Real Estate Investor Mistakes: Giving Up Control

Ever since I had my 1st job in Corporate America, I had to make the choice between which mutual fund to elect to put my retirement money in. At the time I had no idea that the reason I was about to lose my money was that I was about to give up control of my retirement dollars to a fund manager. So guess what happened? I lost my money! It was the first experience I had in really losing money, and the main reason was that I was basically letting someone else decide what to do with it. Today I only invest in self-directed IRA’s where I have full control, and responsibility for any investments.

 

The same seemed to hold true for my real estate investments. When it came to finding a deal, doing the rehab, and managing the unit, I usually always made money. Even when the market fell I was usually okay since I made my real estate investments based on cash flow and not appreciation. Appreciation and tax benefits were merely a bonus in my book, as long as the cash flow was good and I never had too much money sunk into one deal.

 

When the market was good and money was flowing there were many passive real estate investment that came my way. Most were shares of a fund that was going to do large commercial real estate deals. And you’ll never believe what happened. I invested some money and gave up my control and the end result was that I lost my money! Sure there was a possibility that I would have made money, but when you invest in another management team it’s hard to predict what impact the market will have on said team.

 

One fund that I invested in had no real way to predict what would happen to them when the commercial market collapsed along with its financing. It was a new construction play for commercial office condos. It isn’t over yet but the odds of success are slim since a few years have gone by and it’s still a vacant piece of ground. It’s had to get construction financing with the best laid plans when you have no sales or leases signed.

 

The second great commercial fund I made was in mobile home parks. The lesson here was know the management team. The fundamentals and cash flow looked great but I couldn’t predict that management team would sue each other over money. Greed and ego are good enemies of the passive real estate investor. Here’s a case where a really good real estate investment deal went south and it had nothing to do with the actual real estate!

 

Several lessons learned here. I know I’m going against my own philosophy here because today I only invest in my own fund. But remember who controls it? I also try to help my investors avoid all the pitfalls I’ve encountered in the past with funds. Our fund as been in business for 5 years and we’ve never once missed a payment, sure anyone could sue anyone but the two other partners and myself have a business relationship that’s almost 10 years old, and we’re not contingent on 1 deal so it’s impossible to lose it all (in fact we own thousands of mortgages, and no matter what the market we have exit strategies to come out ahead). Bigger deals are not always better. Sometimes a lot of little deals give the better return. Don’t get caught up in the hype, invest smart.