My 10 Biggest Real Estate Investing Mistakes
As many of you know, I started investing in real estate in 2003, since that faithful day I bought my first duplex that I have bought and I have kept millions more and have helped others to acquire much more than that. During those investments I have made many mistakes, some of which were smaller than others. As I reflect on those years, I try to make sure I have a full understanding of the lessons that the hard hit school imparts, and that I would like to pass on to other investors, both seasoned and new. I have come up with the 10 biggest mistakes I’ve ever made and how you can avoid them. (I’ll also write down the 10 smartest decisions I’ve made)
These are not in a certain order:
1. Always believing the seller or the real estate agent in the expenses. After my first investment property, I learned this hard lesson when I realized that those expense numbers did not include vital items that dragged money out of my pocket. The main ones were maintenance and legal expenses. Also, I suggest to always get the utility bills and average them throughout the year, also get the previous years. For every expense they list, have them test it, and then be sure to include legal, maintenance, replacement, vacancies, and various other reserves. Remember that the seller is looking to place their property in the best light in terms of operational numbers and 95% of real estate agents just have no idea and simply present what the seller tells them.
2. Like # 1, believing the seller of all reported income items can be disastrous. In my first duplex, the landlord stated that even though one of the units was empty, they had a tenant in line and even presented a lease, yet the lease was not signed … duh. Well my real estate agent was clueless like most agents and I was so green I overlooked it too. So after we closed we called the tenant and she said she changed her mind and of course we fought the sellers to make it up to us for almost 6 months after closing but we never saw a penny. I also suggest getting proof that all tenants are up to date, as indicated in the operational status. If they do not receive a rental credit in the form of money at closing.
3. Do not use a real estate agent who specializes in investment properties. You don’t need to use a real estate agent to find great deals, however if you are new I suggest you use a competent real estate agent who not only specializes in investment property but is also a real estate investor. Many people use family or friends who are real estate agents to find investment properties and wonder why they are losing money each month after the purchase because the agent had little or no experience as an investor. We see this all the time. You would never go to a dentist to have your back adjusted, you would go to a chiropractor. The same goes for investment properties, as I always tell people … make sure you use someone who is first a real estate investor and then a real estate agent second.
4. Call your local police department or ask neighbors about the property in question. This is something that I have made a priority after that first duplex, I was working in the garage when a neighbor came up really fast and looked scared and said, “I can’t stay long, they are watching us, the tenants downstairs They’re running a drug and prostitution house out of there, I have to go. ” With that said, I called the local police department and spoke to a detective who was investigating the tenants, at which point he informed me that they had been in the duplex about 6 to 8 times. The last 12 months of 911 calls, I relayed the information the neighbor told me and I gave the go-ahead to raid the tenants. Yes, I gave the authorization to search my own investment property. They got several illegal weapons and many drugs. Then I was able to evict them. Basically, I inherited the problem from the previous owners instead of knowing it beforehand and negotiating better terms or moving to the next property.
5. Not converting empty units fast enough. This is a basic lesson, however, this is a lesson that I have taught over and over to other real estate investors, especially new ones who have full-time careers. It took me between 30 and 60 days to get the unit “ready”. Why? Well I decided to do it all myself and do it only on weekends, well that resulted in having an empty drive for 90-120 days. The cure for that is if you don’t have enough time in your day to get the unit “ready” in a maximum of two weeks, I suggest you hire the job. Yes, it will cost a bit more, however it will save you time. Time really is money.
6. Don’t market your empty units right away. I used to wait for the unit to be fully profitable before putting it on the market; I would lose more than 30 days. So start marketing ASAP, clean that unit ASAP, and if there’s any upgrade you’re doing, sell the vision to the tenant, act like you’re already there and you’re the best next to Chuck Norris!
7. Failure to conduct criminal background checks. I let my first tenants in without background checks; this was a mistake as one of them was a drug addict and a violent drunkard. I never really do credit checks because most of the people who rent have some kind of financial problem in the past. For me the most important things and without criminals and a verifiable current job.
8. Failure to use a competent property management company. Like finding a competent investment real estate agent, finding a property management company has been a very complicated task and topic. Once I reached a stage where I realized my best abilities and discovered new offers and did not handle the day-to-day task, I decided to start a property management company. Well, since that day I have fired 6 management companies, all of them had sunk my property. The truth about using a general property as a management company is that they don’t look at your property the way you do; they just see a way to make money from administration fees rather than investment and how to maximize it. I could probably list 50 stupid mistakes property management companies have made that have cost me thousands of dollars. The solution !? Either getting to the point of being able to have an in-house property manager focus 100% of their attention on your properties or using a property management company that has a CPM or ARM designation. These are delivered through the IREM association for property managers. To obtain a designation, the person or company must take intensive classes and have a volume of experience.
9. I was going to include lessons learned on dealing with contractors, however that list is too long, so just one number, I will write a full article on this topic alone in the near future. Instead, it will be about the condition of the units you rent. This will also be on my list of best decisions. But I contradict a lot of other real estate investors with the mentality of … Of the tenants they just trash the place, they just make the contractor white on everything and not update anything. I think of it as a big mistake for not knowing who my tenant base is, what they want, and how to deliver it to them. There are some truths in thinking that if it ain’t broke don’t fix it, but when you turn on a unit it reminds the end user, who are you attracting? Personally, I made the decision to update the modern color schemes inside the house, doing 1 to 3 different colors in a row in white, and updating the light fixtures, plugs, and door handles. Most of the time you could leave the floor, bathrooms, countertops and cabinets as is or once again. Seeing having modern colors and fixtures brings a slightly different tenant depending on the area. It really plays into the mood of the unit. I like to go into properties knowing my plan and build that slight increase in costs when buying. Your tenants will love it and you can demand a better tenant at the best market price. This is more or less a mistake of not knowing my market and playing the bottom of the tenant pool vs. the top of the tenant pool for that market.
10. Not having reservations on the property. I am a huge advocate of having reservations at a property and leaving those reservations alone … don’t touch them. Too many times I have heard of people having financial problems, because after a closing they transfer money to another investment and then they need a lot of money for repairs, but they have no capital. I have done this too; We close a deal and then move those reservations over to the next one. This also applies to rehabilitations. Get your hands off me! This could make or break your investment.
Well there they are, and after reading them, I think I could easily move on to another list of 10, but making higher-level mistakes from an operations standpoint, as well as marketing and lead generation. However, the intent of this list is to immediately learn some very powerful lessons that you may be facing right now with your current properties or you are thinking about investing and weighing the pros and cons. Often times, new real estate investors get excited after reading a book and want to jump into rehab or buy multi-family properties, but soon find that it can be a well of time and money. I am not here to scare anyone who is investing in real estate; it really is the best investment there is; I just want to make sure that everyone is fully aware of every step on their way to financial freedom.
Again, feel free to ask any questions.
Thanks,
