Although real estate investing can seem like a game of high stakes poker where large sums of money are made or lost in a single deal, for most investors it’s the consistent repetition of deals that make a modest sum of money that lead to wealth.
You can create $10-50k in profit (equity) from rehabbing a property, and create several hundred dollars in monthly recurring cash flow from a single deal.
This isn’t enough for anyone to retire on, but can, fairly quickly accumulate into quite a bit of wealth if done consistently over time.
After flipping just over 70 houses from 2011 to 2016, I changed my strategy.
In 2016 I started, Green Vet Homes, focused on buying, rehabbing, and renting homes, mostly to homeless veterans through a rent voucher program, and doing an occasional flip to create some extra cash.
For me, this has led to a much higher level of satisfaction in my work, a higher level of financial success, and more time to enjoy other things in life.
What would have taken decades to build traditionally in a 401k, I’ve been able to accumulate in just a few short years through buying, renovating, and renting the right deals in the right areas, accumulating small chunks of cash flow and equity with each deal.
This is why I love rental real estate as one of the best investment vehicles that exists, and love helping others build their own portfolios.
However, after all these deals and many years of investing, I can tell you that making money is not automatic.
I recently sold the worst deal I’ve done since starting my new company in 2016, and after licking my wounds and doing a post-mortem evaluation, I want to share the three main reasons why I think it went so poorly, so hopefully others can learn from my bone-headedness.
Here are the Deal Figures
|Projected Figures||Actual Figures|
|Contract Sale Price||$160,000||$147,500|
Sucky Deal Reason #1 – I Went Off Strategy
In 2016 I established a VERY clear strategy around the type of house I would target, area, home features, marketing strategy, target ROI, etc. In a nerdy spreadsheet I worked out what the numbers needed to look like in order to move forward with purchasing a deal.
I believe this led to a lot of my early success. I had to hustle and work hard to find the deals that met my buying criteria, but knowing exactly what direction to move and what the specific goal was, allowed me to achieve pretty significant results much quicker than if I had sprayed a lot of effort in a thousand directions.
I essentially determined up front that I was going to purchase houses that were:
- approximately 1,000 sq ft
- ranch houses
- no basements
- built after 1960
- In 3 specific south suburbs of Chicago
- Each property had to create $500 of cash flow/month after expenses
- Each needed to have $40k in equity after the rehab
I determined that if I stuck to these parameters, I could build a portfolio that would lead to my version of financial freedom within a just a few years.
This strategy worked really well, but many times, deals would come up that fell outside of this specific strategy. For example, I sometimes come across deals that don’t work as a great rental property, but that I feel I could flip and make some extra money.
This was one of those deals. Since it seemed to need pretty minimal work (all of the major stuff had been updated recently), I thought I could be in and out fairly quickly and justified tighter numbers than I typically like to have when purchasing a property.
As you can see in the numbers above, the renovation ended up costing more than I thought and I didn’t pay close enough attention to the comparable sales in order to ensure that my buyer’s appraisal would come in where I needed in order to make a profit.
Looking back, I realized that this deal seemed like an easy $20,000 or so profit, but was actually a huge distraction of time, energy, and capital away from the strategy I established up front and was working really well.
Sucky Deal Reason #2 – I Let Financing Sway My Decision Making
These days people tend to operate with the mindset that, “if someone is willing to finance it, then I’m going to buy it,” whether it’s an investment property or a new TV.
This wasn’t always the case though. Before you could finance just about anything, people purchased deals based on the merits of the deal.
Because financing is so plentiful these days, I try to take all of the funding options out of the equation when evaluating a purchase. I know I can get financing, but I like to make sure the deal is going to be a slam dunk in terms of equity and cash flow before factoring the availability of debt.
Ironically by doing this, the deals that I tend to buy are usually better than a typical rental property, which has led to more availability of financing because lenders really like the deals I typically do.
For this particular deal, a new lender who I respect very much, approached me with a new lending platform that is focused on working with mission focused companies.
Because I was excited to work with them, I justified purchasing a deal for more money than I should have because I was in a hurry to be one of the first to use this new funding concept.
Had this funding not entered into the equation, I probably would not have purchased the property based on the merits of the deal itself.
There are a lot of deals that investors can get funding for, but that does not mean they should. I have to remind myself all the time to focus on the deal fundamentals first (equity and cash flow), and then focus on the funding options.
Sucky Deal Reason #3 – Everyone Has a Limit to Their Bandwidth
Mathematically it always makes sense to leverage cash flowing rental properties as much as possible in order to buy as many properties as you can with the cash that you have available.
For example, all things being equal, if you had $100k to use to invest in real estate, it would be better mathematically to purchase five properties, each with a $20k down payments, than it would to buy one $100k investment property with all your cash and no mortgage.
The problem is, all things are not equal.
Five properties means five different (excellent) deals that you need to find, five different closings, five different tenants, five different sets of maintenance issues… all of the challenges to owning a rental property multiplied by five.
When people argue whether it’s better to pay off their rentals or stay leveraged so they can use their capital to purchase more property, the argument tends to focus purely on the spreadsheet math and not the personal energy, focus, and bandwidth that is multiplied by owning more property.
When I was broke and just starting out, it made sense to take on just about any new deal or challenging investment that I could in order to add more cash flow to my monthly income. Survival is different from prosperity.
However, as I’ve grown my portfolio over the years, I have increasingly realized how important the personal bandwidth aspect is to factor into the equation. I ask myself, am I actually winning by gaining a slight financial edge, if it also means lowering my quality of life because I’m exceeding the capacity I have to handle this deal.
I’ve also realized that having fewer (and better) deals has given me the capacity to generate other streams of income as well, arguably making me more profitable than I would have been buying more quantity that is not purely the best of the best deals.
There is a phenomenon that happened to me and many others, that the quality of my portfolio (ie net profit per deal) can become inversely proportionate to the size of the portfolio. In other words, at a certain scale, the more deals added to the portfolio, the worse the per deal numbers can . become due to lack of focus per deal.
I attribute the terrible numbers on this deal largely due to trying to manage too many deals (and other life commitments) at once. I needed to focus more attention on the deal in order to keep my renovation costs very low, and create the biggest impact with the renovation dollars I spent.
Also, when it came time to sell, I did not have the time and flexibility to challenge a terrible appraisal valuation because I needed the proceeds from the sale of this property to roll into other deals I was juggling.
It’s impossible to predict every challenge that will come up on each deal. Investors take their knowledge and experience, and come up with the most accurate projection that they can.
Anyone that has been investing long enough will have a few deals that go much better than expected and a few that go worse. The key to long-term success and eventual financial freedom, is having a strategy that leads to pretty consistent winners while learning from the losers.
Never get too down over a deal that doesn’t go as planned, and never get overly confident because of a big success. Real estate investing should be treated like a craft that you continually hone over time, perpetually learning from mistakes and improving on each deal.