Guided Real Estate Investing Podcast #31: My Past Mistakes as a Real Estate Investor

Guided Real Estate Investing Podcast #31: My Past Mistakes as a Real Estate Investor

Announcer: You’re listening to Real Estate Investing Talks, a SimplyDoIt podcast. Your journey to success in real estate investment starts right here, right now. Here’s Dani Beit-Or.

Dani Beit-Or: Here we go. Now I’m in focus. Good morning/good evening/good afternoon, everyone. Thank you for taking the time off your busy day, busy week. I appreciate you joining me.

We do this session every Friday at 11:00 a.m. pacific time right here, so obviously you know where to find that session.

The whole point of this session, it’s a real estate talk where I usually talk and you guys usually listen.

Although I’ve got to say, I always appreciate you putting questions. It’s always beneficial when you do that because that session is mainly for you guys, an opportunity to ask questions, and I have something that I always want to cover myself.

I’m actually looking into how to host someone else in a session like this. I think we can’t do it on a PC, only on a phone app. Maybe next time we’ll do a phone app and try to see if we can host someone with us.

Thank you for joining me. My name is Dani Beit-Or, obviously. I’m based in Southern California. Before we start with today’s topic, I just want to say two short announcements.

Next week, I’ll be speaking, really speaking, in the class in San Francisco on Tuesday, next week and Wednesday in Sunnyvale. It’s in the room. We can actually see each other face-to-face.

I’ll be talking about investing in rental properties out of state and flipping out of state and some other techniques how you can move a little bit faster and even move faster than that and how you can incorporate different strategies and techniques.

I’m kind of melting different concepts or different strategies of investing together so all of us can actually benefit and do better as investors, move faster and so on. It’s usually about an hour/hour-and-a-half depending on questions. That starts at 7:00 p.m. on both nights.

But for those who want to get a little bit extra from that evening– [sniffs] Excuse me. I have a little bit of a cold. We start at 6:15 as an early session. We call it a power session. The whole point of the power session is actually not have specific content but more of an open Q&A for everybody to ask.

I’ve learned that investors don’t always have a place to go and ask questions. The whole point of the power session is, if you have a question regarding real estate, that I may know the answer or can help you. Maybe someone in the room can contribute. That’s always what we’re trying to do, to do a little bit of sharing and communicating with each other. It’s not just about what I have to talk about.

At seven, usually we start with the fuller content of the class. We talk about specifics and of course we take more questions, next week. The link is in the comments. I think it’s the first link.

The other thing, if you want to read our eBook, it’s a simple, easy, very well-structured book to follow and read, by all means. It covers a lot of things we talk about, just in a more structured and easy to follow way.

With that said, if you have any questions, put them on as I speak and we’ll address them gladly.

Today’s topic is I’m going to share with you the mistakes that I’ve done. I can’t share with you all the mistakes that I have done. We don’t have time for that, but I just want to point a couple of things that I’ve done in my past that I think are the bigger mistakes doing investing myself and learning from those mistakes. I’ve definitely learned from those mistakes, and I’m hoping you will learn from them as well.

Mistake number one, and I put those in the notes. It’s what I call ignoring the hidden costs. The type of real estate I’m talking about, just to put it in perspective, are primarily rental properties, in my case, out of state, but that has nothing to do with the mistake.

I think when I just started years back, I wasn’t as detailed to the numbers because, you see, this type of real estate, from my experience, is not a big numbers game. It’s a small numbers game.

If you’re neglecting to account for 50 bucks there and 100 bucks there, you’re actually going to hurt yourself or not be able to really analyze the investment property because it may seem as small numbers, but they very quickly add up when you’re talking about these type of properties.

Let’s just talk about a few common mistakes that I see. Number one, when I see investors, or other companies even, presenting their rental properties to investors to invest, there’s probably a couple of things that I never see or almost never see.

Number one is vacancy as if houses are a hundred percent occupied of the time. There’s no accounting for that, no mentioning of that. Maybe somewhere hidden, yes, but when they present the deal, it’s not included in the numbers. Vacancy, just to give you one example.

Another example is HOA, Homeowners Association. Not all the houses have them, but many do. Those who don’t, it can be another 20/50/whatever bucks per month. Remember, small numbers game, not big numbers game.

Number three is leasing fee. Leasing fee is what we typically pay our property management company to place the tenant, so it’s like a tenant placement fee which is paid every time a tenant is being placed in the property.

It could be yearly. It could be every few years, but it’s there. Maybe not all the property management companies charge that fee, but typically they do.

When you add those three– Just as an example. Maybe their others. I just want to point out those three items that are many times being left– Even two of them are being left out, you don’t have the complete picture or the complete analysis properly of the property.

Remember, small numbers game. I made those mistakes. Maybe there are other fees such as you’re not counting properly for repairs. Maybe you do. Maybe you don’t. All of those things are part of the transaction. You can’t just say, “It doesn’t exist,” and all of a sudden to be surprised. Make sure you are aware of all those costs.

Also, make sure you’re aware that when you come to purchase the property, you need to be ready, typically, for the down payment, obviously, if you’re buying with a mortgage, the closing costs you will have, the mortgage cost if you’re using a mortgage.

Almost every property that we buy requires some make-ready, maybe $1,000, maybe $7,000,- It varies- to make the house ready: prep it, finish it, touch ups, all those little things. It needs to be expense in order to get the house rent-ready.

If you don’t account for those things, you’ll end up saying, “Oh, I only made $20,000,” and you end up actually realizing very quickly that you need $30,000 between all those expenses.

It’s very important that you actually do a proper analysis, and don’t neglect things that seem like nickel and dime or small numbers because they really add up quickly and, over time, they add up to quite a significant amount.

Next point is what I call the buying with a negative cash flow strategy. What’s a negative cash flow? Basically- I’ve done it many times- we buy a property with a mortgage. Let’s just say we put five percent down, which is not very common today, but let’s just say we put five percent down, so that means I have a 95 percent mortgage.

The income that comes in, the rent, covers all my expenses, the mortgage. But then I find that between whatever comes in and all the expenses, I’m actually in a negative cash flow. Let’s call it $150 a month.

First of all, I have done many of those deals. Looking back, I wish I had done things a little bit differently. I wish I had purchased a smaller number of properties with a little bit more of a down payment, let’s say 20 percent down, to make every property independent of me.

Let me explain that. When I’m buying with a negative cash flow, I need to supplement every month whatever the negative cash flow is. I have to send a hand into my pocket and bring in $200/$450/$100, whatever the number is, to cover that negative.

On one hand, there’s nothing wrong with it if you know the consequences. The consequences are, A, you got to bring in money every month and, B, there is actually tax benefits for it because you’re going to report a greater loss, so it’s not completely losing money here. There is some circumstances that that would be okay to go in that direction.

I’m not saying it’s not okay. I’m just saying, for me, again my mistakes, I have purchased a lot of properties years back. I’ve put as little money down as possible, all generating negative cash flow, and when the real estate market turned into the crash, it was very difficult to cover those negative cash flow.

If it’s one or two properties, it may not be an issue, but when you have a large portfolio, it adds up to many hundreds or thousands of dollars a month. All of a sudden, whatever your income is dependent on, suffers. Then, it’s going to be hard for you to make those payments.

Going back, I would just use a different strategy of being a little bit conservative, putting a little bit more money down, making every house independent of me, and whatever happens in my life has nothing to do with the property. The property is self-sustaining, financially. That’s what I want to accomplish. With the negative cash flow, It’s difficult.

Remember, negative cash flow is not a taboo that “don’t do that”. That’s not the way I see it. I think that there’s questions or understanding how to go about the negative cash flow. Maybe it is right for you to go this way.

I have investors who actually employ that strategy because it makes sense, but generally speaking, if you understand the consequences of the negative cash flow and you’re okay with them, that’s fine. If you can, avoid them, even better.

Obviously, it maybe sound trivial to some of you not to be in a negative cash flow situation, but there could be reasons why you would want to be in that situation and good ones, financially good ones.

Number three, buying land. That’s a little bit tricky. When I say buying land, I mean just buying a piece of land, not necessarily a big acreage. What I have done in the past that I consider my mistake, I would go into an area where some big developer bought a huge acreage of land.

They’re subdividing it. They’re developing it. They are putting infrastructure. They are putting roads dividing into specific lots with a clear goal to sell those individual lots to owners or investors, whoever, and then someone will eventually come and build the house on that property.

It’s not always like this. There are other parts of the country that you can actually find many, many, many lots within a certain part of the city already developed, and you can just come in and buy that lot.

Now, here’s my problem with it. If this is the type of investment you want to do as the land, remember this. Maybe you’re getting a really good deal or bargain on buying that piece of land, but the fact that you are in an area that has a lot of lots competing with you, the price doesn’t really matter because when this area will appreciate, all the lots around you will appreciate as well.

There’s always going to be tons of competition because, many times, there’s pretty much the same thing, the same lots. Same area, same geography, same zip code, everything. Basically one next to each other or just about.

That’s one challenge. The area appreciates. Your lot appreciates. Yippee ki-yay. Now, we have more money on the lot. Go sell it. There’s tons of competition out there with you. There’s tons of competition. That’s one.

Number two, many times when you do a deal like this, the developer is still developing lots in the community, and he’s selling them too. That means you have a very powerful, strong player on the ground that is competing with you should you want to sell that lot.

I can tell you that from first time experience. I had a developer who was interfering or blocking my potential sales because I didn’t want buyers to come and see my lot while he has many lots to sell as well.

He would remove the sign. He would make it difficult for the realtors to come and see the lot, access to lot because it was a gated community. When people would come into the sales office, he would take them and show them available lots, not mine. All of those things made me realize this is a bad setting, bad scenario, a very weak position for me to own lots.

One more thing, many times in that type of a situation, you need an experienced or knowledgeable agent to sell this type of real estate. It’s not all agents that there are no lots and there’s nuances that– the expertise is a little bit different, and when you want to find that agent, you would quickly see that not a lot of agents want to deal with lots.

Then, you have maybe a few people, potentially a few agents to work with, which could be enough, but let’s say– I remember checking once in an area, and I could tell there are maybe five relevant agents to work with. Five agents is nothing. I mean expert agents.

Why is it nothing? Because one doesn’t want to work with you. One is not responding to emails and phone calls. Then, you’ve got three. Out of those three, one is just completely not someone you want to work with, then you end up with two that maybe you’ll end up working with.

Let’s say you start with one and don’t get along. You want to work with two, you’re left with one. That’s just not a good proposition.

If you’re in an area that you have, I don’t know, 20 experts in lots and you can choose out of the 20, that’s a much better setting to buy lots.

Now, how I would consider to buy a lot? Either I would go with this scenario with a developer with multiple lots with a clear plan to put a house on it. That would make sense to me. That way I’m creating an improvement. That’s a very good proposition, generally speaking, or I would rather go to a developed area.

Sometimes, I go into a developed area. There are already houses around. Maybe there is a community or a neighborhood, and maybe there are three lots scattered throughout the neighborhood. Maybe I’ll pick one of them, or maybe there’s two. One next to each other. I would pick one of them or two of them, and I’m not really competing with anyone.

But also, I would want to have a clear plan. What am I going to do with this? I may just hold it. But personally, I would want to have a plan of holding it with a clear path of how I’m going to build on it to create an improvement.

Remember, when you have a lot, typically you will still have to pay for maybe Homeowners Association if there is one and property taxes.

If you break ground by any means, typically you would also need insurance. They’re maybe very cheap expenses, but they are still expenses when there’s no income coming in. Lots is the third thing.

For those of you who are joining us, if you have questions, you need clarification of what I’m talking, feel free to add those questions. I see a lot of familiar names, so good to see you guys. It’s great to see people that, obviously, I know well.

The fourth thing I want to say is diversification. A lot of investors think that it’s better maybe to buy one property in this market, let’s just say in Tampa, and one property in Nashville, and one property in Dallas, one property in Phoenix or maybe two, whatever, which makes perfect sense because you say, “Oh, I’m diversifying. If Tampa goes to a bad economical period, then not all my properties are in the same basket.” Logically, absolutely it makes sense.

Now, I’ve executed that plan for myself. I had multiple properties in multiple markets. It was one here, two there, one there, nine there. It was just scattered all over.

What I’ve realized, when you hit that scale of a certain number which is more than maybe a handful, and you have to maintain multiple relationships with multiple property management companies, that creates a burden on you because every property manager company is different: different processes, different communication styles, different information they provide.

You find that it’s actually a little bit more difficult to maintain all those relationships even when you are the clients and they are the service provider versus just saying instead of just having 10 properties in eight markets, it will be easier to have maybe five and five or six and four in two markets. It’s a consolidation effort.

Now, I had a conversation with one of my investors. What’s the number? He wanted to know if I have how many markets and what’s the number, and do I have a percentage of maybe 80 percent here and 20 percent there of properties.

I told him, “This is not about these numbers. There is no right and wrong here. There is only your truth as a person, as an investor.” If you think the correct thing to do is 10 properties in 10 markets, that’s your belief system, go for it. That was mine. I changed it.

I have investors saying, “Only when I have 10 in one market is when I’m starting to look into other markets.” Everybody has their own comfort zone, feeling, what they want to do. That’s fine. There’s no right and wrong here.

I just want to say that many people, such as myself, come to this saying, “Oh, I’m going to diversify. It’s better, smarter.” Yes, it is, but it comes with a price. My suggestion is find that balance which is a very individual number for you.

The last point I want to mention is that I think that when I got started, I didn’t have the guidance.

By the way, I was interviewed for a podcast yesterday. We were exactly focusing on that aspect of the obstacles and challenges that an investor have. Now, the obstacles and challenges are very different on the stage you are in.

The beginner/newbie has different challenges and obstacles than the one that have done a few investment properties and the one who has done already multiple investment properties.

A lot of those people in different stages have different challenges. Many times, they don’t understand that finding that person in their niche of investing that will help them overcome the obstacle, address a lot of concerns, show them the path, many times, just get them unstuck from a stuck situation because something in their mind is blocking them about what to do. If they don’t find that mentor–

Again, I’m not saying you’ve got to find me as a mentor. Of course you have to, but I’m not going to be able to mentor everybody especially in niches that are not relevant for what you’re trying to do, but in your niche, find that mentor. That mentor will be your brainstorming. That mentor will help you eliminate obstacles, move to the next level. It will help you.

I had people in my life, but the mentorship wasn’t there. I had to figure out a lot of those things by myself. By the way, I still don’t have a good mentor to the level I am in. It’s something that sometimes I find someone. I think it’s a good benefit, and then it switches to someone else.

The mentors that I use now are more people that are my level that we communicate and talk. A level of experience and capacity of a volume of transactions. Those are the people. It’s more of a exchanging ideas and thoughts and not a clear mentorship.

But for you, that person can be opening a lot of opportunities or open your mind or address problems. Make sure you find that person and in niche. That will definitely help you overcome the current and maybe future obstacles.

Again, it varies. Everyone has their own challenges at the place they are in. I can tell you for example, I have a couple of people that I mentor, not in real estate, but business-wise, real estate investment, small starting businesses that are hitting different challenges, and it’s not about where to buy or how to buy. That’s not about the core investing, but in their lives, their business cycle.

They’re telling me, “I’m stuck. I have a problem with specific problems. I have general problems. I have goals I want to accomplish,” and I am mentoring them to get them to the next point as a business as well as investors that I do everyday, investors that want to invest and get to the next level.

Find that. Find that mentor in your life in your niche. Use that. If you need to pay a little bit or a lot, go and do that. It will help you go to the next level. There’s no doubt in my mind, assuming that person or mentor is a good one of course.

Good, less than 30 minutes. With that said, I am done with the point I wanted to cover today. If there are questions, by all means, please place them either in the live chat right now, or if you’re watching the recording, put them in the recording.

While I’m waiting for questions to come in, I just want to ask for your likes of course or sharing. It’s always beneficial. Then mention, again, I’m speaking next week in San Francisco on Tuesday, and I’m speaking in Sunnyvale, Silicon Valley on Wednesday evenings. You are most welcome to RSVP. There is no cost if you pre-register. There is a small fee if you show up at the door, so it’s probably in your best interest to pre-register.

Then, the links are in the comments. I also put a link to our eBook. [] You are most welcome to download our eBook and gain more structured, step by step information than just the small pieces of info that we’re putting here.

Again, we’re doing this every Friday. I know there is a topic for next Friday. I just can’t remember what it is. Thank you, Gabriella, for the feedback. Nore, very good to see you and for the feedback. I appreciate it.

I’ll wait another 30 to 60 seconds to see if there are questions coming. If not, we’re just going to call it a wrap and get on with our busy schedules. I’m just going to wait here a few more seconds.

Very good, everyone. With that being said, have a terrific weekend. I hope to see you in person in one of the events that’s coming up or one of our future sessions here or other sessions or maybe one on one. Have a great week. Bye-bye.

Announcer: Congratulations. You are one step closer to success in real estate investment. You’ve been listening to Real Estate Investing Talks with Dani Beit-Or. To learn how SimplyDoIt can guide you through the real estate investment process and achieve nationwide success, visit us on the web at Thanks for listening.