August 30, 2018
Joe Fairless

5 Lessons Learned from the Worst Real Estate Investments

When seeking to learn investment lessons from others’ real estate investing mistakes, you don’t just want to hear about their worst deals ever. What you really want to know is why it was bad and how you can avoid making the same mistakes!

That said, here are five lessons active real estate investors learned from their worst deals ever:

Lesson #1 – Rental Properties are Better Wealth Builders Than Fix-and-Flips

Garrett White learned two valuable investment lessons from his worst deal ever. It was his first attempt at a fix-and-flip in 2017. Up to that point, he had only purchased rental properties. Garrett purchased the property for $77,500 from a burned-out landlord, put in $18,500 in renovations, and sold it for $120,000 three months later.

While he was able to make a profit on the deal, the first lesson he learned was that, compared to fix-and-flips, rental properties and rental syndications are much better wealth builders. On fix-and-flips, the main benefit comes from the short-term forced appreciation. Whereas for rental properties, you’ll benefit from short-term forced appreciation, long-term natural appreciation, ongoing cash flow, tax advantages, and the principal paydown. He made a quick profit with fix-and-flips, but to build long-term wealth and use his time more effectively, he believes rental properties are a much better option.

Lesson #2 – Time is Your Most Valuable Asset

Another investment lesson Garrett learned from his real estate investing mistake, which resulted in his worst deal ever, was the importance of time. He said the amount of time, hustle, and stress involved during those three months spent on the flip were greater than the four years of owning six rental properties combined. The large time commitment involved in identifying a fix-and-flip opportunity, evaluating and closing, managing or doing the renovations, and selling the deal weren’t worth the stress and short-term profit. Instead, Garrett would have rather spent his time cultivating relationships with brokers, owners, and accredited passive investors so that he could syndicate deals and buy rental properties.

Lesson #3 – Consider Creative Financing Before Passing on a Deal

Robert Lawry II’s worst deal ever was a deal he didn’t do. It was a 2-bedroom condo with an oceanfront view listed for $30,000 in 1993. Robert was 19 and couldn’t fund the purchase price, so he passed. Today, the condo is valued at $800,000…ouch!

But Robert learned a valuable investment lesson. Rather than passing on the deals he cannot fund alone, he now knows that he should brainstorm creative financing options first. For example, he could have raised private capital to purchase the condo. Or he could have implemented the house hacking strategy, bringing on a roommate or two to cover the acquisition costs and to pay rent to cover the mortgage payments.

Don’t pass on the deal just because you cannot fund the acquisition costs. If the return projections are truly strong, you shouldn’t have an issue finding someone to help you purchase the deal.

Lesson #4 – Don’t Deviate from Your Investment Criteria

Eric Jacobs’ worst real estate deal was a home he purchased in the Bahamas. He knew it wasn’t a good deal but he bought it anyways. Eric lost a fair amount of money on this deal, but he, fortunately, learned an important investment lesson and realized the error is his ways and didn’t pursue any more deals in the Bahamas real estate market.

His real estate investing mistake was that he fell in love with the property. As a result, he deviated from his investment criteria and ignored the results of his underwriting. We’ve all been there, but we must remember that we set our investment criteria the way we did for a reason. If the deal doesn’t meet our criteria, no matter how much we love it or try to bend the numbers, we have to pass.

Lesson #5 – Hold Partners Accountable

On Roman Bulgakov’s worst deal ever, he was betrayed by his real estate business partner. He trusted that his partner had the best intentions of the company in mind when the reality was that his partner was only looking out for himself.

Roman partnered with a contractor who agreed to finish the project in six months at an agreed upon price. However, the contractor ended up taking twice as long and charging twice as much. By the time the deal made it to the closing table, Roman only made $1500.

Roman’s investment lesson is to keep partners accountable. He failed to create accountability checks along the way, which the contractor took advantage of. Moving forward, Roman has a defined process with his partners in which he has frequent check-ins to receive status updates on his projects. That way, he can catch timeline or budget deviations before it’s too late!

The Value of Real Estate Investing Mistakes

Though a misstep may sometimes be inevitable when you’re entering into a new business venture, it’s important to see these as an opportunity to grow. Every bad deal is an investment lesson, an experience that, with some hindsight and careful reflection, you can really learn from. For even more actionable advice, check out my book series, Best Real Estate Investing Advice Ever!

Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.
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