I often reflect back on my experiences over the last 30 years as a real estate investor. Even so, it can be tough to pinpoint the biggest mistakes I’ve made, probably because I’ve made so many errors in judgment. The good news, of course, is that experience makes us better, especially when we learn from our mistakes and commit to not repeating them. So, in the hopes that I can help you avoid doing some of the ill-advised things I did over the years, here are my most expensive real estate investing mistakes, along with what I learned from them.
My 3 Biggest Mistakes Over the Last 30 Years as an Investor
Mistake #1: Giving up Control
When considering any investment, the first two things I look at are return OF capital and, of course, return ON capital. I learned the biggest and most expensive lessons when I went all in, usually with the promise of high returns, giving up control of the investment itself as part of the process. Chasing high returns without controlling the investment usually went hand in hand with neglecting to properly vet the investment, the market, and the people I was investing in. Obviously, no one manages your money quite like you do.
Related: The Biggest Mistake I Made as a New Investor (& How You Can Avoid It)
To be quite frank, whenever I lost the most money was when I gave up control of running the investment vehicle itself. Now, I’m not saying that you shouldn’t ever do this, but when you are giving up control, it’s a good idea to pay extra attention to the investment, the risk, and the overall exposure.
Never doubt that if the unexpected can happen, it will happen. For example, maybe market conditions take a dramatic shift and financing dries up. This happened when I was investing in commercial real estate. We owned the land, raised the money to develop the land, and the financing just happened to dry up as the real estate market tanked, and there were no potential unit sales or prospective tenants.
Another time, I invested in a fund and the managing partners just began suing each other. I probably still couldn’t have predicted that their personal animosities would have such a big impact on the project, but then again, I could/should have gotten to know the partners a little better before committing my capital.
Mistake #2: Not Evaluating Joint Venture Opportunities Enough
Many times, especially when starting out with limited knowledge or bandwidth, we decide to take on partners or set up joint ventures, all with the hopes of limiting our risk exposure and workload, but we may be doing the exact opposite and actually taking on more risk. When I was new to note investing, this was the exact scenario that happened, and some of our note sellers took advantage of us.
Today, whenever we’re looking at new opportunities, it’s a much deeper dive, and we’re looking at it from many angles. We now ask questions like:
- Does the opportunity fit our company’s core values?
- Is it in our wheelhouse? (Ours tends to be real estate or debt-related.)
- How can this joint venture benefit both parties?
- What will the roles and responsibilities look like?
- How tight is the business model?
That a lot of homework and vetting should go into screening potential partners is a lesson I learned after having several unsavory partners in the past. And, of course, you need to look at compensation and legal structures. After all, a JV is like a business marriage, and you have to plan for the exit, just like with any good investment. Think of this being like a prenuptial agreement before getting married.
Mistake #3: Not Preparing for the Unexpected
Whenever a partnership or JV arrangement starts, it’s like dating. Everything is great at first. Later on, as things change and challenges arise, the real character of the partners comes out. It’s when the chips are down and things aren’t going so well that someone’s true colors appear.
The unexpected can take many forms. Sometimes it’s a market downturn or change of a business model. It could be that the environment is different now or that you’re blindsided by a lawsuit. Other times, maybe the partnership is no longer financially viable—or it’s no longer a fair exchange of efforts or labor.
One thing I’ve figured out is that it’s best to prepare for the worst and do your homework upfront. Often, people jump into things very quickly and easily without thinking that maybe they have different goals or without any regard of what could happen in the future.
For example, a friend of mine once told me that he and his wife were buying a vacation home together with three other couples who were all friends from childhood. It sounded kind of neat in the beginning, but then I began to see the realities of figuring out who gets what week or weekend, who’s paying for repairs when one party can’t swing it, or better yet, what happens when someone passes away or gets divorced. You get the idea.
What about you? Got any war stories to share?
Has anyone else’s deals or partnerships been derailed from unexpected events? Better yet, what are some of the biggest mistakes you’ve made in real estate?
Please share below! After all, the best (and cheapest) lessons are the ones we learn from others.