THE MISTAKE THAT PROMPTED ME TO CHANGE HOW I INVEST IN REAL ESTATE
June 13, 2017 By Larry Arth
There is nothing more sobering than hearing a fellow investor talk about costly mistakes they made. Anyone who has done lots of investing has made bad decisions or made mistakes along the way. A quote of Jim Rohn comes to mind, “It’s important to learn from your mistakes, but it is BETTER to learn from other people’s mistakes, and it is BEST to learn from other people’s successes. It accelerates your own success.”
I have always loved that quote as it makes so much sense. This is why successful people like to hang around successful people.
It is funny, we grew up always being told not to copy or cheat. Later on in life we learn that copying (from successful people who have made the mistakes and perfected systems) is the key to getting ahead quicker and with less headaches.
My largest mistake and how it changed how I invest
Being too quick to hire a property management company. improper diligence when hiring a property manager has to be my largest mistake (or failure) to date and cost me most of my portfolio.
After buying and holding properties for many years, 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.
Closing down a business in Minnesota and opening a new one in Florida, along with selling our personal home and buying a new one in Florida, meant there was much to do and organize. Preparations were running on overtime already when my daughter announced she was getting married and wanted to do so before we moved away.
With all these details to attend to, I put a very big task on the back burner (hey, truth is they were all big tasks but something always gets done last). I still had 13 great investment properties I had to turn over to a property management company.
Enter, the rookie mistake
Hindsight is 20/20, it was a clear mistake, but with such a busy calendar I was desperate to find a property manager to relieve me of the landlord duties so I could move on. I simply 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 not made 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 which escalated into 100’s of thousands of dollars and a loss of most of my portfolio. Having no experience up to this point on working with property management companies, I did not even know what questions to ask. My mind was so preoccupied with checking the task off my to do list that I did not realize I was subjecting my largest assets to collateral damage.
Enter Lies and embezzlement!
The result of my mistake resulted in 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 yes, they even embezzled from me. They would bill me for work between tenancies 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 I made a surprise visit to these vacant units. 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.
Yet not one of these items was completed. They were showing units that were messy and in need of repair and updates (no wonder they were not being rented). 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 and changed how I handle my investments.
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. While I used to believe a dollar saved on property management was a dollar added to my ROI. This was not an accurate belief. I now know differently.
Why working with a GOOD property management company has its benefits and is more cost effective
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. With so many rules, regulations and laws changing all the time having a reputable company responsible for this can be very beneficial. Saving you one misstep may prove to be a huge cost savings.
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 professional management companies are now endless but the key takeaway is GREAT 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!)