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Investor Mistakes: Too Big, Too soon

Disclaimer: Nothing is this article is meant to constitute financial advice of any kind, and is the opinion of the author only. Seek professional advice before making any financial decision.

Property Investment isn’t always going to be ‘plain sailing’. It is hard work and it takes time particularly with a long term buy and hold strategy. And therein lay the problem. To me it was all about instant gratification. Patience was not one of my strong points and I felt there has got to be a faster way to financial freedom.

Let me share with you the “deal of the century”. The year was 2003 and I was only two years into my property investment journey. Because I had bought a few properties, I was starting to think I was 10 foot tall and bulletproof. The timing was perfect for an agent I knew well to say to me;

“Arn, I’ve got the deal of the century for you”.

It was in Papatoetoe, Auckland and the section size was 1012m2. There were 3 x 3-bedroom units already existing on the site, on one title. It was close to the Middlemore hospital and was in a good Papatoetoe location.

“The section’s huge. Just renovate the existing units and then subdivide and build on the back of the site. You’ll make a killing on this one” the agent said. I got so excited by what I was hearing that I was starting to lose all rational thought.

The prudent thing to do before declaring unconditional on this deal would be to seek the advice of your mentor, right? And so, I did. I called my mentor at the time, a very experienced agent and investor, and asked him what he thought of the deal. He knew it well and said to run a mile from it. “You’ll lose money on this one”. I thanked him for his advice and shortly thereafter rang my solicitor and asked him to declare the agreement unconditional.

All I saw was the huge profit I KNEW this deal would make and I clearly thought my mentor had got it all wrong. What did I base that on? Nothing. I had no experience doing a subdivision let alone a four-lot subdivision. Furthermore, I’d never built a brand-new home.

I was completely oblivious to the fact that the property had been on the market for a year.

That alone should have rung some alarm bells that something wasn’t quite right, but it didn’t even register to me. I just felt that the rest of the market had overlooked this amazing deal. I just thought I’d won Lotto.

So now I’ve bought this property with now idea of where to start and what to do. It was an enormous renovation and I had no experience in something like this. Who do I call to start the development process? How much will the renovation cost? Who will do this renovation? I had a lot of questions but no answers.

What went wrong?

Well in a nutshell, EVERYTHING. Anything and everything that could have gone wrong did go wrong.

· I ended up doing the renovation on the units three times and used three different builders on the job. The first builder hardly showed up, the second was a drug addict and asked me to pay in advance to fuel his habit and that of his crew and finally the third builder ended up seeing the job through to completion.

· I had issues of theft, and I didn’t do a feasibility report prior to purchase, which would have informed me that I would need to go through three sets of properties and get the consents of all the owners of those properties to connect to the stormwater.

· All of this not only added to the cost but also to my stress levels. What should have resulted in profit of over $100K ended up costing me about $100K. I was at my lowest point. I was an emotional wreck and was experiencing some pretty dark times. All of this I had put on myself.

However, upon reflection, this was the best thing that ever happened to me. There is no doubt in my mind that if I had not gone through this experience, a disaster even bigger was probably just around the corner. I was simply trying to go too big, too soon.

This experience taught me so many things;

· It taught me to be a lot more patient and to be thorough with Due Diligence prior to purchasing.

· It taught me that property investment is not a race, and it is okay to slow down. It also highlighted that you should engage the appropriate professionals so that you can make an informed and rational decision, not one based on emotion.

· I learnt to formulate a strategy in line with my own risk tolerance. Property Development and large-scale renovation is not for everyone. If this type of property does not fit your strategy, move on to something that will, or ensure you educate yourself so that you don’t make the type of mistakes I made. You will know what is right and comfortable for YOU.

· It’s important to know when to cut your losses. Throughout this development, what should have taken 12 – 15 months ended up taking over two years. I knew I would be losing money on the deal once I was close to finishing. Early on in the marketing process I was getting offers which would have resulted in a loss of around $50K, but to accept that was really hard at the time. The longer the property remined in what was then a falling market, the loss continued to increase. It took me a further six months to accept that the market is no longer prepared to pay what I want but rather it will pay what it believes it is worth. That lesson (not knowing when to cut your losses) alone cost me about $50K more as the total loss was over $100K once all the properties had been sold.

· Property Investment will not always be a bed of roses. There will be ups and downs. What I found through this process is that what doesn’t break you will only make you stronger.

There will be times where you may think; “why am I doing this?” and you may want to give up. My advice to you when you do feel this is to go back to the first day you began this journey and remember WHY you chose to invest in property.

For most of us it will be to achieve financial freedom, but deep down its probably more about what financial freedom can provide us. For some it might be to be able to spend more time with your family or loved ones. Ultimately, it’s likely to be able to give you more control of your time and to give you the freedom to be able to do whatever it is you want whenever you want.

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