Back in 2006 I bought a condo in the Orlando, FL area and thought that I was going to flip it for a huge chuck of money. Well, you can imagine that I was just signing for the biggest roller coaster of my life. These are 4 lessons that I learned on my first Real Estate Investment deal:
Fear of Missing Out
Investor can fall prey to this cognitive bias real easy. Fear of Missing Out is a compulsive concern that one might miss an opportunity about a satisfying event. Including a profitable investment.
Today, I can see that back in 2006 the Fear of Missing Out made the decision for me. You really have to be aware of this cognitive bias to control it. It takes a lot of self-control and delaying gratification to do it. I have learned that is better to develop a strategy and if an investment fits your strategy, then it could become a great investment. Buying a piece of real estate just to buy it is never a good idea.
Back in 2006 I wasn’t aware of sales tactics. Now that I have a little bit of more knowledge I can identify some of the strategies/tactics that the realtor used to convinced me:
- Scarcity: Realtor: “If we don’t make a decision soon, prices are going to keep going up and somebody else will buy this condo before we do. There is not a lot of inventory in the Orlando area.”
- Social Proof: The realtor setup a conference call with a prior client of his. This client bought a condo in the same place that I was looking to buy. He told me about his great experience with the realtor and all the money that he did when he sold the condo.
- The realtor took me to lunch to a very nice place. “Just because he wanted to show me the numbers”.
- The buyer told my realtor that he was going to pay all the closing costs.
- Commitment: The realtor used phrases like: “Will you buy if the buyer pay all the closing costs?”
People say that Real Estate Investing is a numbers game, well it’s. I was investing in Real Estate and I didn’t know what I was doing. Eleven (11) years later I can tell you that I was trying to flip a condo in a market that didn’t make sense. We all know about the 2008 crashed. Since the day that I bought the condo, I have lost more than $65,000:
- I bought the condo for $225,000 and today (06/2017) is worth $147,000
- Financing: I took a mortgage for $180,000/30/ARM and a line of credit for $45,000
During my owner years I had to:
- Replace the A/C ($3,500)
- Replace the Carpet ($3,800)
- Update two (2) Bathrooms ($9,000)
- Update the Kitchen ($4,000)
- Buy New Appliances. Twice. ($3,000)
- Paint. Twice. ($1,000)
There was no vacancy at all. The location of the condo was a great one, but I had to rented below market value for a while due to the 2008 crashed. The tenants that I had took great care of the property.
- The main one for me is that I don’t have complete control of the property.
- It can take a while, and a headache, if you have to fix a leak from your upstairs neighbor.
- HOA fees can go up.
- Special Assessments can eat the profit.
- You can’t control who become the HOA President and/or Board Members.
- HOA controls which type of financing a seller can get.
- It doesn’t sell as fast as a Single Family Home.
- If you have a new tenant moving in, the HOA needs to approve it. This can delay the process and consequently reduce your profit.
- They can be in a great location.
- If the condo is bought at the right price, it can become a great cash flowing property.
You need to have a basic understanding of what you are doing before you invest your money. This is not only true in Real Estate, but in other type of investments as well. I’m not saying that a condo is a bad investment, but it has to be bought at the right price and location.
Something that is really important is that you need to understand that Real Estate is not a liquid asset. Sometimes you can’t get sell the Real Estate that easy. If you want to be a prudent investor, you need to be financially ready before you start investing in Real Estate. You may have heard about success stories, but we don’t know what happened before the success. You need to be really cautious, when buying investment property, because everybody wants to sell you something. I’ve learned that the best way to invest in Real Estate is doing it prudently, and that is when you are financially ready.