My #1 Investing Mistake, It Cost Me Dearly!!
Working in the real estate investing arena for years I have seen many people making investing mistakes along the way (present company included). Yes, if you are new to investing you are subject to making mistakes. If you have previously invested, you too of course will sooner or later make mistakes. After all it is those mistakes that teach us the best lessons.
So how do you avoid making mistakes?
People love to share their successes. I have found that asking people about their failures within their investments teach us much more important lessons. After reading a book “Failing Forward” by John Maxwell (a must read for anyone), I found that learning people's mistakes is more interesting and informative than hearing of their success.
My biggest mistake:
Here you go, my all time biggest mistake...improper diligence on hiring a property manager. Indeed you may call this my biggest failure. After buying and holding (selling some) properties, we decided it was time to move away from the cold state of Minnesota into the warmth of the Florida sunshine state. Up to this point I managed all of my properties. We were scheduled to move in about 6 weeks and the tasks that needed to be done were many.
Many details to work through
Closing down a business in Minnesota and opening a new one in Florida, selling our personal home and buying a new one in Florida caused the move preparations to be running on overtime. (Oh and my daughter was getting married the weekend before we moved and the wedding had to be planned!) With all these details to attend to, I overlooked the remaining 13 investment properties I had to rent out. I needed to find a property management company to take care of these.
A rookie mistake
It was a clear mistake, but with such a busy calendar I called two management companies and talked with them briefly and ultimately hired the cheaper of the two. Perhaps, if my schedule was not so full, I would not have done such a stupid move. This lack of diligence cost me dearly.
Hiring the cheaper management company did not save me one nickel, in fact it cost me tens of thousands of dollars. Having no experience up to this point on working with property management companies, I did not even know what questions to ask.
Lied and embezzled!
The result of my ignorance was hiring a company that was unable to keep my units filled. They did not know how to manage the property in a down market and they embezzled from me. They would bill me for work between tenancy that was never completed. Because these repairs, cleaning and updates were not completed, the units were not showing well and therefore were not getting rented out either. This of course created negative cash flow that eventually left me with a $20,000 per month negative cash flow.
You see, one day I flew back to take care of some family issues and using my lock box key entered one of my vacant units that was for rent as I was curious why had not yet been leased. (My property management company was not aware of me being there).
Shocked at the way the unit looked, I called home to confirm with my wife that yes indeed this was the unit we just sent $3,700 to cover some updates that needed to be done. Needless to say while I was there I fired that company and hired the higher priced company that I had earlier passed on. (I failed forward on that day, I tell you.)
I now use property management companies for all investments
While it was devastating at the time, this experience put me on a path to a better understanding of property management. In fact, I learned much over the years about property management and believe when you hire a good one you can benefit greatly from them. Things like:
Economies of Scale Pricing on Repairs:
They know many vendors and because they use so many repeatedly for the various buildings, they can get better pricing.
Sourcing and tenant placement:
The most important attribute to this business is good quality tenants. I cannot compete with a company who interacts with tenants 24/7. They have access to more tenants and through more experiences can better screen them as they know what to look for.
They keep up on the ordinances and laws:
The best way to run a profitable business is to stay on top of local and state codes and compliances such as renting permits and licenses, proper eviction processes and zoning ordinances.
Fair housing laws:
This can be a big issue if you are not 100% clear on fair housing laws. Keeping current on this requires you to take classes or courses of some kind to make sure you are compliant and not violating any of these laws. These laws deal with equal and fair treatment for all people to avoid housing discrimination.
As an investor I want to spend my time investing and not dealing with tenant calls. To me the list of reasons to use a professional management company are now endless but the key take away is PROPERTY MANAGEMENT MAKES OR BREAKS AN INVESTMENT.
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Not all management companies are created equal. Hiring the company that will look out for your best interests as if it were their own is paramount to a successful investment portfolio.
Over the years I have talked with hundreds of them and have learned many questions to ask them. I have created this list of questions that give me a clear understanding of who they are and what their operations are like, (Wow if I only had this list years ago!)