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My 5 Biggest Mistakes I’ve Made in Real Estate Investing

Updated: Sep 19, 2018

1. Buying a place with a friend WITHOUT a partnership agreement

My second & third blogpost, where I spoke about buying my first property in Victoria, BC with a friend, is where this great deal all unravels. Well, not totally, but partially. Basically, we bought this house as friends and business partners. We both wanted to get into real estate but couldn’t do it on our own, so we partnered up. He was handy and smart, and I was smart and eager to learn. So it worked. I remember when we were going through the purchase process, our lawyer asked, "Do you want to also draw up a partnership agreement?" My partner immediately said no because that would cost us extra in legal fees. I wanted the partnership agreement, but I didn’t push for it. We had a conversation where we said, “We’ll be completely reasonable and amicable if this doesn’t work out, right?”. “Yes of course”, he said. So I trusted him.

Big mistake.

Fast forward about a year and half and we were no longer on the same page. We had done some pretty great renovations together, but he was always starting projects and not finishing them, and I wasn’t able to live with him anymore because it was an absolute disaster of a house. I don’t know if you’ve ever tried to live without a living room, a kitchen, and a half working bathroom, but at some point, that wears on you. And when your partner starts (but doesn’t finish) projects, you get fed up really fast. At that time I was working at the University, working on my PHD, and I had a dog. I needed to come home to a stable enough house where I didn't lose my mind.

So I chose to move out to maintain my sanity.

He stayed, payed minimal rent (in exchange for continuing renovations), and spent the money that we had coming in from our other units on “materials for the house". When I asked him to produce receipts for these materials he never could, but I tried to trust him, he was one of my best friends after all.

After about a year of him spending all the incoming money and barely progressing on any renovations, I had had enough. I didn’t trust him anymore, and every day I felt like I was being taken advantage of. I decided to consult a lawyer and see what I was entitled to.

This is a really long story that I don’t even like to even think about to be honest, but basically he did some shady things and ended up buying me out for below market value. I was trying to be kind to him and let him keep the property (I was originally wanting to sell and split the profit), but he didn’t want that. He wanted to keep the property. So I accommodated him, and it bit me in the butt. I trusted a friend that I thought still had my best interests at heart, but it turns out he didn’t.

So, don’t do what I did. Do team up with a friend or partner, but do it in a smart way. When your lawyer asks, “Do you want to draw up a partnership agreement?” you scream “YES”. It may cost you an extra $1,000 upfront but let me tell you, it’ll be worth it down the road if everything goes south like it did for me.

2. Not calling my local tenancy board sooner

This story comes from the first place I bought with my current partner in Halifax, NS. We bought the house as we were driving across Canada on a west-to-east road trip where we was helping me relocate from Victoria, BC to Halifax, NS. If you thought buying a house was stressful, try buying it while you’re driving across the country and are out of phone and internet service more often than you’re in it. Don’t do it. But that’s not the mistake I made here.

The house we ended up purchasing was one we thought we had lost, but came back on the market when the previous deal fell through. We offered on the house along with two other offers, and we were told that our offer was $20,000 below the other two offers. Somehow though, we got the house. Crazy right?! Well, not so much. The other two offers had the condition that the house had to come vacant. Ours specified, “as is”, which meant that it came with the current tenants in it. It was a duplex, so there was a basement suite and the main house. We were happy to keep the girl in the basement suite, but knew we wanted to move into the main unit. We assumed we just had to have a friendly conversation with the people who lived in the main unit, explain to them that we were planning on moving into our new house, and give them at least 3 months notice so they could find a new place to live.

Seems, reasonable, doesn’t it?

Oh no. What we thought was going to be a pleasant, in-person conversation where they congratulated us on buying our first house as a couple, turned into a very angry conversation. We knocked on their door asking to come in, then promptly told them of our plans to move in in 3 months. Rather than congratulating us on our new house, they promptly told us to “get out of their f*cking house immediately”. We then went through a 2-month battle of trying to figure out how to get them out so that we could move in. We served incorrect paperwork, pissed them off, and spent a lot of money on registered mail. Needless to say, we eventually got them out, but not without incurring damage to our unit and writing nice little “F*ck you” messages throughout the house.

How could we have avoided this? Well, rather than sift through google to try to figure out what the correct process was for evicting tenants and serving the correct paperwork, we could have called (or gone in person) to our local tenancy board to figure this all out from the get-go. Needless to say it cost us about $1,000 in unpaid rent and left us with a dirty and slightly vandalized house.

Don’t do what I did. Call your tenancy board ASAP to figure out your rights.

3. Hiring a contractor without an agreement

Fool me once, shame on you. Fool me twice, shame on me.

I have a bad habit of trusting that people will do what they say they’re going to do. I have been burned time and time again doing this, and each time it happens I say, “I am not going to trust the next person that promises me something! I’m going to make them write it out in a contract”. But then I meet the person and I think, why wouldn’t they do what they say they’re going to do? They seem so sweet.

Part of me hates this about myself, but another part of me likes that I see the good in everyone. The happy medium I’ve recently accepted is that in my real estate career, I need to err on the side of caution. I always need to write up contracts and enforce these contracts. I am also lucky to now have a partner in real estate (and in life) that is much better than I am at being the enforcer. He is kind, but direct. A trait I still lack but am slowly learning from him. He knows how to have those difficult conversations that need to be had, and for that, I am grateful.

Anyway, we recently hired a contractor for our first big renovation job. My renovations up to this point have always been either cosmetic (therefore I can do myself), or I’ve had my dad who can help me with them at little cost. This renovation involved electrical, plumbing, all new windows, painting, flooring, and a lot of crack-filling and drywalling. We started out doing a lot of this work ourselves, but then realized that driving 8 hours every weekend to our renovation was wearing us out. Big time. So we hired a few guys. We got a referral from our realtor for an electrician to do the re-wiring. We called a few companies about window installation quotes, and went with the cheapest quote. We called a few local paint companies for quotes on paint jobs, but realized that their quotes ($10,000 to paint 2 apartments) was WAY over our budget. So we found a guy who came recommended from our electrician that could do it all – crack fill, paint, drywall, lay floor, etc. He came in, did about a 45 minute walk-around where we told him everything that we wanted done and then we asked him for his quote to do all of this work.

And we held our breath.

“Well, it’s a big job. It’ll take me about 4 weeks of full-time work, and I charge $25/hour. So that’s going to be about $4,000 total for the whole job”.

…. Are you kidding me?!

Man, you’re hired. (we tried to contain our excitement as we shook hands with him). Going from a $10,000 quote just to paint the 2 suites, to $4,000 to do literally everything else, was amazing. I think we mic-dropped our paint brushes as soon as he left and went and grabbed a celebratory drink! This was the best news we had received in a long time.

Fast forward to today. We’re on week 10 of the renovation, and they’re just completing the first of two suites. Yes, you read that correctly, week 9. And we pay him $1,000 in cash, weekly. So, we’re $9,000 in and not done. But that’s our fault, because we shook hands with him rather than drawing up a contract. We should have paid him partially up front, and held the rest for when he was completely finished the job. We’re now $5,000 over expected budget and nowhere near close to completion.

So friends, don’t do what I did. Don’t trust the friendly 50-something year old man that reminds you of your dad. We love him, but he’s definitely taking advantage of us. And you know what, there isn’t much we can do. We’ve reached out to other contractors but everyone is busy doing other projects at this point. And we need it done ASAP so we can get it rented.

Sigh. It’ll be fine. Just ask me how I’m doing in 2 months from now (when it’s hopefully ALL DONE).

4. Not trusting my head (that’s right, head)

I’ve always been a firm believer in the saying “trust your gut” and “do what feels right”. Well, that was until I say this TED talk about fear and gut feelings. I really wish I could find it for you right now, but I sadly haven’t been able to resurface it. Basically, the talk is about how the brain has a way of producing that ‘gut feeling’ as soon as you are about to do something risky. Essentially, your brain says, “No, this is scary, let’s not do this”. This feeling is what I have been wrongly attributing to be my gut feeling for the past few years. It’s that moment of fear right before I’m about to do something risky, like put down $20,000 of my own hard-earned money on a house, that makes me say, “Nope, this one doesn’t feel right”. Even though I’ve run the numbers 10 times, I’ve had the inspection, the quotes, I’ve done the research on the area, and secured the rental income. Even though my head says, “This is a good deal” my gut says, “This is scary. This is a terrible idea”.

So what have I done?

I have pulled out of at least 3 great deals over the past couple of years because I got scared just before that large chunk of money was due. Even though I spent weeks and weeks researching the property and checking everything out, I still pulled out. I was scared. I thought, “This doesn’t feel right, I need to walk away”. But once I realized that this feeling is essentially a built-in safety mechanism that your brain uses to keep you from taking risks, I got over it. It’s kind of like that moment when you’re standing on the edge of the cliff, about to jump off into the water, and you get that fluttery feeling in your stomach. You’ve seen every one before you do it, but as soon as you’re about to jump, you think, “This is a bad idea”. So what do you do?

You jump.

Metaphorically speaking, you jump into that deal. If you’ve done your due diligence and checked everything out, it’ll be okay. Thinking back on the 3 great deals I pulled out on, I regret losing them more than I regret any deal I've gone forward with.

I know it’ll be scary, but when the time comes to buy your first, or second, or fifth investment property, jump.

5. Not starting years ago

WHY didn’t I start sooner? 26 feels too late. I had friends that bought their first house in year 1 of university and rented out the extra bedrooms to their friends.

Can you imagine? Getting to live with your friends (which you are likely doing anyway) but having them help you pay down your mortgage? GENIUS. This is definitely something I will be encouraging my future kids to do. Not only is it a smart business move, but it will also teach them responsibility, managing finances, project management, and how to be a landlord.

Regardless of when you start, NOW is always the time. I’m part of the Bigger Pockets community, where people of all ages are just beginning in real estate. It’s a great social space to be involved in. I ask these people questions, advice, and sometimes I just jump on threads that I’m interested in and I learn about real estate in a different market than my own. I have spoken about Bigger Pockets in previous posts but continue to sing their praises because it’s honestly an invaluable resource.

Anyway, those are my 5 biggest mistakes I’ve made over the past few years. I hope you learn from my mistakes and don’t make them yourself!

Luckily I’ve had Stella by my side for every single one of these mistakes, and she always makes me feel like I’m making smart decisions (whether it's true or not)!

Tune in next week for more real estate advice and more dopey Stella photos!

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19 Eyl 2018

The fear of the deal is real. So is everything else you wrote about. Awesome blog post.

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