We are deep into our fourth investment property at this point, which still qualifies us as newbies, but we have picked up on a few mistakes lessons that we have taken away from our first two years of doing this. Real estate can be very profitable, if you can recognize good deals (and bad ones). Chances are, though, that you are going to have a few stumbling blocks along the way – new or not. So what lessons have we learned so far?
1. Not Setting a Strategy Starting Out
We knew what we wanted as our end game – we wanted to have enough cash flow coming in to replace both of our incomes. The problem was that we didn’t have enough money in the bank to work with in order to accomplish that! So, in order to get to our cash cow game, we had to play the equity capture game.
Going into it, though, we were on two separate pages with our strategy, so there was no consistent map for us to follow. That led to some confusion on which direction we were going to pursue when purchasing our properties. Since then, we have luckily gotten on the same page and are aggressively pursuing equity capture homes – aka they are ugly and we bring up their value. In turn, that will put enough money in our bank one day to be able to up our game to apartment complexes and increase our passive cash flow.
2. Not Having a Good Team
This one was a costly mistake! We went for the least expensive instead of the one with the best reviews. We thought the others were too expensive on their bids – out of our budget for the renovation costs – so we opted for someone who told us that they could make it work within our budget. WAY OFF THE MARK!! It ended up costing us so much more money in holding costs, fixing their mistakes costs, and stress. It wasn’t worth it. This time around, we went with someone who actually was given an award for the highest member reviews within our group. I can already say, from only a week in with them, that it is a night and day difference. He actually calls to update us and sends us pictures! They started to gut out the property on a Monday and called Tuesday afternoon to say it was almost down to the studs. I am impressed.
3. Paying Too Much
Another costly mistake – obviously. We were new and ignorant. We had no idea how much money went into these deals to make it work and so we bought something that was fairly overpriced for the amount of repairs it needed done. Sometimes, it is best to just walk away from the deal. With more due diligence and research, I think we could have seen it, but we were under pressure to get the deal moving, so we fell into this mistake. Research the neighborhood to see what comparable sales look like. Drive through the neighborhood to see if it looks like somewhere you would feel ok in after dark. Having a good handle on the next step helps with the purchase price as well.
4. Underestimating Renovation Costs
We are still learning about the approximate costs associated with the major systems in a house – HVAC, electricity, plumbing, roof and foundation. From the major systems, we work our way up through the details. If your roof is rotten, you are likely going to have rot and mold somewhere in there. You will have your kitchen and appliances, bathrooms and plumbing fixtures, flooring, trim, doors and windows, drywall, paint (exterior and interior), light fixtures, landscaping, clean up and demolition, etc. These are for the major ones that we have done. If you go for more of a cosmetic renovation, you are likely just looking at updating things a bit to bring it up to speed with the higher priced sales in the area – something like cabinet and appliance updates, or flooring, or painting the walls.
5. Not Accounting for Soft Costs
This was another costly one! I guess they all are kind of costly in a way, though… We had the numbers bouncing around in our heads for the renovation, purchase price, refinance, etc. However, we did not really keep up with how much we were just blowing through on soft costs like interest only mortgage payments for the hard money loan, utilities, permit fees, closing expenses, etc. This added up to over $11,000 as we talked about in our post about the renovation gone wrong. They are not something to just discount!
6. Poor Communication
As I mentioned also in our other post about our mistakes, we paid for these mistakes in our marriage as well. However, it was a two way street. We got upset because of the problems we were having and ended up having shorter fuses with each other. That led to us not talking very much, leading to additional decision making without keeping each other in the loop. This all added up to a really significant breakdown in communication where we were two parts of a team that was supposed to be unified, operating completely separately. It ranged from small instances, like offering a totally separate military discount to potential tenants than what we had originally discussed to much larger decisions, such as how we were running a major renovation.
7. Didn’t Keep Good Books
This one is still a big learning curve for us! We were using Quickbooks Online, but entered in our properties completely incorrectly. Months later, I figured out how to do this with a really helpful tutorial from our real estate group, but there are so many months of clean up that need to happen. It’s overwhelming! I could probably knock it out if I could just dedicate two solid days to it, but I haven’t found that time at all. We mixed and mingled our “business” funds with our personal ones because of how much we ran over on the renovation, and the lack of communication mentioned in number 6 led to multiple charges that I actually have no idea what project they went to.
While our real estate investment right now is run as a personal investment project and not a business, we want to do much better at treating it like a business. That is one of our goals for 2019 – no mixing funds and operating like a business. That means constant communication on decisions, since we are both equally invested in this. It means better book keeping, better accounting and following a set strategy. We have definitely learned from what we have done wrong and to me, that makes them lessons not mistakes!
These are good points for people to remember on almost every building or renovation project. I usually underestimate the renovation costs, thinking I can do it for less. Hubby is better at estimating costs but, then, he doesn’t live in the same project dream world that I do 🙂
I am trying to get better at OVER budgeting for renovations – that way if it comes out a good deal if I overestimate, then it will for sure be a good deal when the real costs come in! This house we are doing right now, they didn’t have plumbing or full re-wire estimated in, but I threw it in for my own calculations because looking at this place, I just had a feeling all of the systems would be needing some TLC. Sure enough, he’s re-wiring and having to plumb for moving the water heater.
I am a local realtor and have justed dipped my toes into personally investing. However, I have been a bit nervous about flipping because of your point #2. A good team is so critical in the success of the flip. That is my current mission, to find someone I can trust to do the work they say they will do, even if it costs a bit more. Great read!
That’s great you are getting into investing! The team was such a critical hit for us – we have an amazing team in place for the one we are currently flipping (not really a flip because we are planning to hold it), and it is night and day difference. In a week of work, they have ripped it down to the studs, taken care of the mold problem, rearranged the floor plan, put on the new roof and are looking at starting sheet rock. Last time, it took 3 months for them to “rewire”. I didn’t know any better, so I wasn’t as on top of things as I should have been, but it was such a hard lesson to learn. If you ever want references, let me know!