Our 13 Biggest Mistakes Investing to 675 Units in Real Estate

And How You Can Avoid Them

One of the major foundation principles that I learned while attending IPEC (Institute for Professional Excellence in Coaching) was that “You cannot make a mistake.”  Many mistakes, or bumps in the road, are merely judgments that are made after the incident has occurred.  For instance, a person looks back at an action that they performed six months ago.  At the time, the decision was based on all current information he had at that particular moment. 

As time progressed, things changed and his perception may now be that he committed a mistake. 

My opinion is that when you make a decision, you are not making a mistake.  I feel that inaction or procrastination is a bigger “mistake” than flawed action. 

I live by this tenet: Thought—Desire—Action—Result.  If I am living in constant doubt, I will never perform the desired action to achieve the results I am looking for. 

We all have different criteria that we use to take measure of our actions. One person might deem something a success while another may feel they failed at the same exact task even though both achieved similar results.

For example, a company may set certain growth targets, but fall slightly short of those objectives. The team can display frustration at missing their target, but they can also be exuberant that the company exhibited positive growth.

If you view missing the target as a mistake, then expectations will be lowered and the team will be less optimistic. 

However, if the team is excited about their progress – despite the lack of hitting their goal – then this excitement will fuel their momentum and they’ll be able to envision a brighter future.   We always try to stay positive and view every “mistake” as a learning experience, understanding that we can often learn more from mistakes than successes. 

Let’ begin discussing our two biggest mistakes on the way to accumulating 675 units.  We will delve into our two largest stumbling blocks in this article. 

Nightmare manager

When we were still newbies in the business, we were excited to assume control of our second property, and with it came the on-site manager. He seemed okay at first, but we both felt that something was amiss. He’d been living on the property for twelve years and acted as if he was part owner.

Every time we suggested a new change or a new policy, we were met with resistance. We eventually had no choice but to evict him, but the nightmare didn’t end there.  

He wasn’t happy about the eviction and tried to sue us for workman’s comp and discrimination, but the cases were thrown out each time. Strangely enough, when he was replaced, the operations of the property soared. Net income rose 30% and the billing system he was so adamantly opposed to was implemented with zero complications.

In fact, the tenants expected it because this was the norm for the market. 

Our mistake in this situation was not firing the manager as soon as we took over the property. We should have interviewed him beforehand and laid out our business plan to see where he stood, and if we had, we would have noticed how difficult he was to work with and would have saved ourselves quite a bit of trouble. 

 Unscrupulous Mortgage Broker

Have you ever been in the middle of doing something and just knew that it wouldn’t end well? That’s exactly how we both felt when we decided to use a mortgage broker to help us acquire financing for our second property.

Sandy (fictitious name) told us that he could secure an SBA (small business administration) loan for our deal, and all he would need was half the payment up front, and then the other half when the deal closed. He explained that if he couldn’t secure the financing, he would refund us the down payment. 

You can probably guess where we’re going with this. Just as the closing was approaching, Sandy conveniently disappeared. We were scrambling to find another source of financing and had to reach out to a couple of local banks.

We lucked out and we were able to qualify for the mortgage and finally close the deal.

In the meantime, we kept trying to find Sandy, who eventually reappeared and told us he was going to find us a lender.  When we told him that it was too late and we had already found a bank to lend us the money, his response was that he was entitled to the payment because of all the work he had invested into the deal. 

We were forced to contact a lawyer who suggested we sue Sandy for breach of contract, and that’s just what we did. Despite trying to negotiate with Sandy just so we could settle the issue without all the extra mess, he wasn’t interested. After a few months, the judge issued a judgment in our favor for the down payment and legal fees incurred.

The saga should have ended there, but Sandy was beside himself because he claimed that he had already spent the money, and that us “rich owners” didn’t need the cash.

We eventually came to an agreement that Sandy pay us monthly installments that were to be broken up into six equal payments. 

What is the moral of the saga? NEVER pay a mortgage broker any fee until the deal is closed.  You can pay the appraisal fee, but don’t pay any other fees associated with the loan. 

As you can see, we committed some pretty bone-headed mistakes, but we didn’t use these mistakes as an excuse to slow us down.  It only added fuel to the fire and inspired us to continue our learning. 

Task

Before taking over a property, interview each employee to see if they will be a good fit for your company.  Discuss what you will expect from them and how you will run the property.  It is vital for your success to begin your team building off on the right foot.

When looking for a mortgage broker, ask for referrals from your broker, attorney and your accountant.   Begin to develop relationships with local banks that are expanding their portfolio and prefer lending on multifamily assets.  These local banks are much easier to deal with, and have an intimate knowledge of the local market.