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!
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
Avoid these Three Mistakes I Made as a Real Estate Investor
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