The #1 Mistake I See Real Estate Investors Make (And How to Avoid It)

By |2 min read|Published On: March 11th, 2024|

With over thirty years in the real estate lending business, I’ve experienced all the ups and downs this industry offers. My company, Gelt Financial, has facilitated over 10,000 loans, with between 5,000 and 7,000 of those being rehab loans. Throughout this journey, one common mistake keeps rearing its head among real estate investors: underestimating their capital needs.

Let me be clear – the work always costs more and takes longer than planned. Things happen that you can’t foresee or control. Even if you buy a property that seems turnkey, unexpected issues like bad tenants or a failing roof can pop up, reminding you that real estate is an inherently capital-intensive game.

I’ve seen countless promising deals crumble, not because the investor overpaid by 5 or 10 percent, but because they didn’t have enough capital reserves to sustain them through the inevitable challenges. To be candid, most borrowers don’t let us know about their capital shortfalls until it’s too late for us to help.

And this isn’t just a problem for mom-and-pop investors. I’ve witnessed multi-million dollar deals implode at the hands of massive, publicly traded companies because they failed to maintain adequate capital buffers. Not too long ago, a real estate fund out of Philadelphia went bankrupt for this very reason despite our lending relationship with them.

The hard lesson I’ve learned? Always overestimate how much capital you’ll need. As an investor, you must be slightly pessimistic with your projections because bad stuff is inevitable. Everything will take longer and cost more than you think, without fail.

My number one tip is to keep a substantial war chest of capital on hand. However much you think you’ll need, double or triple it. Capital is your safety net, your best protection against the numerous pitfalls of real estate investing. It’s what will carry you through the tough times when deals go sideways.

While having ample capital reserves may seem excessive, it could mean the difference between your investment dreams coming to fruition or going up in flames. Don’t learn this lesson the hard way like I’ve seen so many others do. By prioritizing a robust capital backbone from the outset, you’ll significantly increase your chances of navigating this bumpy road successfully.

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