of salt. The same is true when you’re getting advice from someone who might benefit from the sale of the property you want to buy, like your real estate agent.
Always do your own research and reach out to experienced real estate investors if there are concepts you need help understanding. You can also check out online platforms for real estate investors if you need to ask questions and get advice from people who have been through it all. The real estate investing forum at Bigger Pockets is an excellent resource when you’re first getting started.
Investing in real estate isn’t always as exciting or lucrative as our favorite real estate shows make it out to be. In the real world, buying property to renovate or rent out is hard work! There are also an endless number of perils to avoid, many of which you never see play out on television.
Before you buy a home to flip or manage, make sure you have an expert to lean on, a good handle on the numbers, and the discipline to walk away if the property you want winds up being a sour deal. If you rush into real estate without having your ducks in a row, you could wind up learning these lessons and plenty of others the hard way.
The following tools do a great job of letting you test out the performance of different portfolios. If you play around with these portfolio analyzers, asset allocation tools and calculators, you should be able to find a portfolio that fits your unique needs.
If you already have a retirement or brokerage account with a big institution, then that’s the logical place to begin your hunt for a good portfolio. I invest with Vanguard for a variety of reasons, but one is the section of their site dedicated to investment calculators and tools. This is a great resource for constructing mock portfolios and seeing how they have performed in the past.
They have sections that help you set an asset allocation, compare fund performance side-by-side, plan for retirement, and even to plan for education expenses.
In my estimation, the most useful area is their mutual fund and ETF screener. This page allows you to find funds that fit your specific needs based on categories like fund type (stock, bond, domestic, international, etc.), fund value (small growth, large value, etc.), expense ratio, and total return.
Of course, if you don’t use a large brokerage, tools like this will be less applicable. Each institution’s services are tailored toward investing in the funds they own, so it wouldn’t make much sense to use them if your investments are spread among several different accounts.
Portfolio Charts allows you to work with 12 different calculators to build a personalized portfolio. Each calculator provides valuable analysis on a different aspect of your chosen asset allocation. They allow you to quickly figure out a given portfolio’s sustainable withdrawal rate, the time to financial independence, annual returns, and much more.
It’s simple to test out different strategies, and all the calculations produce beautifully rendered charts. Overall, it scores points for being intuitive and easy to use.
For those looking for good portfolio ideas in the shortest amount of time, I recommend going straight to the “Portfolio Finder” page. This section allows you to input your preferred asset allocation, your desired rate of return, and your risk tolerance. You’re then shown a set of unique portfolios that historically had the highest returns based on the inputs you provided. As the site puts it, this area is useful because it allows you to “search every possible combination of assets and identifies the historically least painful options that consistently met your needs.”
I also like Portfolio Charts for its signature flourishes, such as the “Ulcer Index,” which is a single number that approximates how stressful it would be to hold different portfolios based on how they’ve performed during recessions.
One downside to the site is that it has a tendency to run a bit slower than some other calculators. In my opinion, the wait is well worth it.
The homepage of Portfolio Visualizer is a finance nerd’s dream. The sheer number of tools they put at your disposal is impressive. You can do a factor analysis. You can build a momentum portfolio. You can look at a fund’s performance attribution. You can do adaptive allocations. To be honest, I don’t know what half of their offerings mean, but if you want to get into the nuts and bolts of portfolio construction, this is the place to be.
They also allow you to test out a wider variety of assets than any other site I found. From emerging markets to gold to REITs, it’s got you covered. It’s also great for international investors, as you can easily build portfolios based on European or world stocks.
While the level of granular detail you can get into is impressive, I find the site is most useful for the way in which it allows for portfolio comparisons. When backtesting a portfolio, they allow you to enter three asset allocations at once. Then, when you run the calculations, you’re presented with detailed information on all three portfolios on the same page. This is so convenient, and it’s a feature that’s surprisingly lacking on a lot of other sites.
The only downside, in my view, is that the site is a little too stark and utilitarian. I found the other sites on this list feel more warm and inviting in the way they guide you through the use of their tools. Portfolio Visualizers is all about the math, which makes it slightly intimidating for those of us who don’t make Excel spreadsheets for fun.
The “FIRE” in the name FIRECalc is an acronym for “Financial Independence, Retire Early.” The site has gained in popularity as the FIRE movement has picked up steam. All the young super-savers out there want to know when it’s safe to pull the trigger and leave their day job.
You use the site by inputting your spending numbers, your current savings, and your asset allocation. The calculator then shows how your portfolio would have performed for every starting point since 1871 by running a probability analysis called a Monte Carlo simulation.
FIRECalc is a good tool for the investor who’s looking to avoid catastrophe. It very quickly shows you how well a given portfolio would perform across a variety of different economic conditions. It also tells you how likely you are to end up running out of money in retirement. They use a great analogy to help make this concept intuitive:
“Suppose you are building a house in Honolulu. No one could predict the temperature for any given future date during the decades the house will be used. But if you know that it has never been under 52° in that location in all of recorded history, you could make an intelligent judgment about how much heating capacity is enough.”
The main downside to FIRECalc is that the interface feels dated. It’s not simple to find out where on the site you need to go to change your asset allocation, for instance. Another point against them is that you can only run simulations based on five types of stocks and three types of bonds. That makes the tool of limited use for those who want to invest in things like commodities or international stocks.
But if you’re interested in constructing a more standard portfolio based on stocks and bonds, and you want to know how well it can endure rough economic spells, then FIRECalc is great.
If you want a quick snapshot of basic asset allocation ideas, you should check out Bankrate’s Asset Allocation Calculator. It asks for information such as your savings, tax rate, and your future goals. It then generates a pie chart that recommends what percentages you should invest in stocks, bonds, and cash. And honestly, who doesn’t love a good pie chart?
This calculator is unique in that it asks you to input a number that reflects your outlook on the future of the economy. You can manipulate those variables and watch as the pie chart recommends more or less aggressive portfolios. This is a cool feature I didn’t find in other calculators.
I also like that they place a major emphasis on your starting age when giving portfolio advice. As the site notes, “Age is by far the most important aspect of asset allocation. The younger you are, the less likely you need this money any time soon.” That thinking might be implied by the other calculators, but there is something nice about seeing it written down and knowing that they think it should be critical to your asset allocation decision.
I’d love to see a version of the Bankrate calculator that includes more diverse investment options, but that would also require that they make sacrifices on ease, speed, and simplicity, so I understand why they have it the way they do.
Learning how to buy and sell investments so as to minimize your tax burden is an art. Strategies like tax loss harvesting and automated asset allocation can save investors thousands of dollars if done correctly.
Betterment is a “robo-adviser” that prides itself on handling all the intricacies of tax management for you, a fact that their asset allocation calculator makes abundantly clear. Betterment’s calculator asks for your desired asset allocation, your current taxable and tax-protected investment numbers, and your investment horizon. Once you input the data, you can see how much money you’d save over the course of, say, 30 years, were you to reap the benefits of what they call a “tax-coordinated portfolio.”
I tried calculating how much I’d save on taxes with a 75%/25% mix of stocks and bonds, with starting retirement totals of $50,000 in both a taxable account and a Roth IRA, invested for 30 years. The result was an extra $37,000 in my account if I used their tax optimization techniques, which is nothing to sneeze at.
If you’re considering a robo-adviser for your investments, spend some time with this calculator to make sure the benefits will be worth the (potentially) higher fees that they charge (compared to DIY index investing).
The downside to the calculator is that its simplicity and ease of use comes at the expense of a lack of features. Much like with FIRECalc, it’s impossible to model a portfolio that invests in anything beyond stocks and bonds.
All of the above tools use past financial data to try and make predictions about future returns. Some naysayers on personal finance message boards use this fact as a reason not to trust any portfolio arising out of such backtesting. They insist that because “past performance does not guarantee future results,” all the efforts to construct a portfolio based on backtesting are fatally flawed. They’re quick to point out that the perfect portfolio can always be cherry picked in hindsight, and that is all these calculators are helping you do.
There is some merit to that argument. You shouldn’t base your investment decisions solely on what has done well in the past. But, if you believe that history generally repeats itself, and that data analysis can help you find trends, then you should absolutely be using these tools to help inform your decisions.
To the backtesting naysayers, there is always some reason why the future will be totally different:
“The FED has been practicing a policy of quantitative easing, so everything is different now!”
“We now have Bitcoin, so everything is different now!”
“Banks are too big to fail, so everything is different now!”
All of that might be true. But we still have to do something. At a certain point we have to make an educated guess based on the most robust backtesting tools available to us, then let things run their course.
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