My strategy for educating myself when I started was twofold:

Go broad and shallow reading about the best investors in all domains(Venture, Private Equity, Hedge funds, Capital Markets et al.) and understand how they spot opportunities.

And then go narrow and deep studying failed investors who have been wiped out due to some mistake.

I have shared a lot on Twitter about the signals I have seen from successful investors, but it’s the first time I will write at length about the most common fatal mistakes I have came across, especially from real estate investors.

If I hadn’t taken the time to really study the mistakes of others, I would have easily faltered during COVID or the current recessionary pressure. But I held my own.

For example - I read about an investor who started in ‘99, made bank by 2007, but then lost it all in 2008. His fatal error? Not using fixed-rate loans.

And turns out a ton of people made the same mistake. So now, I’ve got this rule where I will only get a fixed rate loan for at least 5 years.

Like Buffett says there are only two rules of investing, Number 1 - “Don’t lose any money” and Number 2 - Don’t forget rule # 1.

Let’s dive right in:

Here are 9 fatal mistakes I have seen time and again. Hope they help 🙂

Poor Financing

Based on my exposure, bad financing is one of the most dangerous errors that investors can make. In fact, I’ve seen many investors go out of business or lose money as a result of bad financing more than any other mistake.

Bad financing for me is:

  • Crazy high interest rates
  • Interest rates that keep changing on you
  • Monthly payments that are just too damn high
  • A big fat balloon payment at the end that you weren’t expecting

The vast majority of commercial, portfolio, hard money, and private lenders fail to meet any of these criteria.

So, if you’re borrowing money at a whopping 14% interest rate, with a huge monthly payment and a total remaining loan that’s due in just one to three years, plus the fact that the loan is personally guaranteed, that’s just too much risk.

The reason is that the property is likely to have negative cash flow due to the high interest rate. Additionally, a balloon note means you will have to either refinance or sell the property in a very short time period. As we saw during the 2008 credit crisis, refinancing can be difficult when credit dries up, even if you have perfect credit and a solid income.

Lately, I’ve been using some creative financing tricks to seal deals. Basically, I will change the variables of financing to be in my favor and still offer the seller what they want. Example - If the numbers still work, I’ll offer to pay a bigger down payment and lower interest rate in exchange for a longer loan term and no personal guarantees, but keep their asking price if the seller really cares about it.

I’ll share the full playbook with the full creative financing toolset in the near future.

Miscalculating the Resale or Rental Value

As investors, our main task is to understand how our customers, buyers or renters, make decisions, and then translate that information into value.

Without a clear understanding of the full value potential, it can be difficult to make an informed purchase offer that yields a profit.

On your first deal, it is natural to feel uncertain about determining value. However, there are several actions you can take to empower yourself:

  • Focus on a manageable target market that you can become an expert in.
  • Regularly analyze all transactions within your market using resources such as the MLS, Zillow, or local tax assessor. This is the equivalent of daily weight training in real estate, keeping you sharp and competitive.
  • Seek professional assistance. For resale value, work with a skilled real estate agent or appraiser. For rental value, check data from rental estimator sites online or ask the property managers in the area.
  • Understand how to do projections with a financial model with validated assumptions.

I have talked at length about all of this in the community

Poor Location

Real estate value is heavily influenced by where it’s at. The people and businesses who rent or buy from you consider location as a crucial factor.

3 blocks in any direction can have different demand and different return profiles. I never get it when people just say a market is good or bad!

So, it’s important to scope out the good and bad spots in your location before you drop some serious cash. Some people can still make bank in rough areas, but it’s a tough game that newbies should steer clear of.

I’ve constantly passed on high cash flow deals because they come with risk and opportunity cost of time and result in headaches.

On the flip side, I’ve totally screwed up when buying properties in prime locations. I’ve paid way too much for some of them. But, because the location is so good, it’s helped to make up for some of my boneheaded moves.

Here is how I vet my markets

Underestimating Repair Costs

Underestimating repair costs is inevitable at some point, but you should avoid enormous cost overruns that could deplete your funds or cause other problems.

To minimize mistakes, learn a reliable repair estimating system. You will find a couple of books in the Supermode’s resource section that teach you how to estimate repair costs.

You could also seek help from more experienced rehab investors or contractors.

You can connect with these individuals by:

  • Attending local real estate club meetings
  • Scouting neighborhoods for remodel projects
  • Asking for advice on the Supermode Community

Underestimating Capital expenditures

Capital expenses are the once in a while big expense items like a plumbing system or a roof or a heating system replacement.

But the reason for the fatality isn’t misjudging capex. It is not having enough backup cash that you can still survive.

There are formulas to estimate with high confidence. Some ways to go about it are:

  1. Review the property’s historical records: Review the property’s past records to see what kind of work has been done in the past and how much it cost.
  2. Inspect the property: Conduct a thorough inspection of the property to identify any existing issues or potential problems. This can include checking the roof, plumbing, electrical systems, HVAC, and other building components.
  3. Plan for contingencies: Always plan for contingencies and unexpected expenses. A good rule of thumb is to budget an additional 10% to 15% of the estimated costs as a contingency fund.
  4. Consider the property’s age and condition: The age and condition of the property can have a significant impact on the estimated capital expenditures. An older property may require more repairs and maintenance, while a newer property may require less.

I set aside 5 - 10% of monthly income for Capex reserves

Letting emotions drive your decisions

This is a common mistake for new real estate investors. It’s understandable–looking for your first deal is an exciting pursuit and it could be a wild goose chase and when the deal feels right, the tendency is to cut corners.

But, it’s important to not get too hyped up and balance your excitement with some real, honest, and unbiased analysis.

Enthusiasm is important but ensuring your business stays alive is more important.

Every step I take goes through a series of macro and micro analysis. I am not just looking at the return profile but also how to mitigate risks.

Here is my risk mitigation framework

Choosing the Wrong Real Estate Strategy

Real estate investing is pretty cool because there are a ton of different ways you can do it. But the internet can be a bit much sometimes. It’s easy to get totally swamped or end up wasting time climbing the wrong hill (This was a life changing blog post)

Here’s the truth: there is no perfect strategy. However, you can find one that suits your strengths, your values, and long-term vision/mission.

Instead of adopting someone else’s perfect strategy, think carefully about what you want to achieve and which real estate strategy will help you get there.

If you need cues on how to go about it, this is how I went about it.

Not Using Your Due Diligence Period

Some veteran investors who know what they’re doing can afford a super quick closing, no inspections done, and no financial contingency. They have assessed their downside and they know if the deal goes belly up, not much will happen to them.

But for your first time at bat, that might not be the best way to go. Instead, try to build in a short but fair window for you to check things out and back out of the deal if anything sketchy pops up.

During due diligence, it’s important to obtain a professional third-party property inspection, and use data to estimate current and future value and rents.

This will help you double-check all the key assumptions you make in your offer. If you find that you made a bad assumption, you may need to renegotiate or walk away from the deal.

Remember, some of your best deals may be the ones you don’t do.

Choosing Bad Contractors

When it comes to fixing and flipping properties or managing rental properties, finding reliable and skilled contractors was one of the top reasons I encountered for detrimental failures.

Unfortunately, it can be difficult to find contractors who complete high-quality work, finish on time, clean up after themselves, and offer reasonable prices.

In my opinion, the reviews online lack credibility and the best way is to ask other established investors for referrals.

Real estate is a total hustle. You have to have big dreams and be willing to take some big risks, but knowing the timing of taking those risks is essential. It’s inevitable that things won’t go as planned and having that be on your first deal can be real gut punch if not detrimental.

But when it comes to risk, we shouldn’t really think of it as a bad thing. It’s more of a way to filter out the people who aren’t really committed to the game. The ones who just pretend to invest and then give up at the first sign of trouble.

The ones who are successful didn’t get there because they’re perfect. They’ve made mistakes in the past and have the scar tissue to show for it. But the thing is, they’ve learned from those mistakes and have figured out how to avoid the big ones that could knock them out of the game.

Hope these insights help.



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