What was your biggest Real Estate Mistake?

[bizaro86]

In another thread, I advised someone to ask people about their mistakes. That's a bit personal, so I thought it only fair for me to start. Being imperfect, there have been a few in my relatively short real estate career.



The biggest one that comes to mind is a purchase I made. I bought a partially below grade condominium in a building here in Calgary that was was emerging from a troubled period (mortgage fraud, etc). I got what I considered a below market price for the unit, and by comparison to rents for other 2 bedrooms in the area, I expected excellent cashflow after my renovation.



The mistake was twofold. I should have waited another 2 months and bought the unit that came up for sale in the building then. It was also a 2-bedroom, but it was in better condition, not in the basement, and 20k less. One of my co-owners got a great deal. I couldn't buy it also, since I spent the last of my downpayment $, and had to save up more before buying again. The lesson from this was patience. Real estate is like baseball with no called strikes. This property was a good deal, but buying it prevented me from buying a great deal later.



The second mistake was not doing enough rental market research. I had a hard time getting my target rent on this unit, as I underestimated how big a factor being below grade was. I discounted the rent from comparable properties, but there were many people who just weren't interested once they realized there was no patio/balconey. "Where will I put my barbeque" was a common objection. I ended up getting the rent I had anticipated, but I wouldn't willingly sign up for the amount of work it took again.



Anyway, that's the biggest mistake I've made, so the kimono is open. What was your biggest real estate mistake, and what did you learn from it?



Regards,



Michael

 

[AndreiAngelkovski]

I've personally had a few "big" mistakes in my career of investing in real estate. To name one: I invested in an opportunity that was presented to me a few years ago in a small little town called Port Colborne, Ontario. The numbers and data that were presented to me (in a very well put together package) seemed GREAT! The numbers showed positive cash flow, very conservative appreciation, and solid facts about the town. I trusted the people who were selling me the opportunity. I also thought that because the initial contribution was so small ($8000), I thought it was a "no-brainer". So about 1 year later, I realized we over-paid for the place, the positive cash flow became significantly negative, and it was only going to get worse.



Lesson learned:

1. Never invest in something just because it is "CHEAP" or "cheaper". There is a reason why it's cheap!

2. Never invest in a town that you are unfamiliar with just because others are doing it and claim they will make "good money" on this "steal of a deal". That is B.S.

3. Don't just trust other people's research. Even if it's someone you think you should trust. I've made that mistake a few times.

 

[wgraham]

Great question!



Looking back, if I could do it all over again, I would have all of my properties in one or two neighbourhoods in one city! I didn't focus on a niche market soon enough and dominate that market. I spoke about this at this months YYC meeting.



Pick a small niche....become THE EXPERT....and dominate it.

 

[AndreiAngelkovski]

I agree! When I first started investing I began buying in 4 different cities! Thank goodness I stopped when I did, because I am realizing now all the challenges I was faced with. But now I am totally focusing on 1 area and becoming the expert...and loving it!

 

[jonathanb]

Graham,

Do you think maybe having a couple types of properties in a couple different markets would be a benefit though? So as to not have all your eggs in one basket?



Just a question...



jon

 

[Thomas Beyer]

[quote user=jonathanb]So as to not have all your eggs in one basket?


Specialization is key. One has to become an expert in an area and in a certain property type. That takes quite a while ! .. Then diversify .. much later, though !



I should have bough more properties in Edmonton, even if they seemed expensive in 2006 and 2007 .. as we went into too many markets, too quickly. The 2nd biggest mistake was to be overly optimistic in smaller markets. Smaller markets are cheaper for a reason, as they do not weather a storm all that well, with higher vacancy potential if a major employer drops employees. After a major portfolio cleanup over the last 1.5 years we shed all small properties, far away properties or those that couldn't be cash-flowed due to market or mortgage situation to arrive at a far more stable portfolio in 2010 !



Some diversification is good .. but not overly.

 

[wgraham]

Hi John,



I do believe in diversification to a certain degree but at some point it becomes dilution! I know that having properties in 4 different cities is too much "diversification" and that it complicates my life and my business.



I think it is part of the learning process....finding out what works for you and what doesn't but at some point in time you have to determine what works and run with it.



A couple of years ago I figured it out.....and you won't see me vering off unless the market changes significantly!

 

[GaryMcGowan]

Similar to Andrei's story,

We were doing a lot of deals during a short time frame and for this one in particular I was to excited to get the deal done and didn't look closely enough at the fundamentals. We bought in a very small town and at the end of the day we had to evict with a sheriff, renovate half of the property, hold the property for many months while vacant.



Lessons learned.

How to evict. Heard every excuse in the book from the tenant.

How to use the court system for our benefit.

Real estate should never be rushed and you should always buy on your terms.

Be patient there will always be a good opportunity.

Stick to the Fundamentals.... They are called Fundamentals for a reason!

 

[TangoWhiskey]

Thomas,



In the last this thread you confirm the importance of being a local expert and consolidating yet could you have grown as large by concentrating on only one or two markets?ew



You've mentioned Dave Lindahl here on the forum as the best writer on multi-family investing books, and he is hugely successful as a multi-family investor (if you believe his marketing materials anyway). Dave Lindahl doesn't seem to be exactly a local expert when he mentions his deals, although probably having a good idea of local conditions.



So here's the main question, is becoming an expert in one market ie picking your niche as your path to success the key or is it actually a hindrance in becoming truly wealthy? It seems likely that becoming hugely successful, owning say 2000 + units, is not possible by being an expert in only one market rather than learning how to identify it in multiple markets.



Thomas, how do you go about feeling secure in your purchase in towns you have never been? Simply do your due diligence to normal levels and feel secure in that? Or how does one feel expert in any one area yet buy many buildings in many towns?



Thanks, sorry for the long post.



Tris W.

 

[Thomas Beyer]

[quote user=TangoWhiskey]say 2000 + units


All journeys start with a small step (Chinese proverb) .. and if you fail in step one, 2 or 3 the long journey will be a short one (my Canadian adaptation of this proverb) !



My first 6 buildings were ALL in Edmonton (15 + 20 +24 +24 +12 +120 units) .. and then around it (StonyPlain, Camrose, Wetaskiwin, Fox Creek) .. and then after the 12th building or so in other provinces .. but all clustered or large 90+ units per city .. (with 2 exceptions .. one sold in Detroit and one still owned in Campbell River with 65 units) .. for example we own 300+ in Dallas, TX ... 108 in Abbotsford, BC ... 93 in Sudbury, ON and 120+ in Yorkton, SK



Yes, local knowledge always helps .. but can be provided by realtors or better, property managers .. and with their help walking around a few blocks .. you get a feel for it .. for example in Dallas we spend over a year on area research .. and thus avoided all the crappo C and D areas and added this to our due diligence list as the #1 question: "Do you feel safe leaving the car?"



David Lindahl does buy 100+ units at a time and I also assume he gets an area analysis done .. as with 100+ units you really more on the onsite manager/couple/team plus property manager than your own skills after purchase. You become more of a people manager than a local expert.



btw, Bill Gates was not very diversified when he became super rich .. so I still think that diversification is NOT a good way to get wealthy .. but STAY wealthy ! To GET wealthy you have to focus first (like me, on multi-family, for example) .. so now we can do some land development and construction and hire experts in that space .. but that is not what you do at the beginning !! As stated .. in hindsight focusing even more on Edmonton would have been OK .. perhaps better even !

 

[TerryKruse]

My biggest mistake was thinking that tenants wouldn't mind paying more for a much larger space.



The reality is that a 2 or 3 bedroom in a certain area rents for a certain price and it is difficult to get additional rent (not impossible though). We got our rent when things were going great guns in Calgary but it was more difficult when the economy dipped.



We eventually sold the property but we learned from it. It was also a great lesson in the value of cash flow.



Cheers, Terry

 

[bizaro86]

[quote user=TerryKruse]The reality is that a 2 or 3 bedroom in a certain area rents for a certain price and it is difficult to get additional rent (not impossible though). We got our rent when things were going great guns in Calgary but it was more difficult when the economy dipped.



We eventually sold the property but we learned from it.



I like this lesson, and it squares with my experience renting condominiums, where 2 bedroom units of various sizes in the same building all rent for the same amount, even though the larger units cost more to buy and have higher condo fees, since fees are calculated by unit factor which is proportional to size. Now I look for units that are big enough (and well laid out) but not too big.



Did you end up getting a good price on sale? It seems to me that buyers are more willing to pay a premium for square footage than renters, and I'm curious to see if that was borne out by your experience.



Best Regards,



Michael

 

[AndreiAngelkovski]

Based on my experience, this rental cap defiinitely applies to smaller towns and cities. However, when I began investing in the Toronto Beaches over 6 years ago, the rental demand and the price/rent ranges were a lot more diverse. For example, a 2 bedroom suite can range from $1000 / month to $2500 / month plus on the same street! There are obviously some significant differences on the suites i.e. size, quality of finishes, parking, ensuite laundry, etc.



But my point is that in the Toronto Beaches, tenants are willing to pay a premium for quality, modern suites. Most of these tenants are largely young professionals who wish to wait 1 or 2 years before they buy their home...so they want to rent in the meantime and save up for their downpayment.

 

[margaretcowan]

In Campbell River a few years ago, I trusted a veteran commercial realtor from a major real estate company recommended by a successful investor. If I'd followed my usual system of separating myself from the realtor or at the minimum, had visited the local police station as I always did and do now, I would have avoided a "lemon"--not the colour--of a property.



I was at the property for the building inspection. The inspector didn't have a ladder long enough to get up on the roof. He called a "ladder man" in town who stood on the sidewalk with me as the inspector went up on the roof. The ladder man said only, "This is not a very good area."



I confronted the listing and selling realtors with this. The selling realtor said, "What! My daughter goes to the elementary school right at the end of this street. This neighbouhood is fine. Some time back there were some drug problems but the area is all cleaned up now!" There were some nice looking single family houses on the street plus a couple of older walk-ups, one of which I was buying. Looked OK.



I should have believed the ladder man instead of the realtor. When renters found out the address, many didn't want to rent there since the reputation still lingered and a few bad apples were left too. The suites turned over too often and repair bills were too high. I sold the building for the price I paid two years later...much to the relief of my caring, diligent, long suffering local PM.



Lessons:

1. Always go to the police station to check out the street and neighbourhood. Separate yourself from the realtor when doing your research.

2. Pay attention to little red flags like the "ladder man".



Now when little pieces of "help" come my way, I ask myself, "Another ladder man?"Like the last time I looked at a building I had doubts about. We talked at length to a tenant, left her suite and stood out in the hall. She opened her door and added, "There's vandalism here and noise." Another ladder man/woman!



Margaret

Mama Margaret & Friends Cooking Adventures in Italy

www.italycookingschools.com

 

[TerryKruse]

I did really well on the sale (up in the posts a bit) - more like breaking even but that was excellent when I had a 30k mortgage prepayment penalty.



I sold in the "downturn" or at a bad time but it was a really great home.



It was basically sold because someone saw my Kijijji ad for an auction of another home, they came to see this one and bought it. It showed really well and if they keep it for a few more years they will do really well.



Terry