Real Estate Investment Mistakes To Avoid

Squaw Valley, Lake Tahoe California

Unless you are really rich or don’t care about financial returns, you probably shouldn’t own any vacation property. In the Spring of 2008, I bought a vacation property at my favorite resort up in Lake Tahoe. The property is in a secluded place with ski-in/ski-out during the winter and golf, hiking, and fishing on the premises during the summer. Ah, the good life!

Although Bear Sterns had gone under, I was still hopeful things wouldn’t get too bad. Our government consistently bails everybody out after all. Unfortunately, I was wrong as there was no amount of money the government could inject into the system at the time that could stop the wave of defaults. Instead of making a lot of money from my job that year, my income got whacked and I lost over $200,000 in my vacation property the subsequent year.

I thought I was getting a deal for $700,000 because the owner had just bought the place a year ago for $815,000. Surely, a property with over $80,000 in gross annual rental revenue could not go much lower. Of course I was wrong because the condotel secondary mortgage market shut down as no banks were willing to lend for vacation properties anymore. The only people who could buy were those with enough cash. This was a great reminder why cash really is king.

As the financial crisis worsened in 2009, fellow resort owners started going into foreclosure, bringing values of adjacent properties down as well. This is a big problem with owning a condo. You are at the mercy of your neighbor down the hall. In a real estate downturn, the first properties to get hit are vacation properties because they are non essential. Meanwhile, you have tons of people shirking on their loans in California because we are a non-recourse state. If you stop paying your mortgage and hand back the keys, the banks cannot go after your other assets!

I’d like to go over some real estate mistake one should avoid making. It’s good to relive financial errors in order to make better choices in the future!


1) Extrapolating your income. 2007 was a record year for corporate profits and my personal income. I remember getting my bonus at the age of 30 and distinctly thinking I could finally consider myself rich. I felt confident that I would continue to make a similar amount for the next 10 years. What I didn’t anticipate was the beginning disconnect between performance and pay starting in 2008. It didn’t matter how well I performed, I couldn’t get paid well anymore because the overall profitability of the company was down. My pay was reduced for the next two years and only popped back to my 2007 highs in 2010 after I negotiated an aggressive guarantee since I was getting poached by a competitor.

There really is no income guarantees unless you work in a unionized job or the government. The private sector has become brutal in the way it cuts compensation and staff to compete today. Whenever things are going fantastically well, remind yourself that all good things come to an end. Extrapolate an income that flattens out or fades lower to be conservative. The median household income of Americans is now only $50,000. It used to be over $54,000 a decade ago!

2) Not spending as much time looking over the property as possible. I realize that buying a property is a highly emotional experience. If you find something you like, you start getting nervous that someone else will snatch the property away from you, especially now that the housing bull market is back. The real estate inspection is incredibly important to insure that there are no hidden leaks, mold, foundation cracks, and other structural issues. I highly recommend you visit the property at least three times for an hour each at different times of the day and week. Ask a bunch of questions, and similar questions to see if you can catch inconsistencies from the selling agent.

Please realize that the real estate market is very collusive. Your real estate agent knows mortgage brokers who know title officers who know property appraisers. Every single industry has seen commission rates drop due to the advent of the internet and technology (think Expedia and travel agents) except for the real estate industry due to the higher risk in selling something so valuable. There will inevitably be some sort of conflict of interest with so many moving parts to a property purchase. The best thing you can do is keep shopping around for the lowest mortgage rates and call an independent inspector to re-inspect the property. Here’s a related story on how my home insurance company tried to bilk me to pay 45% more in monthly premiums.

3) Not running the numbers over multiple scenarios. Before each property purchase, I create an entire spreadsheet with three different income and expense scenarios, especially for vacation and rental properties. I’ve got the Bullish, Neutral, and Bearish scenarios to work with. Only if I can survive for at least five years with the bearish scenario will I pull the trigger and buy the property I’m considering. Part of my assumptions in a bearish scenario now include a total loss of primary income, a 40% haircut in property prices, and 2% higher interest rates. Although if asset values are taking so much, interest rates will be going lower, and not higher.

My 2008 bearish property price downside scenario was 20% too optimistic! The unexpected positive was that I was able to modify my loan for free down to 4.25% for a 30-year fixed jumbo from 5.875% thanks to a Department of Justice lawsuit that forced Bank Of America to allow on-time payers refinance lower due to a drastic drop in interest rates. I do wonder whether Bank of America would have done anything to help if the government didn’t step in. I’d read the loan mod post and check with your bank to see if you qualify.

4) Not getting a third opinion. Property often times blinds us. We begin to think irrationally once we’ve found our dream home because we fear if we don’t act fast, someone else with take our home away. Realtors also blind us into buying or selling property that we otherwise shouldn’t. Despite telling my real estate friend I wasn’t interested in selling my home, he found a way to get me to list my house for three and a half weeks on the market. It was a pain to always show the house and keep everything super clean. To claim some of my authority back, I decided to price above market so that if there was a bid, I wouldn’t feel bad selling. You can read more in, “Lessons Learned From Not Selling My House.”

Every prospective home buyer should bring along at least two other people with them to inspect the property. At least one of these people should be a homeowner who will provide both the good and bad of homeownership.

5) Not talking to your neighbors. If you have a chance to speak to your neighbors, do it. Ask them what the pluses and minuses for the property’s location. Maybe firetrucks wail their sirens constantly past 10pm. Maybe your block tends to flood when it rains. Maybe there’s been an increasing amount of burglaries over the years. Or maybe your neighbor knows that the liquor store across the street is in contract and will be torn down and replaced with a respectable office building.

Your neighbors can provide all the candid detail which the selling real estate agent and fancy brochures cannot. Of course your neighbor probably wants the property to be sold for top dollar. But more often than not, you will be able to glean some fantastic information that will save or make you a lot of money.

6) Not checking the sales prices for comparable properties. The easiest and best way to check the sales prices of comparable homes is to punch in your desired property on You can see sales history and home value estimates to get a ball park figure of the properties’ worth. From there you’ve got to do your own calculations on mortgage cost, rental yields, and so forth to get a best guesstimate on value.


Vacation properties should be purchased primarily for lifestyle purposes only. When I bought my vacation property, I imagined a scenario where the family and close friends could go up and play. I wanted to always feel at home while on vacation and I really do every time I go up to Lake Tahoe three hours away. However, my purchase was a very poor economic decision if we just focus on the numbers. I’m here to help you not make the same mistakes.

Owning your primary residence is a wonderful situation once you’ve found your ideal home. It’s a place where you’ll probably spend at least 10 hours a day. You’ll likely build equity over the long term as well as generate lots of happy memories if you buy within your means. Don’t let the current housing good times convince you to make delusional financial calculations. Always buy a property to enjoy first. If you do, the only thing that will change with the markets is your financial ego.

Related Post: How To Correctly Analyze Investment Property


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Updated 2H2015

Photo: Squaw Creek run at The Resort At Squaw Creek, 2015.




Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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  1. nbsdmp says

    I’ve struggled with this same desire to pull the trigger on a second home. Luckily I’ve not taken the plunge…yet. Interestingly when I involve other people who have 2nd and 3rd homes in the decision process, each one other than 1 uber-weathly, friend advises against it. The logic is you can stay at the Ritz for about close to the same cost for the couple weeks a year you can actually spend there. They say you have non of the risk and headaches, and also you don’t feel tied to go to that same spot all the time. I think if you have a family, it is a little different and don’t get me wrong it would be sweet to have a condo in Vail Village, but you are right Sam unless you are very wealthy, don’t be doing it as an investment. My take is I’m going to do a 1031 exchange in a few years with a rental property to pay cash on my future retirement home that I’ll “rent out” before moving a couple years later. By the way, Tahoe is sweet…I totally understand the allure of having a place there if its only a 3 hour drive!

  2. says

    I once owned (with friends) a condo in Mammoth, California. or those who do not know, Mammoth is a ski area accessed by mostly southern Californians. We bought low ($40K) and sold 10 years later ($65K). Vacation properties are risky! There were years that snowfall was erratic and demand low. Mortgage, fees etc still must be paid, even when the income goes down. During the 10 years, we may have broken even with all of us using the property every year for a few days. It was not a bad investment, but I did much better in my other (income property) investments.

  3. says

    These points seem to be such common sense, yet so many people don’t do them.

    A friend of mine just bought a place. It was an impulse buy. He keeps on joking around about how he’s so random. I don’t find it funny.

    After buying the place, he asked me where to look for tenants. This is research that you should conduct in advance.

  4. says

    We purchased our condo near the height of the market and it’s still down about 15% (optimistically…) Our market is usually a few years behind CA though so I hope it’ll be better next year.
    $700,000 for a vacation property? Wow, you’re rich! I don’t think we’ll ever buy vacation property. We’d rather go somewhere new.

  5. Chris says

    Hope all turns out well with your vacation property Sam. I’m curious, if you only use it a few times a year, why not just rent instead and avoid all the headaches and uncertainty?

    On another note, how do you feel about vacation property in Hawaii? You have a stake in a place there too, correct?

    Thanks, Chris

    • says

      I use it about 30 days a year, and going up now that I’m retired. It’s always easy to ask questions in reverse after we know the facts. I buy property for the call option that it may be worth more in the future than at time of purchase.

      Remind me again what your current real estate portfolio situation is? thx

      • Chris says

        3 Single Family homes, two rented, living in the third (foreclosure project I just finished). My tone wasn’t arm-chair quarterbacking, it was simply out of curiousity. I’m fascinated with Real Estate as well, and tend to be interested in the thought processes of other investors.

        The fact that you put yourself “out there” on a daily basis, on your blog, isn’t lost on me.


        • says

          Time to put yourself more out there Chris. I sense a shift in your comments towards the negative. If you want to say something, write a whole post about what you’ve done, publish it and let me know how it goes.

  6. says

    Yeah vacation properties are not for everyone. There’s a log involved and getting a loan is a lot harder now than it used to be. Being very thorough and not rushing are great tips. It can be tempting to just snatch something up, especially if traveling abroad and only having a limited amount of time on location to make a decision. But an investment as big as real estate shouldn’t be hasty!

  7. says

    Good tips. The one about not extrapolating your income is a good one. Due to the Sequester, our company has offered a Voluntary Resignation Opportunity to all employees. I can’t go into the details of the VRO, but quite a few people are considering it.

  8. B says

    Real estate lawyer and investor here – I couldn’t agree more. I’m very opposed to buying a second home as an investment. As a toy, someday, if I ever have an 8 digit networth, why not?

    A house in Tahoe is killer – you get heaven in summer and winter. Even if it’s not the best financial investment, I bet it brings you a lot of joy.

    I’m looking at a job change right now in another state and have been researching how much I can get from renting out my current place furnished on VRBO or as corporate housing. It appears that I would do very well (my mortgage is super low, both in absolute dollar terms and monthly payments). I live in a sort of vacation area – during spring training season I think I could get a small fortune. Maybe rent it out for 2-3 years as the market continues to climb, but not so long that I run out of time to get my tax free 121 gain out of it. Anybody out there rented a furnished home on VRBO or a corporate housing site? As with all things that seem to good to be true, I wonder if this would be as well.

  9. says

    The only place we’ve found so far that we want to visit every year is Coronado Island, and that would not be a good investment! I known people who have had vacation homes in the family for generations, and there is certainly an appeal to starting a tradition like that, but I think we should probably stick to residential rentals close to home.

  10. mysticaltyger says

    That comment about being able to count on your income if you’re a government worker is no longer true. I work for a city in the Bay Area and we had our pay cut by ~12.5% back in 2010 and in addition, our pension contributions have gone up about 4 percentage points over that time period, and those pension contributions have gone up by a percentage point every year since about 2002…long before the financial crisis started. In 1999, I was paying 4.76% of my gross pay toward my pension. Now it’s 13.98%, scheduled to go up to 14.73% in January 2014.

  11. mysticaltyger says

    Correction…Pension contributions went up by a percentage point in most years since about 2002, but not every year…but it’s averaged out to almost a percentage point a year and the increases now come every year like clockwork, with no end in sight.

  12. says

    This is all very excellent advice, but definitely can be tough to adhere to considering the emotional aspects of purchasing a property (as you’ve pointed out).

    What I find interesting are these two statements:

    1) “It looks like we’re just getting back to peak 2007 property price values around the country.”
    2) “The median household income of Americans is now only $50,000. It used to be over $54,000 a decade ago!”

    They don’t seem to support each other at all. I know the cost of borrowing has been very cheap recently (and still is historically), but with stagnant to decreasing incomes, I often wonder how the recent rapid spike in home values (especially in California) can be sustained.

  13. Kristy says

    Thanks for the tips! My husband and I have been looking at purchasing a vacation home recently and I keep saying no, then yes. It is a very emotional decision, but not always financially sound. Thanks again for the sound reasoning behind not purchasing a second home…at least for me!

  14. nbsdmp says

    Sam, question for you: (I understand if you don’t want to answer) at $80k in revenue an year this has to come pretty close to being a financial push or slight positive for you and not something that you are sinking more $ into it each year? I understand the loss of initial capital but if you are servicing the debt it is not the end of the world from an investment standpoint.

    • says

      Indeed. At the time it was a 10% gross rental yield which was good. Rents decreased by about 20%, but the yield is still over 7% gross. With the loan mod down to 4.125% from 5.875% for free this January, it actually spits out a profit in the rental program.

      I’m sticking with the plan and keeping it forever. It’s a lifestyle choice.

  15. says

    Has the price recovered back to where you bought it? With the San Francisco market being so hot, I would think it would have dragged Tahoe up a bit too.

    That is spectacular country. My sister went to school in Reno for a bit, so we used to make it to Tahoe at least once a year. Love it.

    • says

      Not yet as the condotel market is still relatively closed. There is usually a 2 year lag in Tahoe so perhaps in 2015. Don’t plan to sell forever, but for those who want to sell, I wouldn’t for awhile.

  16. RJE says

    My wife and I talk about a 2nd place on a regular basis. We currently rent 2-4 weeks a year at the coast. Although we can afford to pull the trigger, we haven’t. I like having the dividends off savings pay the rent during prime rental season, and having the ability to travel and rent somewhere else if we want to.
    If we ever buy another place, it will be a lifestyle choice, not a financial one. I can spend a couple weeks or so in almost any decent property. I can see if we wanted to spend more than a month at a time, or went several weekends a year, it would be nice to have your own place. Or, if you were preparing for retirement at the new location, and wanted to start to put down roots.
    At the same time, I find it hard enough to maintain one home, let alone two!

  17. says

    I’ve been starting the research to buy our first rental property. In my part of California, I see the real estate market heating up again – multiple bids, selling for over asking price, etc.

    Considering the rising costs and stagnant rents, I still haven’t been able to make the numbers work yet. Not enough margin.

  18. says

    This article rings true! When a few partners and I purchased our property in the Upper Peninsula of Michigan in 2006 (4 bed/2 bath house at Big Powderhorn Mountain), I had spreadsheet after spreadsheet trying to calculate the various scenarios of income and expenses.

    However, here is what I didn’t take into account that impacts revenue greatly on short term / vacation rentals:

    The day of the week major holidays fall on (i.e. rentals are down when Christmas falls on a Wednesday). Basically, if a major holiday falls in the middle of the week, our rentals get choppy.

    Mother Nature! Yes, there are winters were snowfall is below average (even if it is still alot) and the snow just doesn’t come at the right time.

    So, just like Sam says…check your numbers again and again….and after that…make sure the investment fills some other lifestyle need (thank god I love snowboarding)!

  19. Cat says

    I am seriously considering buying a premium condo on the golf course in Mammoth. Orig sold for nearly a million in 2006; 500k in 2012 (REO) and on the market for 635k. It gets between 40k-60k a year in rental – though management company will take 40%. Where do you think the Mammoth luxury condo market is going? Do you think its a good investment? Thanks!


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