It has been just over a year since I bought my first rental property – a duplex and it has given me time to reflect on some of the lessons I learned. I made mistakes that while they didn’t blow up my finances or my real estate investing career I wouldn’t want to repeat them again. For those of you who are interested in investing in real estate but don’t know where to start or are early in your real estate investing career, I hope my experience will shed some valuable insight for you. In honor of the anniversary, I am going to share those mistakes in a series of posts and how I’d approach them in the future. Below is a list of those mistakes.
The first mistake I made is thinking the process would be quick and simple. I had it in my head I’d find the right property quickly, but I didn’t understand where we were in the market cycle and that good deals were harder to find. The other caveat is I didn’t really know what a good deal looked like if I came across it. Finding the right property may take you time especially if it is your first deal. You naturally won’t be able to make as quick decisions as you would if this was your 100th deal. Set your expectations early.
#2 Picking the Right Type of Property & Location
I struggled to truly identify what type of real estate investing I wanted to pursue. I knew I wanted to invest in cash flow as I saw my family make mistakes investing based on appreciation during the bubble. I knew my one criteria is that no matter what the “value” of the property I wanted it to put more money in my pocket each month then it cost to own. What I did not realize was how many different ways from residential – single-family to multi-family, commercial, section 8, A-D class neighborhoods, and more factors to consider. There are strategies that work for almost every type of real estate asset and I struggled to find focus initially.
#3 Too many credit checks
Over the course of 15 months, I put in many offers and had 2 accepted contracts on properties that fell through during my due diligence period. In order to have a financing offer considered, I had to have a pre-approval letter which requires a credit check. I had been working with multiple mortgage brokers and companies in order to find a competitive rate, but I made the mistake of allowing each of them to pull my credit separately resulting in a large number of inquiries on my credit report. The mortgage brokers told me that having multiple pulls in a short amount of time wouldn’t matter if you got a mortgage. I don’t know if that is true or not, but because I had contracts that fell through it hurt me and did affect my credit.
#4 Knowing the numbers
Being able to analyze a deal to understand what you can afford to pay, how much you need to put down, and what the return on your investment will look like are all very important. I struggled to determine those numbers and had a very wide range for what good vs. bad looked like. I didn’t have a great system for calculating my numbers and relied a lot on whatever free rental property calculators I could find on the internet and my own guesses. I could not tell you at the time on what return I bought the property and what I was able to improve it to through bringing in new tenants.
I was super nervous, fearful, excited, and happy all at the same time. Making your first real estate purchase is nerve-racking and represents a big investment that you likely are not accustomed. I didn’t realize how much I controlled in the situation and how much I could control from negotiating terms and closing costs to being able to exercise contingencies (if then clauses) in the contract. I could to a degree control how quickly my financing was approved, how thorough a home inspection I had, and how to conduct the closing. Once the seller accepts your contract (depending on the terms of your contract) you have power over how the due diligence and closing goes. I didn’t take advantage of all this power to clarify what I could control.
These are five areas I made mistakes in my first deal. I’ll go more in-depth into each topic area to show the errors I made and how you can avoid them. Buying real estate can be scary at first, but it doesn’t have to be. Learn from my mistakes and make your first or next purchase go as smoothly and seamlessly as possible.