Experience is the Best Teacher – A Newbie's First Purchase Mistakes

When I decided that investing in real estate was the best way to fund my retirement, I set out to learn everything I could about it. I talked to friends who had been successful in real estate investing, read anything and everything I could find, participated in forums/webinars, attended seminars, ordered courses, listened to podcasts and watched endless hours of YouTube videos.

After all, the last thing I wanted to do was make a mistake when I started investing. Mistakes can cost you time and money, and I didn’t want to waste either.

But, as I learned, there comes a point when you have to stop learning and start doing. The only way to really learn about real estate investing is to take action and actually invest.

Getting started

An inheritance check ended up being my primary motivation. When I received this check I considered my options. I didn’t want to make a purchase of something that would not give me some sort of return on my investment. The market was way too volatile, so money market funds, stocks and bonds were out of the question. And other securities and annuities didn’t have much of a yield. I also was concerned with the taxes and capital gains, so I began looking at real estate.

At first, I wanted to flip properties, but since I was living in Haiti at the time, I couldn’t really supervise a rehab project long distance. Plus, I didn’t want to deal with the capital gains. Liens and notes looked interesting but there was too much of a learning curve. I had been reading a lot about buy and hold strategies so it seemed the natural way to go.

For me, turnkey properties made the most sense because they are already rehabbed, have qualified tenants, and come with a team, including a property management company, in place. All I had to do select the property, run the numbers and pay the cash.

I had already been researching emerging markets so all I had to do was to narrow down to two or three key markets with increasing populations, strong job growth, and an economy ripe for rentals. Memphis and Atlanta stood out as my top two market picks. Both markets had very affordable properties with good ROIs. Next, I researched turnkey companies and found one I liked that served both areas. It should have been a red flag that the company I selected was based in Singapore, but since the team was local, I didn’t anticipate problems. That was my first mistake.

The first three properties

I flew in from Haiti to evaluate the turnkey company’s available properties in person. After visiting the numerous properties in both cities, talking with locals, researching and driving the neighborhoods at different times of the day, I purchased a three-bedroom, two-bath home and a duplex, with 3/1 on both sides, in Memphis and another three-bedroom, two-bath home near a developing area in Atlanta. Within six days, I was a real estate investor with three properties in my portfolio.

I went home excited and couldn’t wait for my first rental checks to arrive. Sure enough, the next month, the funds started rolling in like an ATM machine run amuck – I was truly “in the money!” And I was loving this whole real estate investing thing.

Three months later, though, I had a problem. The tenants in one of my Memphis properties disappeared, and the property management company said they were having a hard time finding new tenants. I wasn’t too concerned, however, because my turn-key company provided a “rental guarantee” that they would cover vacancies up to six months (another red flag). I was confident the property management company would fill the vacancy soon.

A month later – nothing. Again, I wasn’t too concerned because I had my “vacancy warranty.” However, when six months zipped by and I still had no existing or prospective tenants, I was worried. I fired the property management firm and hired another who turned out to be worse than the first. My “ATM machine run amuck” had turned into a black hole attached to my checking account that sucked up property taxes, insurance payments and other repair and maintenance costs – still with no offset by tenants.

Out of desperation, I posted in the Bigger Pockets forum under “Desperate for Tenants in Memphis.” I immediately received numerous responses. Most responses, however, we not real encouraging. The general tone was something like – “You got burned! Get out while you can!” Many said because the property was located in a bad neighborhood that there were not too many options. (One investor even likened it to a war zone.)

But, I was confused. I carefully researched the area, drove through it at different times of the day, and consulted locals, who said it was just a blue collar area – definitely not “the hood” that my fellow BPers were touting.

Even so, I felt I had made a terrible mistake. I started to calculate my potential loss. Then, I received a post from an investor who lived in Memphis and knew the area my duplex was located in well. In fact, he had grown up there. He told me I just needed to understand the neighborhood to succeed there.

The more we talked, the more I liked his approach and philosophy. When I found out he also had a property management firm, I fired my second property management firm and hired this optimistic and encouraging BPer from Memphis.

It proved to be a great move. Not only did he find me tenants for both units (yes, my other tenant baled shortly before I hired the new property management firm), the new tenants were paying 10 to 20 percent higher rent rates than the original tenants.

I am still with this excellent property manager today, and he now manages both properties in Memphis and any others I will likely purchase.

Lessons learned

In retrospect, I should never have used a foreign turnkey company or worked with property managers who didn’t understand the neighborhoods where my properties were located. These, fortunately, were mistakes that will help make me a better real estate investor. And, that’s the key to getting started in real estate investing—while you should educate yourself and understand the basics, at some point, you need to just get started. The mistakes are part of the process that eventually leads to success.

I learned more in my first six months of investing than I did in the year I spent reading about it. And, despite the mistakes I made, all three properties have gone up in value and continue to provide great monthly cash flow.

Here’s my advice.

• Learn the basics. Education is important.You shouldn’t jump in blind but you also don’t want to get bogged down trying to learn everything either (i.e. Analysis Paralysis).

• Find mentors. A good mentor won’t eliminate mistakes – just reduce the overall number of mistakes. Your mentor should be a successful investor who has years of experience. If you don’t know of any, consider joining your local real estate investors association (REIA), a mastermind group or track down a real estate investor you respect and offer to help him or her out as a volunteer in exchange for mentorship.

• Do your research. Before hiring a property manager, vet them and ask for referrals. Before buying a property, use online resources like Neighborhood Scout or Street Advisor to learn about the neighborhood. Or, hire someone to drive it and report back to you. Talk with real estate agents and brokers who know the area well.
• Trust your instincts. Your gut is usually right. I should have trusted mine when I wasn’t sure about using a turnkey company based in Singapore. Watch for red flags. “If it sounds too good to be true…” fill in the blanks.
• Accept mistakes. You will make mistakes. And believe it or not, mistakes are a good thing! Mistakes are an important part of learning. It is from our mistakes that we gain our expertise. Books, seminars and the like can never hope to teach you what you gain from making a wrong move and learning from your mistake. But if you know the basics and have good mentors, those mistakes should be minimal.

The good news is real estate investing isn’t as difficult as it may appear. Start slow and deliberate and as you gain experience, keep growing. Leverage your knowledge into bigger and better properties. Get a mentor early on, and you will move into bigger and better deals sooner. What’s important is that you move – take that first step. You actually may wonder why you waited so long.