5 Lessons Learned from the Worst Real Estate Investments
Each week, we post a new question to the Best Ever Show Community on Facebook. The Best Ever Show Community is a place where real estate entrepreneurs of all stripes and sizes can come together to interact with each other, me, and the guests featured on my podcast with the purpose of everyone helping each other reach the next level in their businesses and their lives.
What better way to add value than to ask you, the community, for your Best Ever advice on a variety of different real estate topics. This week, the question was “what is your worst deal ever and why?”
You don’t just want to just about people’s worst deals ever. What you really want to know is why it was bad and how you can avoid making the same mistakes!
That said, here are five lessons active real estate investors learned from their worst deals ever:
Lesson #1 – Rental Properties are Better Wealth Builders Than Fix-and-Flips
Garrett White learned two valuable lessons from his worst deal ever. It was his first attempt at a fix-and-flip in 2017. Up to that point, he had only purchased rental properties. Garrett purchased the property for $77,500 from a burned-out landlord, put in $18,500 in renovations and sold it for $120,000 three months later.
While he was able to make a profit on the deal, the first lesson he learned was that, compared to fix-and-flips, rental properties are much better wealth builders. On fix-and-flips, the main benefit comes from the short-term forced appreciation. Whereas for rental properties, you’ll benefit from short-term forced appreciation, long-term natural appreciation, ongoing cash flow, tax advantages and the principal paydown. He made quick profit with fix-and-flips but to build long-term wealth and use his time more effectively, he believes rental properties are a much better option.
Lesson #2 – Time is Your Most Valuable Asset
Another lesson Garrett learned from his worst deal ever was the importance of time. He said the amount of time, hustle and stress involved during those three months spent on the flip were greater than the four years of owning six rental properties combined. The large time commitment involved in identifying a fix-and-flip opportunity, evaluating and closing, managing or doing the renovations, and selling the deal weren’t worth the stress and short-term profit. Instead, Garrett would have rather spent his time cultivating relationships with brokers, owners and passive investors so that he could syndicate deals and buy rental properties.
Lesson #3 – Consider Creative Financing Before Passing on a Deal
Robert Lawry II’s worst deal ever was a deal he didn’t do. It was a 2-bedroom condo with an oceanfront view listed for $30,000 in 1993. Robert was 19 and couldn’t fund the purchase price, so he passed. Today, the condo is valued at $800,000…ouch!
But Robert learned a valuable lesson. Rather than passing on the deals he cannot fund alone, he now knows that he should brainstorm creative financing options first. For example, he could have raised private capital to purchase the condo. Or he could have implemented the house hacking strategy, bringing on a roommate or two to cover the acquisition costs and to pay rent to cover the mortgage payments.
Don’t pass on the deal just because you cannot fund the acquisition costs. If the return projections are truly strong, you shouldn’t have an issue finding someone to help you purchase the deal.
Lesson #4 – Don’t Deviate from Your Investment Criteria
Eric Jacobs’ worst real estate deal was a home he purchased in the Bahamas. He knew it wasn’t a good deal but he bought it anyways. Eric lost a fair amount of money on this deal, but he fortunately realized the error is his ways and didn’t pursue any more deals in the Bahamas.
His error was that he fell in love with the property. As a result, he deviated from his investment criteria and ignored the results of his underwriting. We’ve all been there, but we must remember that we set our investment criteria the way we did for a reason. If the deal doesn’t meet our criteria, no matter how much we love it or try to bend the numbers, we have to pass.
Lesson #5 – Hold Partners Accountable
On Roman Bulgakov’s worst deal ever, he was betrayed by his business partner. He trusted that his partner had the best intentions of the company in mind when the reality was that his partner was only looking out for himself.
Roman partnered with a contractor who agreed to finish the project in six months at an agreed upon price. However, the contractor ended up taking twice as long and charging twice as much. By the time the deal made it to the closing table, Roman only made $1500.
Roman’s lesson is to keep partners accountable. He failed to create accountability checks along the way, which the contractor took advantage of. Moving forward, Roman has a defined process with his partners in which he has frequent check-ins to receive status updates on his projects. That way, he can catch timeline or budget deviations before it’s too late!
What about you? Comment below: What was your worst deal ever and why?