4 Lessons Learned From My Biggest Real Estate Investing Mistakes: Tips for New Investors
By Jason Malabute, CPA and full-time real estate investor
I’m Jason Malabute – a CPA and full-time real estate investor. I was born and raised in Los Angeles, but I invest in Indianapolis and Kansas City. My interest in real estate was sparked when I discovered the power of passive income while doing a tax client’s taxes. Soon after, I decided to transition out of accounting to pursue real estate investing through entrepreneurship, as my dad had always encouraged me to do so due to the challenges I could face in obtaining a high paying job with cerebral palsy.
Being a real estate investor and entrepreneur with cerebral palsy has come with its own set of challenges. One of the biggest struggles has been dealing with people’s doubts about my abilities and my own limiting beliefs about cold calling potential sellers and teammates over the phone. I thought they would not be able to understand me or take me seriously because of my disability. However, after thousands of calls with apartment owners, property managers, contractors, brokers, and being a guest on several podcasts I learned that these limiting beliefs were all in my head.
Despite these challenges, I am proud to say that I have never lost money in real estate. When I first started in real estate, I spent a year studying everything I could get my hands on. I watched every BiggerPockets podcast interview, asked hundreds of questions on the forum, and read all their books. From there, I took massive action and started to build my real estate portfolio. However, I had more determination than experience, and I made a lot of mistakes that I hope you can learn from.
Real estate investing can be tricky, but it’s possible to avoid mistakes by learning from others. Here are some of the biggest blunders I’ve made and the lessons I’ve learned:
- Don’t let brokers pressure you into buying a property that doesn’t meet your criteria or convince you that you can cut rehab costs to make the numbers make sense. One of my early mistakes was buying a property in Indianapolis. I was so excited to “buy something” that I compromised my criteria and chased the deal by paying more for the property and decreasing the rehab budget, which turned out to be a bad idea in the long run. Brokers may be focused on their commission and not your best interests. Get trusted contractors to assess rehab costs. Make sure that the comps you are using to justify the scope and budget of the rehab is comparable to the subject property’s location, size, age, and amenities.
- Always have reserves for a rainy day. With my first Indianapolis property I didn’t have enough reserves and it resulted in me paying for repairs out of pocket. As a conservative investor, you should have at least eight months of reserves for a rainy day, especially as we go into a recession. Not having enough reserves and not taking care of big capex items, such as roofs, parking lots, plumbing, and electrical systems saved money up front, but ate away at my cash flow in the long run. As a result, something broke almost every week, and I had to pay for repairs out of pocket. Talk to inspectors and budget for big-ticket items upfront.
- Think big. Another mistake investing in single-family houses for a long time because I was familiar with that space. However, single-family properties are riskier and harder to scale than small multifamily properties. It was taking me 7 months to buy, fix, find a tenant, refinance my cash out, and reinvest cash into another house. It was the same effort to buy a small multifamily which has less risk and higher returns. Single-family homes are either 100% vacant or 100% occupied. Multifamily properties cash flow even when there is a vacancy, late rent payment, or repair work orders submitted. It’s also harder to scale single-family homes because you are buying and selling one unit at a time. We are only allotted a certain amount of time in this world. If you want to make big moves in real estate you need to learn how to acquire more units in a shorter amount of time, and that comes easier with multifamily investments.
- Get over the fear of networking and partnerships. I was scared to partner with someone because I grew up in a conservative Asian middle-class household where partnerships were seen as dangerous. However, I learned that partnerships could bring complementary skills, shared risks and rewards, and increased access to capital. For example, when I started investing, I was terrible at underwriting deals. If I had partnered with someone who was good at underwriting, I would have made better logical investment decisions. Additionally, if I had worked with a team when I first started, we could have combined our resources and networks to scale our real estate business. Build a team that has the same values as you and complements your weaknesses so you can scale your portfolio faster.
Remember, smart people learn from their mistakes, but smarter people learn from other’s mistakes. So, learn from mine and avoid the same pitfalls.
About the Author
Born in Los Angeles, California, Jason Malabute, an MBA, is a seasoned real estate investor, an active philanthropist, and a CPA (Certified Public Accountant). Jason Malabute started his real estate journey in 2018 and studied real estate for 1 whole year before finally investing in three rentals in the very first year of 2019, in Indianapolis. After successfully following the investment strategy called BRRRR (Buy, Rehab, Rent, Refinance, and Repeat) for multiple properties, Jason took the leap from single-family to multifamily investing. He focuses on the Indianapolis and Kansas City Markets. Jason is a co-organizer of the Pasadena/Glendale chapter of Multifamily Masters meetup group in Los Angeles. Jason is a regular blog contributor for Biggerpockets and American Apartment Owners Association.