My Three Biggest Mistakes as a Real Estate Investor

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When I first started investing in real estate, there was an expression that the seasoned investors at the local real estate investors club used for investors like me.  It wasn’t that I was a ‘newbie’.  They didn’t say that I was ‘green’ at investing.  None of the usual monickers that get attached to those that are new at something.  No, I was referred to as ‘young and dumb’.  Young as in brand new to investing and dumb as in I thought I had it figured out.  I had read the Carlton Sheets real estate investing program cover to cover and lucked into my first deal.  Even after stumbling through it, I was convinced that real estate investing was my ticket to riches and was bound and determined to show everyone watching how to ‘Just Do It’.

Needless to say, the seasoned investors at the real estate club were seasoned for a reason!  I would have been much better served as a beginning investor to listen to their advice and soak up some of the wisdom that comes from having blazed the trail before me.  I am still friends with several investors from that original real estate club in Denver, CO. and although we don’t speak as often any more, the lessons they taught me still resonate today.  Even though I had to learn from my own mistakes; the simple fact that they tried to help me early on drives me to do the same.

With that in mind, I looked back this past week at some of my mistakes through the years and there are definitely three that stand out.  These three mistakes have literally cost me hundreds of thousands of dollars and many sleepless nights so I don’t write them without having gone through a very thoughtful process.  Take heart though…at least I am telling you how NOT to make the same mistakes I made!

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Avoid these Three Mistakes I Made as a Real Estate Investor

Experience Counts
There is a reason that many organizations are set up in a hierarchy with the longest serving members in the leadership roles.  There is a reason that many corporations have formal organizational charts which show a natural flow for advancement to leadership positions that favor time served and results earned.  Experience counts!

When I started investing in real estate, I was surrounded by many investors who had invested in all types of markets.  They had invested when money was tight, when money was loose, when interest rates were high, when interest rates were low, when mortgages were assumable, when buyers were desperate, when sellers were desperate, etc, etc.  They had been through multiple real estate cycles and had experienced nearly every scenario imaginable.  These were investors who had failed and succeeded and would gladly tell you why for both!  My 1st biggest mistake was not leaning on them for their advice!

I had read books and attended seminars and thought that my learning through osmosis would protect me from failure.  I was wrong.  What would have protected me from failure would have been surrounding myself very early on with knowledgeable investors who would answer my questions.  They were all around me both in Colorado and in Tennessee, but I had a mentality that I could study my way to success.  Sometimes, success finds those who know where to look!  Every major city in America has groups of investors – whether they are formal or informal – that gather to discuss real estate investing.  We’ll save the debate on the usefulness of individual REIA’ s for another day, but this is where you are going to find mentors.  Investors who feel they have an almost fiduciary duty to try and help new investors.  With the advent of the internet, sites like BiggerPockets have become online gatherings of some very experienced real estate investors who freely dispense advice and knowledge all gleaned from experience.  Investors are literally surrounded by opportunity for both success and failure.  Yet, the days of having to blaze your own path should be left behind.  Lean on others who have ascended to the position of being able to give advice on real estate investing through their years of experience.

Being Inquisitive Is the Sharpest Tool in an Investors Tool Belt

Sorry for the whole ‘Tool Belt” cliche, but I needed to remind investors that there are many ways to increase your chances of success in real estate investing.  One of the best ways is to develop a natural sense of simply asking lots of questions.  Too often, investors are presented numbers from their partners or agents, appraisers, inspectors, wholesalers, renovators and, heck, even Turn-key companies, and they fail to ask even basic questions.  Even when you know the answers, it is good to ask questions.  It keeps you and those presenting you with opportunities or analysis sharp and on their game as well.

I entered into a fix n flip real estate deal with a partner at one point who was a realtor.  He was a friend of mine who I had known for many years, and I knew that he was a damn good person.  I knew that he would never cheat me and would rather cheat himself before ever intentionally hurting someone else financially.  I trusted him implicitly and it cost both of us.  He and I had done many business deals together, but had never partnered in real estate.  He was looking to branch out and develop a second active income stream and tested for his real estate license.  He owned several rental properties and was able to keep them occupied but could not make them cash flow positive.  When he and I decided to partner on real estate deals, he brought two opportunities to me to review and sign off on.  He had compiled all of the data and his analysis and this is where I made my mistake.  My 2nd biggest mistake was failing to question the numbers!

In hindsight, I should have questioned the numbers right off the bat, knowing that he had never turned a profit as a landlord and that he had only recently earned his real estate license.  But I relied on him to do the analysis and I put up the money.  The first deal worked smoothly and we were able to eek out a small profit to split.  He estimated $20,000 in renovations and a resale of $185,000.  Factoring in all costs, we were set to split a profit of around $50,000.  We sold the property inside 90 days after spending $32,000 in renovations for $173,000 after concessions.  We split roughly $30,000 which wasn’t bad, but was a whopping 40% below projections.

On the second deal, we anticipated spending $60,000 on renovations and a resale of approximately $450,000 within 6 months for what would have been an incredible 6 figure pay day!  I will keep this brief!  After spending over $90,000 on renovations and waiting two years, the property could not be sold for $295,000.  These two deals were done simultaneously which only compounded the problems.  Whatever we made on the first deal was eaten up on the second.  I do not blame my partner for one dollar lost by either of us.  I blame myself.  Had I questioned his numbers more and dug through his analysis, I would have found the glaring errors he made in renovation costs and would have been able to point out the mistakes he was making in using comps.  Had I not found them, one of the experienced investors who I should have been turning to for advice surely would have found them.  See how these mistakes kind of compound on each other!

Just Because You Can, Does Not Mean You Should

When I finally started coming around to the notion that long-term buy & hold and passive income streams were a better suited fit for my investing style, I still hadn’t figured out how to avoid the first two mistakes on my list.  I owned and operated a very successful business and had spent years at this point learning from others including learning how to plan, execute and stay on task.  Unfortunately, I did not apply those lessons to my buy & hold strategy.

As a successful entrepreneur, I had my own capital to use for real estate investing, but I also had easy access to credit.  I had banks lining up to give me credit and to fund my real estate transactions.  I was being approached by wholesalers and agents who had seen my name in the County Deed registration lists and who knew I was purchasing property.  They in turn put me in touch with more banks who wanted to do business.  For anyone who has been in real estate for longer than 10 years, you can probably see where this is heading.  I had laid out a clear plan with my wife to purchase 15-20 investment properties which we would allow tenants to pay off for us over a set period of time.  When they were paid off, those 15-20 investment properties would provide us with opportunity to pay for our kids college funds, give our kids an amazing wedding gift (deed to a free & clear property) and provide for our retirement.  My 3rd biggest mistake was failure to stay on MY plan!

I allowed myself to get sidetracked.  I grew starry-eyed and began to have bigger aspirations that had nothing to do with the original plan my wife and I had set out.  Before I knew it, I had more than tripled our original investment plan and had done it using a completely different strategy.  We were not purchasing the style of house that we knew made a good investment and instead started purchasing spreadsheet numbers.  No longer was I using our funds from the successful business.  Instead I was borrowing from every lender who offered easy access.  I was buying simply because I could, not because I should.  Our investment properties took on a life of their own and soon we were not only swallowed by the sheer massive amount of time it took to manage the paperwork and keep the books, but we were swallowed by the debt on those properties.  It affected the time we were able to devote to our business, our family and the portfolio itself.

Understand that I am not saying the large portfolio was the problem.  Many investors plan for larger portfolios and take all the necessary steps along the way.  For us, we wanted 15-20 and ended up with over 50.  I committed all 3 of my biggest mistakes at the same time.  I didn’t listen to those around me who told me I was moving way too fast.  After all, they knew from experience.  I failed to question the numbers on the houses, the locations of the houses and even the method I was going to purchase and began to take actions that were not consistent with the plan my wife and I had set out.

To borrow another cliche…do as I say and not as I did!  If you can avoid these three mistakes as a real estate investor, you can absolutely control your future and point your real estate investments in a successful direction.  Just make one commitment when you find that success.  Share your biggest mistakes with the new ‘young and dumb’ investors you come across and do your best to guide them to success.

Photo: Liz West

About Author

Chris Clothier

In 2005, Chris Clothier (G+) began working with passive real estate investors and has since helped more than 1,100 investors purchase over 3,400 investment properties in Memphis, Dallas and Houston through the Memphis Invest family of companies.

20 Comments

  1. Great post Chris.

    I am a big fan of my REIA group. It is indeed there that you will find your mentor. One of the biggest reasons to be a part of that group is their willingness to share their mistakes. You can save yourself a lot of grief just by networking with these seasoned investors.

    We used to have a meeting once a year where folks would get up and be part of a contest; the members would vote on the best deal and the worst deal of the year for those folks that were brave enough to get up on stage. It was listening to these guys tell about their worst deal (while trying to get the vote) that I made huge strides in my learning. And it was a really fun night too.

    Deviating from their original plan is another common complaint among real estate investors. I will say though that you need to know when your plan isn’t working and be ready to make changes when needed.

    • Chris Clothier

      Hey Sharon –

      Thanks for taking the time to read and respond to my post. REIA groups can be such a mixed bag of results and opportunity for beginning investors, but you are correct. You can usually find active investors within these organizations who love to talk! That is the great thing about most successful real estate investors and why a site like Bigger Pockets just seems to work…investors love to tell their stories.

      Getting investors to tell you their failures is a much harder thing to do. There is nothing wrong with having made mistakes so long as you learn from them and, in my opinion, are willing to share so others don’t do the same.

      Again, I appreciate your comments and the advice you give at the end about making adjustments.

      Chris

  2. Great post Chris.

    I have found several points in my few years of investing. I have learned to look how a deal can go wrong. Too often people find the one way that a deal will be great but it often involves many things to happen just right and if even one goes wrong the who deal is a loss.

    Communication is the single biggest factor to success in my experience. Over communication even. From tenant relations to every single step and person involved in the purchase, repair, and financing side of a deal. If I don’t feel I can bring up something or question something, then I shouldn’t be working with that person. Also on the other end, if the person I am working with can’t handle a a question or communicate effectively, I shouldn’t be working with that person either.

    Lastly on long term planning. I believe it is essential for our plans to evolve as we move forward and learn more and acquire more resources, wether it be business connections or wealth. This needs to be closely correlated with constant long term planning as things change. I have found that a initial plan of mine can be in great detail, projecting out long term qith conservative realistic terms. Then when things change the long term also changes so old projections even a short time out can be drastically changed and this needs to be constantly accounted for. Many deals look great in the proper frame but a mix could end up with a personal liquidity crisis of either time or money without the proper planning.

    Thanks again Chris, great post.

    • Chris Clothier

      Kyle –

      Another great response and again, I really appreciate you reading them and the back and forth that comes from the responses.

      For beginning investors, it is often hard to notice when things are changing and when to make adjustments to your plan. In my case, I simply needed to talk to more investors and be willing to listen to their advice. So often, an investor needs to be saved from themselves and the bad decisions they are making and they need a trusted adviser to just nudge them one way or the other to keep them on the right path.

      Many of the mistakes I have made all correlate to together and end up compounding each other. Hopefully, after reading the post, other real estate investors will keep simple time-tested rules in mind and avoid the pitfalls that can put a serious dent in your plans.

      Thanks for posting.

      Chris

  3. Thanks for this article Chris. I am in the perfect position to absorb this advice as I have yet to pull the trigger on my first deal. It sounds like “knowing is half the battle” in this business and I thank you again for for sharing your knowledge with us “young and dumbs.”

    • Chris Clothier

      C.W. –

      Knowing is absolutely half the battle in this scenario! Thank you so much for taking the time to post on the article. As you get closer to pulling the trigger – do not hesitate to ask others for their advice and make sure you have all your questions answered when you pull the trigger.

      Good luck –

      Chris

  4. Great article Chris!! As a “newbie”, learning from mistakes is key. I’ve already fallen into a few myself! Thanks for taking the time to share the good, the bad and the ugly!

    • Chris Clothier

      Kathy –

      Thank you for taking the time to read the article and to post a reply! There are so many moving parts to every real estate transaction and so many of them happen before you ever even sign a deal. I’m just trying to get investors to engage in the process and really think things through before taking action. Notice i didn’t say slow down or even delay taking action…just be thoroughly self educated!

      Thanks again,

      Chris

  5. Reminds me of a new investor wannabe I had riding in my car as an agent in ’06. He couldn’t hear me say “red hot market” or “multiple offer” no matter what. Kept chasing the market with EXTREMELY Low ball offers. Eventually bought a property for top dollar in the highest markeposiible from another agent friend of mine when the market was starting to wane! Knew too much for his own good! It pays to take seasoned advice sometimes no matter what you paid for the hotel real estate seminar!

    • Chris Clothier

      Jerry –

      Thanks so much for reading and sharing. The more “experienced” investors reach out to new investors and share advice and stories, the better off those new investors will be. They will not all listen (I’m evidence of that!) but those that do will be better off for it.

      Thanks for commenting. All the best –

      Chris

  6. Chris,

    How did you get back on track and not swallowed by the debt and paperwork. Did you liquidate and realign your business? I enjoy your story and I feel like I’m headed down the same path. Also, I sent you an email regarding your bank book, I had a few questions.

    Thanks,

    Frank

    • Chris Clothier

      Frank –

      I surrounded myself with some really good people, got some good advice and made some hard decisions. Today I have a new CPA, a full time accountant to assist and I’ve managed to get all of the junk that I accumulated out of my portfolio. Anything I buy today has to fit a very strict set of criteria and I make sure I don’t deviate. I know its impossible to take solace in knowing others have made mistakes too, but you don’t need to beat yourself up either.

      If there is anything I can do to help, please don’t hesitate to contact me.

      Chris

    • Chris Clothier

      Jeff –

      I get a lot of reading your articles and really appreciate you stopping by my post and commenting. You are absolutely right about remembering those lessons and I’m sure you do the same as me by trying to educate as many new investors as possible. Whether any one listens…that’s ups to them!

      Chris

    • Chris Clothier

      Lee –

      You put a word in there that strikes straight to the heart of it. Be humble. The more we admit we don’t know and are open to idea, the more chance we have to succeed.

      Thanks for reading the article and thank you for posting.

      Chris

    • Chris Clothier

      Hey Frank!

      I just replied to your email and hopefully the answers help you. One of my future articles is going to focus on building lines of credit and I would love it if you posted those questions to the article. I think it will do a lot of good for readers to see them.

      Thanks for reading and posting!

      Chris

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