Everyone can learn from good examples as well as mistakes; anyone who has the former has made many more of the latter.
I have a few general rules when it comes to investing in real estate. One of those cardinal rules — only buy property in areas that you’re comfortable being in at night — came from this experience. We can learn valuable lessons from anyone’s mistakes. Since this series is about helping people starting in real estate investing I thought I’d share the one mistake that I’ve learned the most from. It’s not the easiest thing to write about, but I know it has a lesson for everyone.
The Dream Deal
I was 25 and I had been investing in real estate since I was 21. I was young, doing well and my success went to my head. I had found the golden opportunity, two six-family properties in north St. Louis, both next to each other. I could do all the repairs, the price was unbeatable, and despite the simple fact that I didn’t feel safe going to the property I couldn’t pass up what, on paper, was a dream deal.
So I bought them, did the repairs and tried to manage the properties myself. It’s important to say that at this point one of my goals was to have 500 rental units. These properties put me closer to that but soon created more problems than they were worth.
The First Signs
Looking back, they’re obvious: I could never quite get the properties managed well under my own resources. To start with, there were always vacancies. My manager and I had a rule that we never took anything we didn’t absolutely need to the properties since it was in a high-crime area. One night my manager went there at dusk and had a gun pulled on him. Luckily he wasn’t hurt or robbed because he didn’t have anything on him, but nevertheless it changed how we worked at the properties. We went back but we tried to stay away as much as possible.
Things went downhill quickly after that. There was vandalism and tenants started to damage the units. I had put about $50,000 worth of repairs into the buildings before we started renting them, and those repairs were quickly going down the drain. Eventually we called it a loss, boarded them up and tried to sell them.
The Final Nail
One night a crew broke into both properties and stole everything you could take – everything: appliances, wiring, pipes, toilets, bathtubs, everything but the flooring. I wish I knew who they were so I could hire them as a cleanout crew. That’s one hell of a job for a single night.
In total I lost about $250,000 in those two properties. I sold them for $17,000 and the bank was OK with that; I knew the loss was justified at that point. The guy who bought them from me called me up a while later and asked me to help him sell the properties to someone else — he couldn’t manage them either.
I didn’t. I was out and that was all I wanted after that beating.
I am not exaggerating when I say that that episode put me into depression for about two years. I felt and still do feel like I failed, something which was hard to take after having a lot of success beforehand. However, I also learned the most from those properties and the lessons have helped shape who I am today.
The Moral
Know what you’re capable of and how much time you’re willing to put into a property. And, importantly, learn from your mistakes. If a single property takes up 90% of your time and does not provide 90% of your income, then you need to sell it or at least sit down and have a serious talk with yourself. Why am I in this property? What am I doing? Does this fit my overall goal? If you still find that you can’t justify getting out of the property then find a mentor who’s solved similar issues to what you’re having there and take their advice. No one starts investing in real estate knowing everything, so don’t be ashamed to admit when you’re learning.
As an investor, when you’re looking a property make sure you consider the community the property is in. That advice might seem obvious, but chasing the dream deal in the wrong area can completely flip the value you thought the property had, especially if you’re not experienced serving that sort of community. There are thresholds, but the best deal you’ve ever seen in the exact wrong area can quickly become the worst deal of your career, as this one did for me.
So, be honest with yourself. That means knowing both what your goals are along with your strengths and weaknesses. Be sure to reevaluate what those are — they’re all moving targets and constantly change.