I’m not claiming to be the Warren Buffett of Pittsburgh real estate investing. I’m not even claiming that I’m very good at investing in real estate (yet), but I have been through a couple of things over the past couple years that others can learn from. I’m starting to hit my stride a little and understand the type of business I want to build over the next 10, 20, 30 years. At this time, I have a number of units that I own outright. I also am a principle on 2 LLCs where I own a percentage of different properties. The following post is me trying to emphasize the importance of making sure that you learn from me and avoid making the same mistakes I have made early on in my investing career. Here are my top 5 mistakes to avoid:
1. Do your research and make calculated decisions on where to invest.
Surprise, surprise, that the old saying stands true when investing in real estate. Location, location, location! This might sound obvious but buy properties in neighborhoods you understand. Save yourself the headache and heartache or reaching for ROI in neighborhoods you’re either not familiar with or not comfortable with. The returns seem high on paper for a reason. High crime areas or lower income neighborhoods offer fantastic numbers for investors that specialize in that type of investment, but what the numbers fail to make obvious are the issues that come along with it. If you do want to buy properties in unfamiliar neighborhoods to speculate, I would recommend working with a property management company that specializes in those neighborhoods and trusting their judgment on how to operate your property.
2. Your lease must be airtight.
No, it’s not acceptable under any circumstance to google a short lease because you “just want to get something signed” or save time.
No, it’s not okay to have a handshake agreement.
No, it’s not okay that they sent you an email agreeing to the terms.
As Mike Tomlin would say, the standard is the standard. Do not take short cuts. You do not want to hand a judge a limited lease that you’re trying to enforce with limited protection built into it. Your lease is your biggest weapon in a courtroom to defend yourself and your business against a tenant who is out for blood. Take that seriously. Do not make the same mistake I have and think you’re saving time by using a default lease from google. Call a real estate attorney, have them revise or recommend a lease for you to use. Then use it. Religiously. Period. End of discussion.
3. Get everything in writing and over-document.
Another obvious one, but it is so important to get things in writing. Remember that it’s easier to show a judge an “exhibit” than it is to say, “well we discussed it and came to a verbal agreement.” If it’s an important communication, send it in a text or email and log that communication. If you terminate your lease agreement, get it in writing. If you must pay a contractor, log the expense and keep the receipt for tax purposes. If you are partners on a property or multiple properties, set up a proper entity (LLC, S Corp etc..) to declare your rightful ownership in the property (even if working with family members to avoid conflict). Make sure to set yourself up with processes that are repeatable and performable on a routine basis to make your life easier as you start to accumulate more properties.
4. The hard-ass approach to dealing with tenants/contractors does not work and is ineffective.
Any serious real estate investor wants to maintain a good and respectful relationship with anyone that they do business with. Do not threaten people. Speak to people with respect. Pay contractors on time. A Landlord/Tenant or Property Owner/Contractor relationship can deteriorate quickly. This does not mean allow people to take advantage of you, but if a tenant is 3 days late on rent after paying on time for 11 consecutive months, give them a break. It’s not worth the $35 fee to threaten your relationship with the tenant. Especially if it will cause you to lose an otherwise great tenant and have a vacancy for 3 months.
5. Set up your LLC early.
One thing that I didn’t learn early enough was setting up an LLC or entity early on to avoid having to later pay a transfer tax to transfer your properties into your entity. Transfer tax is a local tax that is owed on every real estate transaction (even where you are essentially selling to yourself into an LLC or entity). So, if you see yourself owning quite a few real estate properties, I would recommend getting your LLC structure down early on to avoid having to pay unnecessary taxes later in the game.
Investing in real estate is difficult, rewarding, upsetting, fulfilling, and challenging all at the same time. It’s important to understand that things ARE GOING TO GO WRONG occasionally. Avoiding some of the things I outlined in this post, will save you time and heartache along the way. Hopefully, you can learn from my mistakes.