Investors buy rental properties for 1 primary reason:
To Make Money.
You and I want to be like this person. Exalting on the top of their mountain. Face in the warm sunshine. Financial Freedom.
But why do so many investors fail at doing it? Why do so many go broke…or go crazy….?
The primary cause involves two small four letter words: Cash Flow.
Real Estate Investors, even somewhat experienced investors, violate the principle rule of Cash Flow routinely and the outcome is always predictable and unfortunate. Cash Flow, or Net Cash Flow, or Free Cash Flow, all indicate the same thing for sake of argument today. Cash Flow is simply Revenues minus Expenses. (Hint–a positive number at the end is what you’re looking for here….)
So how can real estate investors mess up such a simple mathematical formula?
I’ve found that when working with investors and digging into their numbers, 3 primary errors in judgement reveal themselves. Today’s email is going to cover just one of these.
Over-Estimation of Revenue
The first error in investor judgement is Over-Estimation of Revenue. It’s easy to get sucked into this error. Here’s how it goes in real life…..You find a property online or your broker sends you an alert with the message,
“Hey! This one is a SLAM DUNK! It can be rented all day long for $XXXX/month! 3 other houses in the same subdivision rented for this same price, and they weren’t even in this great of a condition! You’d be a Fool not to buy this!”
So, emotionally charged up, you go out and look at the rental house. Your mind starts flowing with estimates of how much you can goose up the rent price. Maybe even bump it up another $100 a month, cause it has that really nice set of stainless steel appliances in the kitchen and granite countertops. Ohhhhh, yeah baby. So, you write up the offer, buy the house, and then WHAMMO–it doesn’t get rented for the first month. Then another month. Then another. Ouch. We’ve all done this, myself included.
Here’s a suggestion the next time you feel that tug on your wallet: Play a mental game with your numbers and your Excel worksheets and play “What-If”:
- What if the rent price wasn’t $XXXX, but rather $50/mo less?
- What if the rent price was $100/mo less?
- What if the property takes longer to lease out than our pro-forma allows for vacancy expense? Ahem–this is another form of over-estimating revenue, just in a twisted thought pattern.
- In fancy Finance terms, this is called a Sensitivity Analysis. In normal life, this is called covering your bases.
Hopefully, these quick suggestions can help you avoid the error of Over-Estimation of Revenue.
I’d love to hear your stories of how and when you made this error, and most importantly, how you put into place tactics and habits and reminders to avoid doing it again! Comment below or message me and I’ll be glad to share it in the next segment of this 3 part article.
Until then, here’s to your pursuit of Financial Freedom!
P.S. Sneak Peak of segment 2 of this article series: How Under-Estimating Expenses can and will torpedo your rental property financial performance and how to avoid this bad judgement.
Curious to improve the financial performance of your rental property?
Schedule your FREE rental analysis: https://calendly.com/danbaldini.