Why People Lose Money in Real Estate?

by Ravipal Atwal
Why People Lose Money in Real Estate

It’s known that it’s very difficult to lose money in Real Estate if you do things right but people find a way to lose their money and sometimes a lot of money.

In 2008, it was one of the biggest recession and it was caused by Real Estate and bad mortgages and people lost a lot of money. We are probably standing next to another real estate recession.

People fail to educate themselves about real estate investing and they fall for investment gurus who promise them big bucks. 

Let’s look at what makes people lose MONEY in Real Estate?

Over Leverage

You know what’s the best part of real estate, it’s Leverage and what’s the worst part, it’s over leverage. People Keep on borrowing money on existing real estate or on Line of credits to buy new. Especially what we saw in Toronto, people kept on borrowing, creating fake income papers to get bigger mortgages which they find difficult to pay when interest rates go up. 

Taking a second mortgage to buy new properties can be extremely risky if those properties are not cash flow positive and bought with the intention to make quick profits. 

Flipping and Betting on Appreciation

People think real estate prices can never drop in cities like Toronto or Vancouver, You just need one bad deal to make things worse. Flipping is almost like gambling, buying with the expectation to sell high can take people down.

It works well for some people but some people lose big bucks, Personally, I want to stay away from this. 

Short Term Thinking and want to get rich quick

Everyone wants to get rich but some people want it very quickly and they buy properties which they can’t afford. They buy properties to flip, borrow money to pay for downpayment and stretch themselves and if anything goes wrong, they find it difficult to pay back money. 

It’s a sure shot shortcut to lose money. 

Buying Pre-Construction to make quick profit

If you are buying Pre-Construction to live, it may be a very good idea but if you are buying to make quick profit because you expect prices will only go up, then you may be dreaming. We have seen so many horror stories that prices drop drastically and people can’t even do closing and they have to lose their down payments. It’s very tricky and be very careful.

Negative Cash Flow

I can’t understand why people want to buy real estate without any positive cash flow, How much money you can put from your pocket. This won’t let you grow because you won’t have money to make payments after 2-3 properties. I would rather find a different business if I can’t find positive cash flowing property.

Remember, This gets difficult if someone loses their job and has properties with negative cash flow, it means they may have to sell their properties if it’s recession and will definitely lose money.

Buying In Bad Neighbourhood

You can improve your property, your tenants but you can’t improve the neighbourhood. Buying Properties in a bad neighbourhood means trouble, you will get troubling tenants, properties won’t appreciate, property insurance will be much higher and management will be a problem.

Underestimating Rehab costs

I have made this mistake, rehabbed one property and underestimated the costs big time, I almost ended up spending and barely made any profits. It was a learning experience but I won’t touch this again. Lots of headaches. Some people want to make quick money and they underestimate the renovation costs which take them down.

I hope you learnt some good lessons, don’t forget to leave a comment. 

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