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The Single Biggest Mistake I Made As An Investor
Joe: Hey, it’s Joe. I’ve got another question here. “Joe, what’s the single biggest mistake you made as a real estate investor?” Well, I guess I’ll put it out on the line. I’ve talked about some of this stuff before, about my personal history and what went through to learn this process. The failures that I had. Way back in 19 — I started investing back in 1986. And in that first few years, I built a business that was worth about $17M dollars and I built it based on borrowing money, on new construction, I was working in California, I was working up in the Hollywood Hills. I was building all kinds of beautiful houses. And everything was going really well.
Joe: And I thought that I’d tied into something. I thought that I was, you know, kind of the Golden Child, that I really, you know, I was really good at this. But, since I was borrowing money, and I was also counting on appreciation of properties, that was my big mistake. What happened in 1990, 1991, the S&L crises happened and the market crashed. And the values of the properties that I had, and I was really heavily leveraged out there, the value of the properties that I had dropped by 30%, 40% in California.
Joe: And the banks came to me where I was getting my construction loans and they said you’ve got to put this much money into these deals. Otherwise, we’re going to take these loans back. But, I didn’t have that money. I was too heavily leveraged into those properties, and I wasn’t going to get that money until those properties were finished and sold. But the bank wouldn’t wait for me, because they were in trouble. So, they took the properties back, I lost my entire business, I filed bankruptcy and I was out of the deal.
Joe: I moved back to Indianapolis and moved in with my parents. You know, I’m thirty-five years old, we’d just had our first baby, it was thirty days old when my wife flew over from California back to move in with my folks. And I was grateful to have folks who love me and would watch out for us. But it was the most humiliating thing that every happened to me in my life. And I don’t wish it on anybody.
Joe: I know a lot of my students have sent me stories about their failures as well. I think that every investor goes through failures in their life and especially when they think that they’re invincible — which is where I was at at the beginning. So I had to, I went back and I started to become a real estate agent. And I learned how to sell properties. And I became a top producing agent within a short, you know, within about a year. I was doing a lot of business. And I started making money again. I started to, you know, rebuild my credit. But I still didn’t have enough money to invest and I didn’t have any credit to invest and I couldn’t go get a loan again. And I didn’t want to get a loan anyway.
Joe: So, I figured out how to do this without cash. And the way that I did it was I went to, I would go out to a listing appointment as a real estate agent, and I would talk to some people that would have their property for sale. They wanted to sell it but they didn’t, had very little equity because the values hadn’t gone up because of the crash that had happened. And I wanted to sell their property and I wanted to make my commission it, but I, they couldn’t come to closing with money. And the only way I could have sold it for them is if they came to closing with cash when we finally sold it because they’d lose money.
Joe: So, what I thought was, well, why don’t we try this as a lease option? And so we did it as a lease option. We sold their property and it gave them three years, and got them their full price, and I took the lease option fee, and I made a profit. And then we also tried taking over the deed. What if you just deed me the property. I’ll make payments on it, I’ll put a tenant in there, I’ll protect your credit and I’ll make, you know, I’ll make a profit over the long term. And I started buying properties that way as well.
Joe: And then we started doing some land contract stuff. And then I started learning how these zero down structures worked and which one made me, which put me in the most control. Because I always wanted to be in control of the deals. I didn’t want a bank to be in control. I didn’t want somebody to come and take that property away from me like happened to me in California. I didn’t want to ever be in that situation again. And, I didn’t want to lose my money, and I couldn’t, you know, use my credit. Since, then, obviously my, well, not obviously, but my credit is improved dramatically. I’ve got perfect credit now.
Joe: But, I don’t use it very often. Because I don’t think that it’s a good way to invest. I think it’s too risky. Same with the cash. When I have cash, I usually buy properties for all cash rather than put down payments on them. So, if I’m going to buy a property with any type of financing, it’s going to be seller financing. That type of financing doesn’t screw up your credit and you can scale it up. You can do as many of them as you can find properties. So the goal here is to find a lot of properties so that you can do this again and again on a consistent basis.
Joe: So, my big admonition to everybody is, don’t take out a loan. And at the beginning, don’t even use your own cash. You know, they say you need money to make money, but I say if you can’t make money with no money, you probably can’t make money with money. So, learn how to do it with no money first. Learn how to do it the bootstrap method, where you pull yourself up by your bootstraps using your brain, using structures that I teach to go out there and put these deals together, flip them, make some money, or keep them and put them in your portfolio.
Joe: All right. Good luck to you.