Exercises: Identifying and Correcting Mistakes

A new investor finds a 4-unit property listed at $280,000. The broker pro forma shows $3,600/month in gross rent (0.9% gross yield on the listing — nearly at 1%), with expenses listed at 35% of gross. The investor is excited and wants to submit a full-price offer immediately. They have $70,000 in savings, which would cover the down payment at 25% LTV.

The red flags here are numerous. First, the 35% expense ratio is unrealistically low for a multifamily property — 45-55% is typical. Second, the investor would deploy 100% of savings with no reserves. Third, the urge to submit immediately suggests emotional decision-making without due diligence. Fourth, the investor has not verified whether the $3,600 is actual collected rent or pro forma rent at market rates.

An investor finds a single-family rental listed at $85,000 in a small city. The price seems like an incredible bargain — similar homes sold for $120,000 three years ago. The investor reasons that they are buying at a discount and will profit when prices recover. They skip the market research and buy based on the price alone.

The reality is that prices fell from $120,000 to $85,000 because the area's largest employer closed a plant, eliminating 2,000 jobs. Population is declining, vacancy rates have risen to 15%, and comparable rents have dropped 20% from their peak. The "bargain" is actually a property at fair value in a deteriorating market — or possibly still overpriced if conditions continue to worsen. This scenario illustrates anchoring bias (anchoring to the historical $120,000 value) and the failure to conduct market research before property research.

Based on the mistakes and scenarios in this track, build a personal "pre-flight checklist" — a set of questions you must answer honestly before making any offer. Effective questions include: Have I verified income using T12 data, not pro forma projections? Have I used realistic expense ratios of 45-55% for residential and 35-45% for commercial? Do I have 6 months of reserves beyond the down payment and closing costs? Have I researched the market fundamentals — population trend, job growth, vacancy rate? Have I identified three specific risks for this deal?

This checklist is your defense against the biases and pitfalls covered in this track. Print it, keep it in your deal folder, and complete it for every property you consider. If you cannot answer yes to every question, you are not ready to make an offer.