So today is a little bit of storytelling time about the things that I did wrong. I’m going to cover five big areas where I made mistakes early on in investing in real estate. So let’s get to it.
1. Living on the Funds You Make from the Deal
Early on, I was really young, had three kids, and we were just starting in real estate investing. We made some good money, but then we quickly decided, “Let’s do this full-time.” We got to the point where we had to find the next deal to keep the money coming in because we had no other way to pay for normal life expenses. I highly recommend having a different source of income. Real estate investing should be something you’re doing to build wealth. The money you make from it should be used to reinvest and create more deals. Don’t spend it all; reinvest it to grow your investments. This way, when deals are slow, you don’t end up taking a bad deal just because you need the money.
2. Overleveraging
At that time, when we were trying to create an investment company, we borrowed money from a home equity line of credit on a house and used hard money for the deal. This resulted in a lot of debt servicing, and we made the mistake of living on some of that money. This created a high amount of leverage. If the market changes, like it did in 2008, values can drop, and you can get caught. You end up with a lot of debt, no income, and an upside-down property. I highly caution against overleveraging. That was mistake number two.
3. Underestimating Expenses
I thought I was pretty good at estimating what it would take to rehab a property. I had experience in construction, had been through many training classes, and I did a lot of estimating on properties. However, when you don’t know what you’re doing, you’re going to get some things wrong. This is why you need to follow a formula that includes a margin for error. A margin of error allows for mistakes and still lets you make money. Underestimating expenses was a big mistake that stemmed from several factors: lack of knowledge and experience, being overleveraged, and picking the wrong deals.
4. Lack of Diversification
Even if you’re really good at one thing, like assessing, buying, fixing, and selling properties, that only works when the market is stable. You can have your timeframes and estimated costs down, but if unexpected events occur—like costs exploding due to a pandemic or prices dropping because of high-interest rates—that narrow focus can become a problem. Cash flow can suddenly stop. Having a diversified portfolio with long-term rentals, short-term rentals, mid-term rentals, and flips allows you to move money in and out of different deals. When one investment type is no longer viable, another may become more viable. Lack of diversification was mistake number four.
5. Emotional Investing
This probably should be mistake number one. It’s emotional investing. That’s when you go out and think, “I have to have this property because it’s unique, because I really like it, because it reminds me of something.” Whatever the emotional reason is, you get attached to it. For some people, it’s about being so competitive that they think, “I have to negotiate on this deal. I’m against somebody, and I need to win.” I’ve done that as well. Emotional investing was one of the big mistakes we made early on in the process.
What I’m happy to say is, even though those five mistakes—and they’re not the only ones I’ve made—have helped me to learn and grow. I now have a diversified portfolio of different types of real estate investments that allow me to explore different areas. We still flip properties, own long-term rentals, and have several short-term rentals, which we really like. We have yet to buy a mid-term rental, but we are open to that idea since we found success with short-term rentals.
So, remember, if you’re getting into real estate investing, learn from other people’s mistakes. If you’re thinking about investing in real estate, but aren’t sure where to start, CLICK HERE to contact us. You can also call us at (678) 389-3887 or email us at [email protected]. We offer free consultations to help you figure out what works best for you!
If you found this information beneficial, don’t miss out on additional content by visiting our YouTube channel. Please remember to like, subscribe, and give us a thumbs up if you appreciate our content and wish to stay informed with more complimentary information. Your support is greatly appreciated!