How Investors Lie To Themselves

The Real Estate Espresso Podcast

How Investors Lie To Themselves

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How Investors Lie To Themselves – A closer look at the common errors in real estate investment

Welcome to my blog! Today, I’m from the Real Estate Espresso Podcast and in this post, I’ll share some insights into what I believe to be a rising issue within the commercial real estate industry in the United States. As a real estate investor keenly plugged into the market dynamics, I’ve lately begun to witness a significant surge in distress amongst multifamily apartment buildings that are failing to meet their financial commitments to lenders. This is leading to defaults and commercial foreclosures.

Nine Ways Investors Lie To Themselves

So, how do investors lie to themselves with regards to real estate investment? In this post, I’ll detail nine common errors I’ve unearthed in this field.

Mistake	Description
Optimistic projections of rent growth	Consumer inflation has risen beyond wage increases, reducing purchasing power and consequently, affordability of consumers.
Cap rate as the primary measure of project profitability	This projection of the value of an income stream often overlooks the recent rise in interest rates.
Using ROI instead of IRR	While ROI provides the total return on an investment irrespective of time, it fails to capture the annualized returns of an irregular cash flow stream. IRR is the more meaningful measure.
Unrealistic projections of unit turnovers and turnover expense	Often, the cost of a unit term is ignored in the financial model or lumped under maintenance expenses erroneously.
Unrealistic expectations of economic vacancy	These pertain to the number of people in default, ignoring the rising delinquencies even among people with high standards.

Other errors include having an optimistic forecast for the cost of capital, relying on comparable rents from properties that are not comparable, committing math errors in the analysis spreadsheet, and relying on rules of thumb for underwriting.

As an investor, be sure to avoid these mistakes. They will only serve to delude you into a false sense of optimism, hindering the true potential of your investment. Continue to learn, engage in due diligence and ensure your projections and underwriting procedures are correct. Wishing you an amazing investment journey!

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