The Biggest Mistake I’ve Made in Real Estate
I had a chance to speak with a group of both beginning and seasoned investors last week, and as I sometimes do, I shared a little about my history and background in real estate…
Why? Because I think there’s a couple of valuable lessons to learn from it… courtesy of the “school of hard knocks”!
You see, I’ve always been a big believer in education, so that’s basically how I got my start in real estate, over 2 long decades ago…
I remember being up late one night, doing some channel surfing, and I run across a “No Money Down” infomercial by the real estate guru of the day… a tall 6 foot 3 guy with a squeaky voice, who had actually done a lot of his deals right in my own backyard.
That’s what got me hooked.
So I end up at his weekend seminar, along with 150 or so other people, after forking over the $500 fee to attend.
And I remember sitting there in this hotel conference room, being totally stressed out because of the $500 I had just spent (it felt like a fortune at the time!), and the fact that I didn’t really understand much of the information that was being shared.
The concepts were foreign to me. The math was confusing. And to be honest, I didn’t even know what ‘equity’ meant at the time!
The only thing that stuck was when some guy went up to the microphone… and talked about how he bought properties with a credit card.
That stuck. That, I could understand.
Now it still took me a while to jump into the investing game because I was still stuck in fear, but what I did do right after the seminar was start applying for credit cards. A bunch of’em.
And sure enough, after several months I had accumulated around 20-30 credit cards… and had credit lines totaling between $75,000 – $100,000.
That’s how I bought my first 3 properties. I took the down payment… right off my credit cards!
Not something I necessarily recommend, but hey, when you’re a hungry entrepreneur, you tend to do whatever it takes, right?
From that start, I eventually gravitated to doing fix & flip rehabs, exclusively. Which is a big mistake I’ll elaborate on in a minute.
You see, I looked around and saw that the most successful real estate investors in my area were doing the fix & flip thing. So I decided to do it myself.
And sure enough, the first few went well. Probably a little too well. Because it got me hooked into doing things one way, and one way only…which turned out to be a huge mistake.
At one point I had half a dozen rehabs going, mortgages on most of them, and a line of credit on top of that to fund the rehabs. Basically, leveraged to the hilt.
I would do the rehabs, put them right back on the market, and sell them off traditionally.
Works like magic when the market is healthy. But when it starts going sideways? Or goes into decline?
Not so well.
That’s when you might want to consider a different strategy and approach.
I eventually discovered that all markets go in cycles. What goes up, must come down. And vice versa.
So you can probably guess what happened, right?
Yup, the bottom fell out of the market… which left me stuck during a time when I had a ton of debt hanging over me, in an environment where I could not resell quickly anymore.
It led to several foreclosures, an eventual Bankruptcy, and my first official wipe out.
So there I was left… no cash, no credit, very few resources, and no lender willing to finance me traditionally anymore.
But I still believed in real estate. And I wanted to continue. The question was HOW.
So what did I do? Pretty much the only thing I could, which was embrace the world of creative financing.
I learned everything I possibly could about things like wholesaling… seller financing… lease options… the use of private money and hard money… putting together partnerships and strategic alliances, etc.
The good news is that after embracing this whole new world of creative financing, I was able to go on and buy way more properties in the next 4 years … than I ever did in the previous 4!
I’ve personally been involved in over 600 transactions now, and today, my investment team and I are as active as ever, acquiring between 3-5 properties per month in high potential pockets throughout the country.
Much of our focus is still on those ‘bread and butter’ single-family homes, but we also will acquire apartments and commercial buildings when the right opportunity comes along
So anyway, that’s a little about my path. Not a lot of smooth sailing, but lots of bumps and bruises and getting roughed up in the “school of hard knocks”.
And I share it once in a while because I think there are a couple of major lessons to learn from it…
Lesson #1: Don’t Become a One Trick Pony
I got tied to doing one thing, and one thing only – fixing & flipping.
Good when the market is active. But it’s not an ‘all-season’ strategy, so it’s not so reliable in a declining market.
And it’s never smart I think to force-feed as many deals as possible deal into one specific strategy because that’s your specialty, which I was basically doing.
In addition to fixing & flipping, I believe you also need to become well-versed in wholesaling, seller financing, lease options, and buy & hold strategies as well (I’ll elaborate on these in more detail in future issues).
That’s what turns you into a transaction wizard, and gives you the ability to offer multiple solutions, to minimize or eliminate risk, and to weather any economic storm.
Lesson #2: You Must Become an Owner
What that whole experience highlighted for me was the critical importance of becoming an owner of assets. Primarily, assets that spin off a passive income – like real estate!
Sure, getting a big chunk of money from a rehab is exciting and worthwhile, but what happens if the market turns? Or you can’t do it any longer?
The money stops, right?
Flipping is still basically a never-ending J-O-B that requires you to show up and keep on hustling … if you want to continue getting paid.
OWNING real estate, on the other hand, is a way to buy an asset once… and to continue getting paid on that asset over and over and over again.
That’s like having a Golden Goose (real estate) that keeps on laying those golden eggs (cash flow).
It's the ultimate asset.
Ever hear that term… “Don’t kill the goose that lays the golden egg”?
That’s a pretty wise quote and an investing principle that I really started embracing.
At one point, I had ownership in around 125 single family rentals, plus a handful of commercial opportunities as well. I’ve since sold off/liquidated a good chunk of them, but I still have a good number of these Golden Geese… that continue to lay those golden eggs.
And even though I’ve expanded into doing more commercial deals, I still invest in and believe that single-family houses are one of the absolute best investments you can make for creating passive cash flow. And one of the safest havens as well.
Think about it.
No matter what happens in the economy…
Shelter will always be necessary. It’s a basic human need.
Remember the housing bust during the Great Recession last decade? In my area, house values dropped by over 50%. But rents pretty much stayed at the same levels.
That’s what I mean by a “safe haven”. The economy can go to “hell in a handbasket”, but if your cash flow is derived from ‘bread and butter’ single-family homes… your income is pretty darn secure!
In my opinion, EVERY SINGLE PERSON interested in creating true passive income should be investing in well-selected, cash-flowing, single-family homes.
(Copyright IR Press, Inc.)