My First Real Estate Mistake

My first property turned out to be my first mistake in the real estate business and one of the best lessons I ever learned.

I am a pilot by trade. I graduated college and went straight into the flight academy. I flew and instructed there until my first real job as a corporate pilot for a medical supply company in Macon, GA. When I quit that full time job to go into real estate full time I had saved up $10,000 and had one deal under my belt. My first deal…a duplex which cash flowed $300 dollars a month. It was the best deal I ever did because it got me going in the business and now I have almost 400 units and 8 employees. I also made one giant mistake!

Always place the deal in context of the surrounding market. I analyzed the deal like I was taught and it did cash flow accordingly. I closed on the deal for $40K. Shortly after I attended my first REIA meeting in which I was promptly told “you’re an idiot!” Unfortunately I had to agree with the person that was telling me this. He and his friends had been buying similar duplexes in the neighborhood for $20K! I paid twice what the property was actually worth.

My point in this lesson is that you must always place a deal into the context of the surrounding market and sub market. Checking the comparable sales in the area would have saved me from that particular mistake but that is not enough alone.

One of the first lessons I teach my students is to know their markets thoroughly. This means knowing the value of what you are trying to buy, but also knowing the exit strategies available in the area.

A large portion of a deals value lies in the validity of the exit strategy such as wholesaling, fix and flipping, hold and operating or refinancing. You need to know you are not just assuming someone else’s headache. If properties are trading a low cost then typically the market lacks exit strategies. When sellers can sell and choose the price or refinance easily, then the prices in an area are higher. When the exit strategies become more difficult, the price of income producing properties decreases accordingly.

You need to find great properties with great exit strategies, selling at great prices. Decide what the last owner did wrong and come up with a better strategy. Create a plan to take the property from day one all the way to sale. Creating a solid exit strategy should be something you do during the due diligence period, before you buy the property. Know the way out before you get in.