10 Lessons Learned From Investing in Apartments

Twelve months into investing in property with over 200 leads analysed and countless offers made has helped lead the groundwork in my investment journey. Most of the lessons I learned were not from books, videos, or expansive workshops but by taking action and going through the process of finding, negotiating, and closing deals. Here are  my top 10 lessons that I have learned so far:

1. Don’t lose a deal because of pride

When I first began searching for properties to invest in the returns on investments that I saw more experienced investors achieving had me excited, it’s easy to find yourself confusing ambitions for greed. When assessing an investment it’s crucial that you understand the market you belong to and what can be achieved in those markets. In other words, managing your expectations can be a very valuable skill when trying to grow your portfolio. 

This does not mean you cave in. It does however mean that you don’t make decisions based on “always having to beat the other guy.” The first few deals I made offers on over a million rand saw myself and the seller argue back and forth about a few thousand rands, risking the whole deal and losing some in certain cases. 

2. Do your own research 

My mom used to tell me as a young adult that I shouldn’t take one’s word for granted. In other words, do your own research! Robert Kiyosaki says the most expansive advice is free advice. I am not an attorney and not providing legal advice, so you must do your own research and engage your own professionals to come to your own conclusions.

Here are just a few examples of topics where I got very different answers depending on who I talked to: 

  • You need a deposit to make an offer on a property. Don’t believe an agent that tells you this, it’s not true. In fact, most of the offers I make do not include deposits. It’s simply a matter of negotiating the purchase where the seller can find value in the offer you have made, these may include concessions that might be of more value to the seller.
  • Another one is that you need money to make money. This is not always the case. In fact historically, in ancient Mesopotamia, there was no currency to trade. Instead, people traded what they had; spice, silk, precious metals, wheat, cattle, food among other things, for what they needed. Finding something that a seller might find more valuable then money can help provide you with the incentives to make a better deal. 
  • How about having those online gurus selling you on a product that’s a short cut to greater wealth such as using the stock market or concurrency using their program. While there are those few people who have gained enormous wealth by such means they were the exception and trying to copy their success is like searching for fools-gold. Probably the most important factor in building wealth in cultivating a strong mindset, it takes time, perseverance, and effort. Remaining consistent with your direction and surrounding yourself with people who are successful at what you won’t accomplish the best way to get to your financial goals faster. 

Again, I am not providing any legal or financial advice…simply telling you things I have been taught that are not accurate or are incomplete.

3. Don’t compromise on your underwriting

We all want to get deals with an impressive ROI of 20% and over. But at what cost? If you are only investing your own money, then so be it, pay whatever you want for a property. However, if you are pooling other people’s money (OPM), you better take that seriously! There are certain industry standards that have been used over the decades that are tried and tested, have never failed, and should always be considered when planning your investment. I have personally seen investors looking for uneducated investors to pitch deals to. This is wrong! We have pursued hundreds of deals just to get one excepted and that can often be a good thing. This is because we do not compromise on our underwriting, the numbers have to work. This does not mean that you can’t make an offer significantly higher than the next bidder, but when times get tough (which they will), you better make sure you did not underwrite your deal aggressively. 

4. Don’t renegotiate the purchase price

No seller likes a buyer who renegotiates the purchase price after a property has gone under contract. However, in some cases, it can be justified. If there are issues you could not see during your site visit and the seller did not make you aware of it could be warranted to renegotiate. Most sellers aren’t going to give a full concession and this will become a negotiation topic. Some examples when you might consider renegotiating include foundation issues, plumbing, and electrical which could be very costly if not caught ahead of time.

However, do not renegotiate items you should have observed during your visits prior to making an offer. For example, do not come back to the seller after your due diligence and ask them for a credit to paint the building; or try to renegotiate for aluminum window frames when you already knew windows were made of steel. Be wise when you renegotiate and pick your battles carefully. 

5. Don’t look for the cheaper offer

Have you heard the saying “You get what you pay for?” Well, oftentimes it is very true! Hiring the least expensive plumbers and carpenters cost me a lot on my first apartment. Not only did I have to fork out more money to buy supplies in order to redo some of the work, but I also had to take out 2 weeks from my December holidays to do the tasks myself. Time is the most precious commodity in our business.

Personally I prefer to pay a professional at a higher cost to complete the work in half the time having me able to market the property earlier and reduce the holding cost on the investment.

6. Don’t try to do everything on your own

Sometimes the most obvious things are the ones most overlooked. Sometimes pride and other emotions might be a motivating factor in having to do all the work yourself, this is one hardest thing I needed to overcome. No one will take better care of what needs to be done then the person who has more to lose from an investment.

We see people that think they know everything and they do not bring in experts to help. This could possibly be because of pride, laziness, or being too cheap to engage experts. I can sincerely say having done most of the work on renovating an apartment, my time could better be served to search for more deals and to build stronger relations. Having a professional come in to do the work in half the time and having the warranty be based on their work would have been worth its weight in gold.

Build a team by building relationships based on others that share the same vision and philosophy. I personally think it is much better to take a smaller piece of a bigger pie than a bigger piece of a smaller pie. Being able to achieve 10-X goals and generate income-producing assets takes a team.

7. Don’t just partner with anyone

There are many reasons why someone would choose to partner with someone when pursuing a real estate deal. You might choose Joint Venture (JV) partner because you need additional net worth or post liquidity requirements, or to split workup, or maybe to have a partner that has signed on business loans before.

I see investors that have to bring in several other people to meet the net worth requirements for the loan. There is nothing wrong with this. However, when everyone thinks this is a non-recourse loan, it could not be farther from the truth.

It is a big deal and you are responsible for other key performances in the deal if they do something that goes against the contract or memorandums provision. Even an honest mistake of having an unorganized deal sponsor or angel investor that lets a suspensive clauses lapse can be cause for major concern. 

Risks of a JV Partnership: 

  • Non-performing partner 
  • Personality differences
  • Change in personal strategy 
  • One partner thinks they are doing more work than the other 
  • Partners not communicating with each other

8. Don’t let management companies ignore policies you have

Probably the most controversial topic for property investors is finding a good management company. Remember, you are typically not on the property on a daily basis. So, you need to rely on your property management company that you hired and trust to run the day-to-day.

We started off managing our 1st apartment not only because the cost to pay a management company for one property in our portfolio did not make sense but also we needed the experience managing tenants. Hiring someone to manage your property and not understanding the process and how the system works is a sure way to disaster.

When hiring a management company, you have to establish policies and make it clear they must follow them. For example, we had a property with a policy stating a tenant must show that they need to earn 3 times the rent, have good credit, and no prior infringement from previous landlords before they can get the keys to the apartments. Placing the wrong tenant could cost you up to a year of cash flow if handled incorrectly. 

9. Don’t let fear hold you back

We all have things we are fearful about and real estate investing is no exception. We all fear the unknown but don’t let it keep you from moving forward. However, if you are syndicating deals, you should have some anxiety. Why…because you are taking other people’s money (OPM) and you should have some uneasiness in case anything happened and you lost their money. Also, if you are always striving to grow and do more, you should have a healthy fear or nervousness of doing something you have never done before… but again, don’t let that hold you back. Push past your fears to achieve your ultimate desired outcome. The path to success is not always smooth…and if you stop as soon as you hit a rock, you will never see the promised land on the other side of that stone! 

10. Don’t let emotion come into play

You must be willing to walk away from a deal if the numbers and terms are not right. When it comes time to make purchasing decisions, I firmly believe you need to know when to walk away from a deal. Listen to your gut and walk away if you need to. Trying to outbid a competitor at an auction when the deal is over your maximum allowable offer is a short victory.

Now, don’t get me wrong, emotions will always be at play when investing in property. The best way to overcome this is to learn to manage these emotions by managing your expectations. A good team, coach, or mentor can help pivot you in the right direction while building the experience to make good decisions. So, it is not always wrong to let emotion come into play, but if you are making business decisions and using other people’s money, you need to make sound business decisions based on facts, not emotion. Also, consulting others you trust when making decisions can save you a lot of heartaches.

One reply on “10 Lessons Learned From Investing in Apartments”

Leave a Reply

Your email address will not be published. Required fields are marked *