I spent many years investing in real estate in south Minneapolis, buying run down–even condemned–duplexes and four-plexes. My husband at the time was the handyman, bringing these properties back to life along with a crew of subcontractors. We rented the updated and remodeled apartments through a government-subsidized housing program, Section 8.
We chose this model of investing for several reasons. First, because it netted the most profit based on the market trends at that time in the 1990’s and second, because working with a government program assured the rent was paid on time without any hassles – GUARANTEED INCOME.
For property management, I handled all the tenants and rentals until we grew to over 40 units, then we hired an assistant to manage our units as we grew the portfolio to over 100 units. Oh…the lessons learned. I’m sharing the goof-ups so you can get to financial freedom quicker while growing your portfolio.
My Biggest Investing Mistakes:
- Not understanding the market, doing research or responding to shifts quickly enough. I made some stupid moves in building a portfolio because I didn’t look ahead in the market.
The game of real estate investing is much like monopoly – buy low, sell high. To follow this advice you must be educated as to the trends in your market, the seasonal cycles, what type of housing is going to be hot next year and beyond. I study the 10–20 year growth projections to expertly guide my clients as where to invest. You want to know what is going to hold value or better yet, appreciate. Then as an investor you can make smart decisions, plan accordingly and correlate your holdings to upcoming needs of the population growth.
Know your market, especially if it’s out of town. In fact, many investors choose a market entirely based on these markers. At one point we invested in Montgomery, Alabama because they were adding a new Hyundai factory and all the new jobs brought in a surge of people needing rentals.
- Moving from owning residential and a system that worked well into buying commercial real estate. l discovered residential and commercial real estate are two VERY different worlds when it comes to investing.
In residential real estate (1 – 4 units), the loan can be amortized over 30 years. In commercial real estate, you likely need a banker and the loan is a 20 year amortization with a five year adjustment, re-qualification process. For commercial, this means higher monthly costs on the money and less predictability. Residential rentals are viewed through the lens of cash-on-cash return, where commercial properties are viewed through CAP rates and NOI. (Capitalization rate, often just called the cap rate, is the ratio of Net Operating Income (NOI) to property asset value. So, for example, if a property recently sold for $1,000,000 and had an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%. Net operating income (NOI) is a calculation used to analyze real estate investments that generate income. Net operating income equals all revenue from the property minus all reasonably necessary operating expenses.)
Another BIG issue that affected cash flow severely was the vacancy rate. It takes much longer to fill a retail or space than a simple apartment and it costs more in taxes and expenses to hold the property. This lesson cost me/us several hundred thousand dollars. I say, “It’s my Harvard education in real estate investing!”
- Doing it myself (DIY) instead of hiring mentors and waiting too long to ask for help.
The learning curve is HUGE in real estate. Sometimes I jumped into a new strategy of buying or I had an obstacle and I simply waited too long to get help. Frankly, I was confused and didn’t know what to do. I got scared and fear caused me to bury my head in the sand and wish for it to correct itself or go away. The problem didn’t resolve and it cost money in losses or missed opportunities.
The most notable trouble came when we were converting apartments to condos in Uptown. The market was HOT for this and my hesitation and inaction caused delays in the process, with empty apartments not being rehabbed in time or up to our standards, etc. Money, money, money down the drain. Whoosh.
I see this often with investors. They bury their heads in the sand and AVOID the hard conversations, like making decisions about a losing property or bad partnership. This costs money and I’ve seen many portfolios get sucked dry because the owners were indecisive. Time is money and minding the business along with the spreadsheets and accounting is critical.
The upside of my mistakes was that innocence, naivety and the willingness to do ANYTHING to make the business work had me growing and expanding to build a large portfolio quickly.
I am sharing these mistakes so you can learn from mine, and NOT make the same troubles for yourself. If you are ever stuck or need advice on how to grow your portfolio or just to get started, remember that I teach others how to become smart real estate investors through coaching and consulting. You can apply for a strategy session at www.leannriley.com to learn more about my VIP Proven Profit Formula or monthly coaching.