My 3 Most Expensive Mistakes Over the Last 30 Years as an Investor

by | BiggerPockets.com

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.

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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.

newbie-mistake

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.

rehab-mistake

Related: These Two Lethal Mistakes Cost Me $500k+ in the Past 4 Years

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.

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. – an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

12 Comments

  1. Ryan Schroeder

    Mine are pretty much the same of yours which in order are:

    1. Entering the wrong partnership; included was not truly vetting who was responsible for what, what happens when things go wrong and what is the exit strategy. It’s one thing to hire the wrong contractor who can can just fire. It is a far bigger deal to attempt to fire an equal financial partner.
    2. Buying when you truly don’t understand the market. Of course it is easier today given all the research we can do on line as opposed to 30 years ago. I made the mistake of thinking there was essentially one metro market…boy was I dumb. Now I conduct fairly constant research to make sure I know where all the sub-markets are going in my particular part of the world
    3. Being under capitalized. When everything was falling apart in the early days my options were limited in solving my problems as I didn’t have the money to solve most of them.
    4. For the bonus round: in the old days I remodeled my buy and holds as inexpensively as I possibly could…yes, out of necessity, but I sure wish I had figured out a different way…particularly related to building systems such as plumbing and electrical. Now I do it right the first time which saves me a ton of time and money in that I’m not chasing down problems later
    5…oh and for one more….now I’ll leave an apartment empty before I rent to the wrong person…that wasn’t always the case…and my life was more difficult than it had to be as a result

    • Mark Douglas

      #5 is key!

      It’s much cheaper to come out of pocket a few hundred bucks to cover the mortgage than it is to hand over the keys to a bad tenant. The physical damage they can do to the property, combined with the mental stress they cause, just isn’t worth it.

      I rushed to fill a vacancy… 3 months later they moved out without notice. Thankfully, there wasn’t any damage, but I still had to turn around and clean up, and re-list the unit. It’s such a hassle. Never again!

      Good tips, Ryan!

  2. Jason Johnson

    That last point on the vacation rental is spot on. I was going to partner with a friend at work on a vacation rental. As we toured the home, his wife kept saying how she was going to change this around, buy this, move that, etc etc. Also, she kept saying how this family reunion will be held here this time, and they will use it that time, etc etc. I quickly realized this was not going to work. I also thought, what if he left his job, or couldn’t pay the half of the mortgage. That very night I decided I would go in on the home by myself. It was the best choice I have ever made!

  3. Juanita McCord

    I absolutely agree. when you partner with someone else you’re just asking for a lot more stress and more head aches for yourself!!
    I don’t think is worth it, I would just work a little harder to be able to do it on my own, and if you make mistakes, don’t be mad at yourself, just learn from them and get better at it, and be happy and proud!

  4. ryan tatro

    Thanks Dave Van Horn and Ryan Schroeder! Great insights that will help us less experienced investors. I appreciate those who are willing to take the time to share their knowledge about what has worked, what hasn’t, and market trends/predictions based on experience.

  5. Andrew Syrios

    It’s nice to see investors talk about their mistakes. I think a lot of newbies get the feeling that investing is (or at least should be) done where every property cash flows like crazy and goes perfectly. Life, unfortunately, just doesn’t work that way.

    • Mark Douglas

      Agreed! One of my favorite podcasts is How to Lose Money. The hosts interview various business owners in every imaginable field, including real estate, and they discuss a time when they lost money on a deal.

      They go pretty deep into the mindset they had leading up to the decision, what they learned, etc.

      For aspiring real estate investors, it’s easy to get lulled into thinking there won’t be any problems..perfect flips, perfect tenants, etc… Like you said, it rarely plays out in real life as it does on paper!

  6. Agree with all of the above. In addition to most of those, my biggest mistake was something I did NOT do. I should have bought many more buy and hold rental houses when the market crashed and houses were going for 30 cents on the dollar in 2009-2012. I bought a few. Flipped a few and made some decent bucks. As cheap as they were, I could have bought another 5 to 8 SFH and /or another 3 or 4 nice brick two flats. I knew they were cheap and prices would eventually recover ( no one knew when or how far) but the crash was top of my mind and top of the lenders minds.

  7. Paul Moore

    Thanks Dave. This is great stuff. I’m studying Warren Buffett, and I’m amazed at what a good job he’s done vetting JV partners and giving up control to others. He’s made mistakes like all of us, but his 19% annual return average over 5 decades speaks or itself.

    I look forward to seeing you at your event in Philly in April.

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