Stop! Don’t Make These 3 Mistakes

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“Learn from the mistakes of others. You can never live long enough to make them all yourself.” ~Groucho Marx

Hi Moguls, Chris Urso here, and I’ve been in this business for awhile now, and one thing I know for sure is... there’s always more to learn.

That being said, I’ve also realized that there are some common mistakes that some real estate investors tend to make. So, to help save you from the pain of making these costly errors, I compiled a list of 3 investing mistakes you need to avoid.

This is not to say that you’ll never make poor decisions in your investing business – heck, even the smartest, most successful investors do, from time to time. Including me. But, the key is to learn from your mistakes – and the mistakes of others – so you can minimize your slip-ups in the future.

So, let’s get right into the good stuff, and talk about the 3 mistakes to avoid – and what to do instead....

Mistake #1: Signing a Broker Exclusivity Agreement

I had a student who sent me a question about a broker who had approached him about a property deal, and was asking him to sign an exclusivity agreement. Understandably, my student had reservations about doing so.

Now, there are 2 types of exclusivity agreements that you should be aware of:

One should be strictly off-limits.
The other can be a good solution.

The first type: The broker will represent you, exclusively, on any of your purchases within the market – whether it’s their listing or any other listing on the market.

Now, I don’t like to do this in the commercial real estate market, because a lot of times, the brokers you work with on this level don’t do a high number of deals in a year – so they don’t like to share their listings with other brokers.

So, I advised the student to respond cordially to the broker:

“I’m sorry, I can’t sign an exclusivity agreement with you for the entire market,
because I’m building relationships with other brokers. But what I’m happy to do
is to sign an exclusivity agreement for this specific purchase with you.”

And that takes us to the second type of exclusivity agreement: this type pertains only to the specific property, and indicates that:

You will not contact the property owner directly.
You will not utilize any other broker during the transaction.

This second type of exclusivity agreement is a win-win, because it makes the broker comfortable, and it allows you to still form other broker relationships for other deals.

So remember – no matter what – don’t fall into the trap of signing a whole-market encompassing exclusivity agreement with a broker. It may seem like a good idea, initially, but it will ultimately limit you in your ability to build your business.

Mistake #2: Failing to Consider the Market Sub-Level

Another mistake that many investors make is focusing on the city-level (or the macro-level) of the market…

They’ll say: “This city has all these good jobs coming in, and there’s a lot of population growth, so a property in this city would make an awesome deal.”

But what they forget to do is explore and research the sub-level of the market. When you’re investing in apartments, especially, everything is hyper-local.

So, while it is beneficial to make sure that the macro-level of the market is positive and growing, you also need to know everything there is to know about the 3-to-5-mile radius surrounding the property in consideration.

You could be in the best city, but have a property stuck in the bad part of town. And you don’t want to get caught up in this situation, because the growth of the city is probably going in another direction.

As you know, the #1 thing in real estate is: location, location, location.

You can make everything about your building beautiful, but you can’t pick that building up and move it to the other side of town. (If only it were that easy!)

So, when you’re starting to invest in a new market, focus on both the macro-level and the hyper-local level of the property’s location. You’ll save yourself a lot of grief.

Mistake #3: Making a Purchase with No Reserve Money Saved

One of the mistakes you absolutely must avoid when investing in multi-unit properties is going into a purchase with no reserve money (or an inadequate amount of reserve money).

You HAVE to plan for the unexpected.

For me, it’s most comfortable to build a reserve account for the first year after purchasing a property.

So, for instance, on a 100-unit building, I will allocate $300 per unit to start a reserve account. (100 x 300 = $30,000 in the reserve account, going into the deal).

bag That money will be placed in an escrow account to be used for future improvements on the property. Every month, you should be adding money to that account.

It’s extremely important to plan for the unexpected BEFORE it happens – whether a roof starts leaking, a boiler system goes out or windows need to be replaced – you want to have that money allocated.

Trust me, when that moment arrives and you need to dive into the reserves, you’ll thank yourself for planning ahead. Real estate investing always involves a certain level of risk, but having no reserve fund is not a risk you want to take.

Best-Laid Plans

Real estate investing is an always-evolving business…

As you learn the ins and outs, you’ll become more confident in your decisions – but you still can’t expect perfection. After all, you would never grow and develop without a mistake here and there.