They started investing in real estate 30 years ago, with so much hope for their future. A rental house here, a duplex there, and soon they had a rental portfolio that would make anyone proud. They actively managed their properties and worked to make sure they were operating at peak efficiency. Then, several years ago, the husband and wife both retired from their day jobs and eased into retirement—funded by their rental income and social security.
This year, they are filing bankruptcy and losing a majority of their properties to foreclosure.
Sadly, this is not a made-up example; this is the story of one of my friends’ parents, and they are not alone. In fact, 95% of the units I’ve purchased have been foreclosures that belonged to landlords who failed and lost their properties to the bank. Most of these people, I would guess, will never again be active in real estate investing. They worked hard for years to build a financial future for themselves, only to see it come tragically crashing down around them, dashing any hopes for lasting wealth creation.
This begs the question: why?
If real estate is as good an investment as we all (on BiggerPockets) make it out to be, why do so many real estate investors fail?Perhaps more importantly, how do you avoid this possibility in your own life?
This question that has been swimming around in my mind for some time now. Each week on the BiggerPockets Podcast, I ask our guest, “What is it that sets successful investors apart from those who fail?” The answers are as diverse as the personalities of the guests with whom we’ve spoken. So what is it?
I’m intrigued by this idea and scared that I may end up the same way.
After all, as Mark Cuban famously said, “Everyone’s a genius in a bull market.” Is that what real estate is? Do some people simply get lucky, while others don’t? Let’s look at some of the possible reasons rental property investors go broke and explore the things you can do to protect yourself.
1. Too Much Risk?
First, let’s talk about the elephant in the room: risk. Risk is inherent in every investment there is. After all, you know the phrase “more risk, more reward.”
However, there is obviously a tipping point at which the risk becomes too great, as my friend’s parents discovered. Perhaps it’s overleveraging properties by obtaining too many “low-down” deals that weren’t deals after all, or maybe it’s trying to buy too many, properties too fast. Maybe it’s constant refinancing of the properties, pulling out all the equity and investing it in more and more deals. Whatever the reason for the bankruptcy, the risk clearly became too great, and these investors lost.
As rock ‘n’ roller Nick Cave sang, “If you’re gonna dine with them cannibals, sooner or later, darling, you’re gonna get eaten.”
So how might someone prevent this? Avoid risk altogether? Invest only in 100% safe…