202: How to Avoid Real Estate Investing Mistakes

SHOW NOTES FOR EPISODE 202: HOW TO AVOID REAL ESTATE INVESTING MISTAKES

Avoiding costly mistakes is a goal of every real estate investor.  However, are mistakes avoidable?  Are there practical things we can do to prevent mistakes from happening?  And when they happen, how should we respond?  In today’s podcast episode, Bill shares insight into real estate investing mistakes by candidly sharing a series of recent calamities that occurred with one of his investment properties.

Before we get started:

• I heard some disheartening news about some of our podcast guests.
• I want to careful, as I examine the info I received and am not disclosing names.
• I’m only getting bits and pieces right now
• Sounds like one person has a business he may be trying to grow too fast.
• Selling turn-key homes that are not properly renovated, inspected and tenanted and he has some very upset clients and potential lawsuits
• You know, we try our best to check out the various guests we have on this show but we don’t always have all available information.
• When I hear reports about less than honorable business practices from a guest, I feel terrible that we have been used as a vehicle to promote someone’s business that hurts someone
• First off, please note, I’m still trying to collect more facts and also don’t want to make accusations based on innuendo and/or rumor but some of the facts I do know are pretty compelling
• My word of caution here:
  • One, I’m not a big fan of turn-key in the first place and truly feel there are some potential problems in the model.
  • Why do I say this about turnkey? Because I started with turn-key investments and really made some bad choices that I learned from!
  • That’s part of the purpose of this show, is to share my mistakes so you don’t repeat them
  • I don’t say that all turn-key companies are bad but I do say that you definitely need to carefully research the company you are considering before buying and don’t go into it with blinders on. If it sounds too good to be true, well, you really need to dig even deeper
  • Also, even though we screen or guests pretty carefully, just because someone is on the show does not mean I endorse that individual, their business or product. I’ll repeat that!  Just because someone is on the show does not mean I endorse that individual, their business or product
  • PLEASE! You still need to ALWAYS do the proper due diligence and check out any business, organization or individual before you give them your hard earned money. That’s just common sense!
  • But, just so you know, there are plenty of folks we do not have on the show as well because of some red flags. And you need to have some red flags, too.
• Red Flags on any potential turn-key company, coaching/educational program, or seminar, boot camp… whatever are
  • Anyone who says that real estate is the perfect investment
  • Anyone who says it’s really easy
  • Anyone who says you’ll get rich overnight
  • Anyone who sells their real estate services, coaching etc. with slick marketing, YouTube videos showing bikini clad supermodels, Ferraris, or lear jets… well, you decide…
• If they say it’s too good to be true… their probably right. It’s not true.
• Doing it right is hard work!

Hey, I have to admit myself.

• I really love real estate investing
• And, being a pretty positive and optimistic person in nature, I do get overly enthusiastic at times… because I really believe real estate investing provides excellent opportunities from anyone who is willing to work at it, especially 50 plusers who want to fill the income gap, get a good return on their investment and build a legacy
• But I’m also going to get real with you. I’m not just going to paint a pretty picture.  I’m going to share the good, the bad, and the just plain ugly sides too.
• Why?
  • Because I do care about the people who listen to this show
  • I feel I have a responsibility to God first, my family next and all of you before anything else
  • I don’t want you going into real estate investing with blinders on
  • I don’t want you to repeat some of the dumb mistakes I’ve made
  • I want you to be realistic – but, at the same time, optimistic
• Don’t lose your enthusiasm just because you hear a few horror stories but definitely LEARN from those horror stories.
  • Ask some simple questions when you hear about someone’s mistakes or how someone got burned:
    • Why did this person get in this situation?
    • Did they not do the thorough research and due diligence?
    • Did they just trust the person or business too much without checking the person and company out?
    • Did they take “short-cuts” in the interest of time that cost them?
    • And the list of questions can go on…
• Sometimes we’re quick to blame the other person when the problem was really us…
  • You don’t want to be one of those people saying, “but he said I should be wealthy now. Where’s my Maserati? Where’s my lear jet?“
• • That’s why I like my friend Paul Moore’s podcast. It’s called “How to Lose Money” and it features guests who to share their big mistakes so others can learn… I think it’s a great idea for a show!  And, yes, I was a guest!  In fact, I could probably we on every week because I have lots of mistakes I could share!  I’ll put a link to the show in our show notes
• The point is, if you just do the proper research and due diligence BEFORE you invest, you’ll avoid a lot of the headaches
• OK, you want hear some real ugly, here it is
  • You know I was just in Indianapolis a couple weeks ago
  • I went there to add a few more AirBNB units to my 22 unit apartment
  • Had a wonderful week– worked my butt off!
  • Added two more AirBNB units (well, one needs a little more work).
  • I actually had the opportunity to meet with and welcome 2 Air BNB guests!
  • I also got to welcome my first traveling nurse, gave her our very cool gift basket with Ghirardelli chocolates, gourmet coffee, Smart Water (killer gift baske)…
  • She was so stoked! Loved the place!  Even brought her bike to explore some of the great bike trails in Indy.  Until, her second or third night…
    • some guy came screaming down the halls in the apartment, at 3 am in the morning, banging on the doors! It scared her to death
    • The next day, she some some unsavory guys in cars in our parking lot that also scared her…
    • But when I she personally called me (of course I’m back in So Cal now) that’s when I knew she really loved he place…
    • When I answered the phone, while driving in Mission Viejo to pick-up some pizza for the kids, I got the call that every landlord prays they will never receive… “Bill, I can’t see… all the lights are out. The building is filled with smoke. I think there’s a fire. They’re asking us to get out of the building!  There are fire trucks everywhere…”
    • What? Oh my God, “Is everyone alright?”
    • Thank God, she said no one was harmed and everyone was OK. There was a small electrical fire near the laundry area with minimal damage.
    • However, I kicked into “first responder’s mode.” I’d had plenty of experience in Haiti.
      • Called my property manager to go down to the apartment and assess the situation
      • Got an assessment of what was really happening and first and foremost, that everyone was alright!
    • Looked at some of the key issues
      • The fire was on our bottom floor, department flooded our first floor
      • Wires were melted
      • Minimal but real fire damage
      • Washer & dryer possibly destroyed
      • Floor was now flooded by water from fire department
      • Called the insurance company
      • Did everything I could from afar
      • It shook me to the core
    • The next morning, my three month traveling nurse tenant texted me, “I’m moving into the Extended Stay Suites. Keep the first month’s rent.  You’ll need it!”
    • Ouch!
    • Now, the other AirBNB guest, who was on the floor where the fire was, was not deterred. He really loved his one-bedroom unit and wasn’t deterred by the fire.
    • In fact, he felt so at home that he didn’t even bother locking the door to his room when he would go out… that is, until two guys walked into his room and took his laptop and cell phone.
    • Batting a 1,000 now!
    • Poor guy, he’s in Indy for job interviews. What could be worse?
    • Had to call AirBNB to see if they would cover his loss. Also called my insurance company
    • Couldn’t get a straight answer
    • Either way, I’m going to make sure he gets the items replaced
  • Bottom line: This is REAL real estate investing and the “Old Dawg Principal still applies – even things you never even thought of or will think of will happen!
  • This was truly one of those months
  • Now, even with all that, you’re going to think I’m crazy, but I still love real estate investing and I still think it’s my best route in my retirement years. I wouldn’t be doing anything else…
  • but keep in mind, I also lived in Haiti for twelve years
    • Hurricanes
    • Earthquakes
    • Riots
    • Murders
    • Kidnappings
    • Malaria
    • Dengue fever
  • All of this is pretty mild in comparison
• But seriously…
• This is all part of my education. It’s expected. Stuff happens!  Welcome to real life!

One thing you will hear on this show, hopefully, is real life!  I’ll try my best to give you a realistic view of real estate investing and what to expect – both positive and negative!

So, the important question to ask here is “What have I learned from these experiences?”

• First off, Be prepared BEFORE bad things happen
• Don’t just have a fire response plan, but also plans for:
  • Flooding
  • Earthquakes
  • Tornados
  • Hurricanes
  • Acts of terrorism or mass violence
  • Civil unrest
• Call 911
• Have an Emergency Protocol or Response Plan in place:
• Have it include a sheet with all the key local emergency phone numbers:
  • Local fire department
  • Local police
  • Ambulance
  • Have some key on-site people/tenants/neighbors phone numbers
  • Have your property manager’s emergency number where you know you can always reach him or her
  • Make sure your PM has a copy of your Emergency Response Plan and knows what to do.
  • In the plan, make sure you include as many worse case scenarios as you can think of:
    • What if the building burnt down?
    • What if one of your tenants went on a shooting spree?
    • How would you relocate tenants short and long term?
    • Where would they stay?
    • How would you communicate with all your tenants?
    • And more…

Could I have prevented these problems

• For the fire, we had the place rewired and inspected, it shouldn’t have happened
  • We still aren’t sure the wires really were the cause
  • I later found out that my PM staff had caught a homeless guy sleeping in the laundry area and called the police. He had drugs on him and was arrested
  • However, he was released. Some say he may have started the fire as an act of revenge but who really knows.
  • Of course, why didn’t my PM tell me about this guy when they first encountered him?
  • That’s another issue…

On the guy running through the hallways, unsavory folks in the parking lot and theft:

• The problem with smaller multis is you can’t justify on-site staff that could help prevent these issues, but with 100 plus units you can
• I called the police and they drive-bys for 5 days but that can only do so much
• I brought in a security guard temporarily for a few days to put people at ease but again, the income can’t justify it
• His reports were helpful and we found out there is still a problem with prostitutes in the area (and in our parking lot)
• We have been planning on installing video cameras and are now more motivated than ever
• I put out the word to my PM and his staff that if they know reliable people that are looking for a place to stay and would be willing to be our “watch dog” for discounted rent, let me know. Our cleaning person called me and said her mother is interested and willing to be our “house mom” and would be that person to be on the altert to issues, check access doors, call the police if people are in the parking lot or disrupting tenants, and more.  I am very excited about that but also cautious and doing it on a trial basis first.

Some Bigger Picture lessons

• Part of it goes back to my buying criteria
• Did I really know the area I was buying into
• I feel I did but yes, there were some surprises
• Starting out, I buy C and C- properties, trying to buy in the “path of progress” where I’m hedging my bet that the areas will improve. I think the 22-unit is a pretty solid C, with neighborhood remnants that are changing
• But how long will it take? What do I do in the meantime?
• Properties in the area are improving and rents are going up
• In the meantime, I’m taking lots of notes, doing what I can to protect my tenants, deter potential problems and prevent future big issues

In conclusion

• I have a confession to make: the title of this podcast was a bit deceptive – intentionally – “How to Avoid Real Estate Investing Mistakes”
• Can you really avoid mistakes – no! – But you can learn from them!
• Please note, I’m not trying to discourage anyone.
• I truly believe in what I’m doing. But, at the same time, all of us need to make sure we are not going into real estate investing with rose color glasses, blinders and/or false expectations.
• You need to do your homework. Get educated.  Get a good mentor.  Do the proper due diligence.  And yes, learn from the mistakes that WILL happen!

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