At one point or another during life, everyone has made some questionable financial decisions.
I still remember that amazing $50,000 truck with leather seats, dvd players in the…. ok I digress.
The point is, I’ve made my share of mistakes too.
However, the real problems start to mount up when you don’t learn from these mistakes and you continue making them for months or even years.
The further down the path you go of financial mismanagement, the harder it is to grab and turn the wheel to get back on course. If you don’t learn and keep making those mistakes, you can find yourself drowning in debt and close to bankruptcy, foreclosure, or other financial perils.
Common Financial Mistakes Everyone Makes
To shed some light on potential financial errors which you may be making, I’m going to describe just a few of the most common ones out there. These are the ones that I see over and over again.
1. Not Insuring Yourself Properly
A lot of people think insurance is a waste of money…and it kind of is.
Insurance is simply spreading the risk around so everyone in the insurance pool is paying for all of the inevitable problems that arise.
Any year that you don’t make a claim, you are absolutely paying for someone else’s claims.
So there is a tendency to underinsure or get cheap policies. I’m guilty of it myself.
A great example in real estate is that many people will get an actual cash value policy equal to what the paid for the property. So, let’s say I bought a rental property for $100k, I’d get a policy for $100,000 and be done with it.
So, if there is a fire, I sell the lot, take my cash, and move on.
This does not cover any loss of rent you’ll have, lost equity, appreciation, etc. You’ll get back your original investment and nothing more.
A replacement cost policy will help you rebuild the building.
Insurance is really complex and detailed, so it’s too much to get into all of it. But, don’t skimp on insurance because you can find yourself in a bind when it comes time for a disaster.
2. Paying Full Retail Price
OK, it sounds kind of weird, but it’s so true!
In today’s world of internet shopping, there is less and less of a need to pay full retail price. It’s especially true for real estate professionals!
When you are looking to buy something, you should always take the time to shop around and find out what sort of deals are available to you. When you are working on a rehab and the budget is $50,000, if you can shave off even 5% of that cost by shopping around, it will add $2,500 to your bottom line.
Think about that for a minute.
Not only does this method stop you from overpaying, it also gives you a moment to think and decide whether or not what you were thinking of buying is actually a worthwhile investment.
3. Paying Interest, Bank Fees, or Late Fees
Bank and late fees are not going to get you anywhere and neither is interest.
There are so many credit cards with introductory rates, there is really no reason you should have to make interest payments. This is especially true for that new rehab project.
If the rehab project lasts 6 or 9 months, chances are your card has a 6 or 12 month intro period with 0% APR.
Also, you can use store financing at 0% at many big stores which allows you to grab ten thousand or more in purchases and pay no interest until you sell or refinance.
This interest can easily mount up over time and add thousands to your total costs. Shave this off and add to your bottom line!
4. Not Using Other People’s Money
A lot of investors like to do it all with their own money.
Some investors like to get loans and pay them down for 3 decades until the balances are 0.
While it’s great to be totally independent, it’s better to increase your returns and make a killing on your deals!
Think about it this way, if you earn $25,000 on a flip and your total investment was $100,000, you earned 25%. Not bad, right?
If you borrowed half and used the other half as your own cash, you’d have to pay some fees. Let’s say you paid $5,000 in interest (I’m picking a really high number here just to illustrate my example).
$20,000 return on $50,000 invested is a 40% return. Even paying a crazy high-interest rate, you still earn a ton more!
5. Leaving Too Much Money in the Bank
It’s important to have reserves, but it’s bad to leave your money sitting around.
If your money is not actively invested somewhere, you’re losing money.
I know you want to wait for the “perfect” deal. But, think about it a different way. If you are waiting to find a deal with a 15% return and you waste 6 months before finding it, your return for the year is cut in half to 7.5%.
you would have been better off finding a deal at 9% at the beginning than waiting half the year to find one at 15%.
6. Not Using Credit Card Points
It might be easier to let your contractor pay for all the materials, but then you’re missing out on all the credit card points!
If you can, always pay for the bulk of materials so you can get the tens of thousands of points which you can redeem for travel (my favorite), cash back, or other cool things!
What other common mistakes are people making as investors?