We all hear from friends and family that real estate is the best investment out there, but is that really the truth? To a neophyte, this information can lead to a horrible experience with real estate. In this article, I would like to share how that advice turned my first investment into a disaster, highlight my five biggest mistakes in that first purchase, and how you can avoid these transgressions.
The market that I chose had very unfavorable demographics. There was no job or population growth, the local government had no clear plan for the town’s growth, the cost of living was extremely high, limiting my pool of prospective tenants, and the tenant laws were unfavorable to landlords. I couldn’t have chosen a worse market!
Looking back, the only criteria that was positive was that the investment was about 30 minutes from my home! I thought it was less risky to buy a property in my backyard and manage it myself. I shattered that limiting belief with my first multifamily investment. My next investment led me to partner with Jake and invest in an emerging market in Tennessee.
As an investor, it is imperative to know what phase of the cycle your city is in. If I had realized the cycle, I would have waited to purchase the asset at a discount or I would have elected not to go ahead with the purchase. Real estate is market specific, and one city may be in hyper supply while another city may be entering the expansion phase.
One of the biggest fears I hear my students express is “I don’t know what I don’t know!” That can be down right scary and dangerous. I decided to invest in an asset with no experience, no team to guide me, and no plan to manage the asset. I had never written a commercial lease, and I did not know how to underwrite the deal accurately.
Once I understood my shortcomings, I decided to seek out a coach and learn the business from someone who already exhibited success and could teach me their framework. Although it was too late for this deal, it served me tremendously for my future deals. I chose multifamily real estate and focused on cash flowing assets that would help me achieve financial freedom.
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As you can see, it is a miracle that I did anything right on the deal. I learned the importance of due diligence, and we created a three step due diligence framework for our students: Due Diligence Framework. My wish is to spare first time investors the pain that I endured due to my lack of education and being surrounded by team members who displayed the same amount of incompetence.
Now with all of these colossal mistakes I committed on this deal, you would think that I would pack up and quit. I almost did, but my reason for investing in real estate was greater than my fear of failure and losing more money. It took me a couple of years to educate myself and meet Jake, but it was well worth the wait.
I also want you to realize that what most people may characterize as a mistake is in fact, a blessing in disguise. If I had never invested or tanked on this deal, I may have never invested in real estate. Or I may have never sought a mentor to teach me how to invest. The point is to never allow a setback to stop you from achieving your goals. In order to become successful, focus every day on your “why” for real estate, and when you eventually hit the bump in the road, you will not veer off course. You may slow down, but you will continue to grind it out as I did.