Real Estate Investment Mistakes To Avoid

I've been a fan of real estate for most of my adult life. Over the years I've learned some important real estate investment mistakes every investor should avoid that I share below.

I follow my local real estate market like a hawk and regularly go to open houses to monitor comps and search for new investment opportunities. My love of real estate continuously also motivates me to work hard. And I feel fortunate to have bought primary residences, rental properties and a vacation property over the last ~18+ years.

Adventures In Real Estate

Before I get into the main real estate investment mistakes to avoid, I'd like to share my experience purchasing a vacation property. Unless you are really rich or don't care about financial returns, you probably shouldn't own any vacation property.

In the summer of 2007, 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 access during the winter. And it has golf, swimming, tennis, tennis, fishing and bike rentals 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.

My Real Estate Investment Mistakes

Instead of making a lot of money from my job that year, my income got whacked. Then I lost over $200,000 in my vacation property the subsequent year. Ouch.

I thought I was getting a deal for the vacation property at $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. Banks were no longer 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. As a result, this brought the 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!

6 Real Estate Investment Mistakes To Avoid

Now without further ado, here are six main real estate investment mistakes that every investor should avoid.

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 of a 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. It 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 are no income guarantees unless you work in a unionized job or the government. Even still you could unexpectedly get laid off.

Note – If you ever suspect you could get laid off or that your employer is going to have RIFs (reduction in force), please read my book, How To Engineer Your Layoff.

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.

To avoid making real estate investment mistakes, extrapolate an income for yourself that flattens out or fades lower to be conservative. The median household income of Americans at $68,703 (data as of September 2020) has only risen slightly after practically going nowhere for 20 years.

2) Not spending as much time looking over the property as possible.

Real estate investment mistakes to avoid

The second real estate investment mistakes to avoid is rushing your purchase. You need to spend a lot of time looking over the property.

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, especially during hot market conditions.

However, a thorough 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 your prospective property at least three times for an hour each. And go at different times of the day and week. You want to observe as many conditions as possible in the morning, daytime, evening, and rush hour. 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.

3) Not running the numbers over multiple scenarios.

Another of the most important real estate investment mistakes to avoid is not running enough numbers. 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%.

This was 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.

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 the neighbors, do it. Ask them what the pluses and minuses are for the property's location.

Maybe firetrucks wail their sirens constantly past 10pm. Or perhaps the 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 onto sites like

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.

Related: 10 Warnings Signs To Look For Before Buying

Keep Your Eyes Wide Open

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.

Fortunately I was finally able to enjoy my vacation property with my kids. We went up in the middle of the pandemic nevertheless, and were able to enjoy the amenities off-peak. It was a nice change of pace.

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 good times in the housing market convince you to make delusional financial calculations. 

Always buy a property to enjoy first, income second, and capital appreciation a distant third. If you do, the only thing that will change with the markets is your financial ego.

Real Estate Recommendations

Now that you are aware of the real estate mistakes to avoid, here are some real estate recommendations to profit.

Explore real estate crowdsourcing opportunities

If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.

Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible.

For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you're looking for strictly investing income returns.

Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It's free to look.

Fundrise Due Diligence Funnel
Less than 5% of the real estate deals shown gets through the Fundrise funnel

Shop around for a mortgage

Check the latest mortgage rates online through Credible. They’ve got one of the largest networks of lenders that compete for your business.

Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible.

This is exactly what I did to lock in a 2.375% 5/1 ARM for my latest refinance. For those looking to purchase property, the same thing is in order.

If you’ve found a good deal, can afford the payments, and plan to own the property for 10+ years, I’d get neutral inflation and take advantage of the low rates.

For more nuanced personal finance content, join 100,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. Everything is written based off firsthand experience. 

About The Author

35 thoughts on “Real Estate Investment Mistakes To Avoid”

  1. Mike Barbanica

    Thanks for the insight! Vacation homes have a lot of potential, but you really have to know what you’re doing. That said, I think you advice applies to a bunch of scenarios and not just vacation rental investments. For instance, you mention checking out comparable properties. This is smart for so many reasons. You don’t want to overpay, and you want to make sure you’ll garner the rent rate you want (that earns a profit). By doing your research, you’ll be able to make a better decision and increase your chances of succeeding. I’d love to add that a good property manager can go a long way in helping you succeed as well. Higher ROIs, happier tenants, and more lease renewals are juts some of the things a quality property manager can do for you, the owner of a brand new vacation rental.

  2. This is a great post. Thank you for sharing some of your personal struggles with owning a vacation home. I think a lot of people aspire to have a vacation property that they can use at their leisure and simply think that it can be rented out for the remainder of the time. While this can be a lucrative move if the circumstances are ideal, there are many challenges that come with owning a vacation property that is also used as a rental property. This is especially true during economic downtimes such as the one you mentioned above. I think all of your recommendations are solid and people should take heed to follow your advice.

  3. Hi Sam. My husband and I bought our primary residence a short sale for CHEAP in Los Angeles County 3 years ago. It’s already more than doubled in equity. We were thinking of refinancing at a rate that is 2.375% less and pulling equity to buy a Mammoth condo for $200k. 4 years ago we gave a property back to the bank when they wouldn’t modify our loan so we can only get an FHA loan at this time and doing a cash out refi is the only way to purchase the condo at this point. We are not looking to rent it out. We spend a great deal of time there (my in laws have a condo there) and would plan to be there more over time, so this is purely a lifestyle decision. Is it a bad decision to make a purchase this way? The payment is no problem for us, just not sure about the method!

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  5. 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!

    1. Don’t do it. Vacation rentals are so wild in CA I wouldn’t even touch them. Look at the comparables in mammoth. Now look at how many rentals are on the market. It’s a renters market, not a landlords.

      1. So to follow up – we did it! Bought a luxury condo in on of the most exclusive enclaves in Mammoth for 100k under listing. I’ve rented in the enclave for years and tracked the prices of every single sale, location and other notes (kind of a hobby of mine on sleepless nights). Except for the two weekends that it took me to get it ready for the luxury rental market, it has been booked solid. I’ve owned it just over 2 months and have enough paid bookings on the calendar thru April 1, 2016, to pay for a year of property taxes and 9 mos of HOA and utilities. The 6 Real Estate Mistakes Not to Make was a very helpful article. But THE BEST is #3 – Not Running Your Numbers Over Multiple Scenarios. That is what I did. I looked at every possible scenario and crunched the numbers into smithereens. Then I made an appointment with my accountant so he could plug in all the CPA, tax and law consequence scenarios that I might have overlooked or not know because tax rules and laws do change and a good CPA knows what might be coming down the pipeline. Suffice it to say – I think I fought like a Samurai and proud of it. Thank you Financial Samurai for being on point, discussing what isn’t discussed in regular circles, for inspiring clarity of thinking, due diligence and independence. Gratefully – SnowCat

        1. Hi ,

          I am thinking about purchasing a second home in Mammoth . Would you mind sharing which enclave you have invested in ?

          Thank you

  6. 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)!

  7. 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.

  8. 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!

  9. 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.

  10. 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.

    1. 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.

      1. Can you explain how you got your 10% gross rental yield?

        Btw … one of the best websites i’ve ever come across. Thank you!

  11. 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!

  12. 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. mysticaltyger

    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.

  14. mysticaltyger

    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.

  15. Kim@Eyesonthedollar

    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.

  16. 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.

  17. Bryce @ Save and Conquer

    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.

  18. 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!

  19. 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

    1. 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

      1. 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.


        1. 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.

  20. 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.

  21. 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.

  22. 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.

  23. 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!

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