25 mistakes investors make [ebook by Jake & Gino]

1. PRESENTS 25 MISTAKES INVESTORS MAKE NO MISTAKES

2. 25 MISTAKES INVESTORS MAKE We have compiled a list of the top 25 mistakes beginning investors make. This is a comprehensive list created from our first-hand experience as beginning investors. Our goal is to help you become a successful investor by avoiding these mistakes. Armed with this extremely valuable information, you will be able to save an incredible amount of time, money, stress, and frustration. Our success didn't happen overnight. Over the years, we've learned how to be successful investors by educating ourselves: creating a solid plan, learning the market, accepting our failures, listening to experts, taking calculated risks, and learning the business inside and out. NO MISTAKES NO PLAN 1 If you have no plan, plan to fail. There are many different strategies of investing in real estate: single family homes, multi-family properties, commercial, retail, land development, lease to own, fix and flip, etc. When we began investing in real estate, we knew we wanted to target residential apartments. One of the biggest mistakes investors commit is investing in several different types of real estate instead of specializing in a single type to start. The problem with choosing multiple strategies is it takes time to learn everything about each particular strategy. When you try to learn too much all at once, you wind up knowing a little about a lot instead of a lot about any one specific strategy. It's a mistake you want to avoid. As a beginning investor, you should choose one type of investment strategy and learn everything you can about that particular strategy. Should you make the mistake of investing in multiple strategies to start, i.e. pursuing commercial properties, single family homes and flipping, you'll be so overwhelmed, you'll lose sleep, money, and even worse, the desire to continue as a real estate investor. You don't want to chase deals. Focus on one area. That's how you become an expert.

3. Real estate is a “local market.” What does that mean? The same opportunities available in New York are not available in California. Every real estate market is different. Our market—Knoxville, Tennessee—attracts investors from all over the world, who are interested in taking advantage of high cap rates as opposed to cap rates in most of California, which are much lower than in Knoxville. UNFAMILIAR LOCAL MARKET 2 When investors realize the high cap rates available in Knoxville, they get excited; so excited that they pay more than the market value for properties. Why? Simply because the properties in Knoxville are less expensive than in many of the other local real estate markets. After they pay more for a property than what it's worth, they soon realize they made a bad investment decision - their asset is not performing the way they speculated it would. (Obviously, cap rates vary according to the price paid for the asset - the real estate investment - versus the income received). Not knowing the local market may very well be one of the most costly mistakes a beginning investor makes. It is crucial to have a thorough understanding of your local market. These are only a few of the elements you MUST know: Market Value Current Rental Rates Tenant Base Job Growth Overall Outlook of Current Economic Conditions Cap Rates Once you know everything there is to know about a local real estate market, you will be able to evaluate investment opportunities and choose the best one(s). FAILING QUITTING AFTER 3 "It's fine to celebrate success but it is more important to heed the lessons of failure."—Bill Gates. My first venture into a real estate partnership ended in disaster. My brother and I invested a large sum of money in mobile home parks in Florida. In the beginning, everything was great. Then, we didn't receive enough income and missed a payment. Then, we missed another payment. I blamed myself for losing my money. It was my decision and my investment. I did not perform proper due diligence. I didn’t even know what that meant at the time, due diligence, but I quickly learned. And it was a very expensive mistake. However, instead of quitting, I enrolled in a real estate coaching program and began my formal education. Even after educating myself, I made mistakes, but I plowed ahead. Fortunately, I never

4. quit and found my new partner, Jake. If I had quit, I would never have continued on the journey of wealth building. Remember, we all make mistakes in life. When I read about other people failing, Donald Trump, Michael Jordan, Henry Ford, Bill Gates, I realized they all had one thing in common: failure. The other thing they had in common was accepting failure and moving on. It isn’t the mistakes that define a person, but how they react to their mistakes. Plan on failing because you are going to fail. In fact, failing is part of success. When you fail, pick yourself up, face your fears, get out of your comfort zone, and get back in the game! FALLING 4 IN LOVE Falling in love with the property and not the performance. When I was a child growing up, my dad would take me to construction sites where we would sneak into houses that were almost complete. I dreamed of living in one of those beautiful homes, and thanks to my dad, my dream became a reality. My love of real estate is why I became an investor. As a beginning investor, my outlook was simple—if the property looked nice and was in a desirable neighborhood, I wanted it. I had no idea what a cap rate was, but I did know the construction materials used to build the home. I quickly learned that only the numbers tell the story, that investors should purchase only investment property based on “actual” numbers and not some broker’s fantasy pro-forma calculations. If you make the mistake of falling in love with the property and not the performance, your investing career may be over before it even starts. Do not fall in love with a property, perform your due diligence to make sure it meets your investment strategy. LISTENING 5 PEOPLE TO WRONG Everyone from family members to colleagues, and friends is going to give you advice. Unless these people have experience and proven success as a real estate investor, they are not qualified to give you advice. You can listen to them, but don't be swayed by their opinions.

5. You've done your due diligence. You know what you're doing. You've developed your plan. Some people may tell you what you're planning to do is too risky, or you should do this or that, but you know better. Remember to always trust yourself. You've run the numbers. What’s the common denominator here? Falling in love with the property and not the performance. When I was a child growing up, my dad would take me to construction sites where we would sneak into houses that were almost complete. I dreamed of living in one of those beautiful homes, and thanks to my dad, my dream became a reality. IN WRONG INVESTMENT 6 AREAS Economic conditions—employment rates and potential job growth—was the reason the properties had no appreciation potential and an unstable tenant base. The main employer in the area was Kodak, but the company packed up most of its operations and left the city with empty buildings. There is little hope for markets that have weak employment opportunities, so seek out cities that currently have a minimum 2% job growth rate for at least two consecutive years. Fortunately, my investment is producing a positive cash flow, however, its value has not appreciated in seven years. Lesson learned - investing in an economy that does not have a healthy employment rate and appreciation potential is not a good investment. NOT INSPECTING EVERY UNIT BEFORE CLOSING. When investing in multi-family properties, every unit must be inspected. We have our property inspector walk through and assess each unit in the complex. In our contracts, we stipulate that we are purchasing rent-ready units, and we make sure they are all in good condition to rent or we will go to the seller and ask for a repair allowance. If you do not inspect every unit, the seller may only show you the units that are in good condition. This act of due diligence will save you thousands of dollars. EVERY UNIT NOT INSPECTING NOT SECURING THREE BIDS FOR EVERY JOB. If your investment property needs repairs, get bids from three vendors. Compare the prices, check the reputation of the companies, and ask for references. Contact the companies' references and ask them about their experience. If you want to choose a vendor whose bid is higher than the other two bids, contact that vendor, let them know you have two other bids that are lower, and ask them if they would be willing to reduce their bid. 8 EVERY JOB 3 BIDS FOR

6. SYSTEM NO BUSINESS NO SYSTEMS IN PLACE TO RUN YOUR BUSINESS. To run efficiently every business needs systems in place—rental policies, billing, maintenance, management and financial reporting, to name just a few. If any of these systems are weak or non-existent, then the investment will not run at optimal efficiency. 9 I received my education in real estate through coaching and by reading countless books. Unfortunately most books focus on acquiring property. I asked my coach for help in building these systems and on running the business. I also sought out help from mentors for advice on implementing these systems. We now have efficient systems in place to run our business. Make sure you have a complete system in place so that your investment runs efficiently. FAILING TO SCREEN POTENTIAL TENANTS. When I bought my first rental property, I didn't think it was necessary to perform background checks on potential tenants. I thought it was a waste of time and I did not want to be bothered with having a tenant complete an application, ordering a credit report, checking past rental history, and reviewing the information. I thought my gut TENANTS SCREEN FAILING TO 10 feelings were a better indicator for choosing a tenant. After I rented a property to a nightmare tenant, I quickly learned my lesson. Screen every tenant or hire someone to do it for you. Have the tenant complete an application, verify their employment and past rental history. You can obtain a background check from online services for a small fee. Charge potential tenants an application fee to cover the cost of screening. You will never eliminate the possibility of renting to a nightmare tenant, but your odds will be greatly reduced when you take the time to screen tenants. FLOW CASH NEGATIVE BUYING PROPERTY WITH A NEGATIVE CASH FLOW. Purchasing an apartment building is equivalent to purchasing a business. Would anyone buy a business that loses money? I know I wouldn’t. Properties that produce negative cash flow are called alligators (they will eat you alive). One of the main reasons to purchase 11 investment property is to create passive income, not passive losses. Do NOT buy an investment property with the expectation of capital gains in the future. You buy for cash flow and capital gains are the icing on the cake.

7. Investors have a short memory. One of the main culprits of the real estate bubble that occurred in 2004-2008 was that investors were purchasing real estate with a "greater fools" theory—there is a fool out there that will pay more for this property than I did. Cash flow was a thing of the past. Sooner or later, the fools stopped showing up and the investor was left holding the bag. If you buy a property with positive cash flow, it will allow you to ride out a storm. RUNNING OUT OF MONEY BEFORE FINISHING REPOSITION. When an investor undertakes repositioning a property—cleaning things up, rehabbing apartments, and running things properly—one assumes more risk, but the rewards are greater. Repositioning a first or second property is not recommended. An investor needs to have a keen OF MONEY RUNNING OUT 12 $ understanding of expenses, holding costs, remodeling costs, and needs to be able to run the property while these renovations are being undertaken. If you decide to reposition a property, it is imperative to budget enough capital to finish the renovations. It is always helpful to have a great relationship with a local bank that may be able to lend the necessary funds to complete the project. NOT FOLLOWING POLICIES, SUCH AS LATE FEES. Policies are created to be followed and enforced. It is unwise to be selective when faced with imposing late fees on a tenant if that tenant can't pay the rent. Tenants talk amongst each other, and you do not want to get a reputation for being soft or showing favoritism. If you do not like a certain policy, then it is at your POLICIES NOT FOLLOWING 13 discretion to alter or remove it. Just make sure that all tenants are treated fairly and equally. Keep in mind, it's more cost effective to keep a good, paying tenant in your property versus the expense of a possible eviction, make-ready and re-leasing the property. NOT MAXIMIZING POTENTIAL INCOME OF PROPERTY. This is a huge and often overlooked mistake that new investors commit. We search for properties that do not charge application fees, pet fees, late fees and utility fees. One overlooked area of potential income is storage space. Tenants bring with them an inordinate amount of stuff, and INCOME POTENTIAL NOT MAXIMIZING 14 $ are always looking for places to store their stuff. What better place than an empty garage or basement to create a storage unit? Some investors even build storage units on their property to generate additional income, offering a storage facility to the tenants. Another area to explore for extra revenue is a laundry facility. Most tenants love this amenity, and if your competition offers laundry, you had better be prepared to offer it. The complex that offers amenities, such as laundry and storage, will also be able to charge higher rents.

8. KEEPING DISORGANIZED BOOKS AND NOT BEING ABLE TO TRACK THE PERFORMANCE OF AN ASSET. Investors lose thousands of dollars when they do not keep proper records. Real estate investments provide numerous tax advantages. Being able to differentiate between a repair and a capital expenditure will allow you to save money on your taxes. Hire a competent BOOKS DISORGANIZED 15 bookkeeper and accountant who both have experience in real estate. We generate monthly reports that include profit and loss statements, rent roll, and operating expenses. These reports allow you to see trends in the property, such as tenants who are paying rent late, increases or decreases in operating expenses, etc. It is vital to create these reports if you have partners invested in the property. They should know how the property is performing, and you can answer all questions if your books are in order. INSURANCE NOT ENOUGH 16 NOT PURCHASING ENOUGH INSURANCE ON THE PROPERTY. There was a fire in my restaurant a few years back and it was closed for business for 10 weeks. I was fortunate to have the proper insurance in place that allowed me to complete all renovations of the damage caused by the fire, to pay my employees because the policy included business interruption INSURANCE CLAIM insurance, pay all the bills while I was closed, and even had some cash left over. Find competent insurance agents who deal specifically in your niche of real estate and have them give you ideas on additional forms of insurance, such as umbrella and business interruption protection. Be sure to compare prices from different insurance companies, based on the amount of coverage offered and the type of insurance. NOT HOLDING REAL ESTATE IN A PROPER ENTITY. There are several entities in which you can hold real estate to limit your liability. Our preferred entity is a limited liability company, or LLC. Consult with your accountant as to which entity is appropriate for your situation. This is one area where you do not want to be cheap. We place every property into a different LLC so that any legal action affects only one property; the ENTITY WRONG 17 RIVER LLC. liability is limited to the assets in that LLC/property. The liability does not extend to our other holdings. This is crucial for us because we do not want to put our entire portfolio in jeopardy. For instance, if a tenant sues us for slipping and falling at our River Bend Apartments, that property is owned by our River Bend Apartments LLC, therefore, the other properties we own will not be affected.

9. You can see the potential problems if all the properties are held under one LLC. What is even worse than using only one LLC for all of your holdings is when an investor holds a property without an entity. Some investors decide to hold the property in their personal name because they do not want the expense of forming an LLC or paying to file a corporate tax return each year. Your investing career and your finances can be derailed forever if you do not structure your investments properly. Once again, please consult with your tax professional on this crucial issue. Another benefit to holding your properties in different entities is that it will be easier to maintain proper records. Once you begin to grow your portfolio, rent collections will increase and you want to be certain that each property is recording the proper income and expenses. My partner uses creative names for each entity, but you can call each entity the address of the property to avoid confusion once you have accumulated several properties. NOT HOLDING MANAGEMENT COMPANY ACCOUNTABLE. When hiring a management company, the only way to hold them accountable is to receive weekly reports on rent collection and expenses. If their policy is not to issue these reports, then find another company. How else will you be able to track if rent is being collected on time, or if expenses took an unexpected jump this month? You should be able to HOLDING MGMT CO. 18 ACCOUNTABLE MGMT. COMPANY receive reports every Monday. Some companies use software that records data in real time. All you do is log in and check the status of your investment. When you sign a contract with a management company, it is advisable to remove any clauses that require a certain time period to elapse before the contract can be terminated. You should be able to end the relationship within 30 days if you are unhappy, and you should be able to access the funds in the bank account at any time. Some management companies are the only cosigners on the bank account. You want to have your name on the bank account in case you run into a problem with the company. I have heard of investors being denied access to their own funds because their name was not on the account. The other clause I would remove is the one that states if you decide to sell the property, the company will become the listing agent. If you like the management company, then you should have the discretion to choose them to list your property. But if they have under-performed for you, why would you reward them with the listing?

10. PAYING CONTRACTORS IN FULL BEFORE WORK IS COMPLETED. You need to develop a strong relationship with all of your vendors. They are an integral part of your team and you want them to service your property as quickly as possible. We always pay our contractors as soon as the job is done, so that they will be more responsive to our needs. If they have to choose between IS DONE WORK PAY BEFORE 19 $ $ $ $ $ $ $ $ $ an employer who pays on time and one who pays late, who do you think they will choose? The only caveat to this is to pay in full only when they have completed the work. Good luck trying to get a plumber or electrician back to the job site if they have collected the entire sum of money and the work is not complete. In business, this is called “Having skin in the game.” As long as they have some money to collect, it is in their interest to finish the job and get paid. To be fair, it is difficult to run a successful contracting business. Their emphasis is on locating new work while collecting money from jobs that were completed weeks ago. If you make their job easier, they will be more inclined to work with you and may even give you better pricing on work performed. SPENDING TOO MUCH TIME AND MONEY REHABBING PROPERTY. I made this mistake rehabbing my first few properties. In the rental business, concentrate your remodeling efforts on those that will bring you the greatest return. For example, replacing counter tops and fixtures in the kitchen is an excellent return on investment because renters will see the perceived value of having a nice new kitchen. & MONEY TIME TOO MUCH $ 20 This is where I got into trouble. In one of my less expensive properties, I installed expensive counter tops and fixtures, when installing less expensive counter tops and fixtures would have been a wiser decision. The type of tenant who would rent this property did not expect granite counter tops. I could have saved a ton of money if I had used the less expensive materials, and the tenants would have been satisfied with the property. As your experience grows, you will be able to determine what needs to be fixed and how much money should be allocated to each rehab. There are certain items, such as roofs and driveways that must be maintained and yet add no value to the asset, but try renting an apartment with a leaky roof. At Wheelbarrow Profits, we have developed a successful “fix-up” strategy to increase value and keep our costs down.

11. STAYING ON THE SIDELINES. The most common reason people do not start their investment career is FEAR. When I began investing outside my market, I was afraid that I would not be able to control my investment and I would fail. I ended up seeking a partner and pursued investing in the Knoxville, Tennessee market. STAYING ON SIDELINES 21 If I had succumbed to my fear, I would have never partnered with Jake and invested outside my local market. I went outside my comfort zone. I pushed the fear away. I educated myself, developed goals and a plan—specific steps to achieve my goals. Allowing my fear to subside and having the confidence to step outside my comfort zone, led to success with a purchase of a 25-unit property. I advise all new investors to invest in whatever properties they feel comfortable managing. I preferred to start small so that when I made my first mistake, it would not derail my dreams of continuing to invest in real estate. You can recuperate from a small mistake, but a big mistake might derail or end your investing career. HAVING NO POLICY FOR TENANT RETENTION. Once you fill your vacancies, your focus should be on tenant retention. One of the highest expenses an owner incurs is tenant turnover. Once a tenant vacates the property, the apartment has to be turned over, or made ready. It might need new paint, flooring, etc. In addition to make-ready costs, you, as the investor, have to spend money to get a new tenant and that means you'll be NO TENANT RETENTION TENANT RETENTION 22 losing revenue every day the property is vacant. We focus our efforts on retaining the tenants who are currently living at our properties. PART OF OUR STRATEGY INCLUDES: 1. Offering excellent customer service. When a tenant has a maintenance issue, we dispatch our techs to handle the situation quickly. Keep your tenants happy! Maintaining the appearance of the property. Offering amenities such as renters' insurance and laundry facilities. Sending tenant surveys for feedback on our performance. A happy tenant is one who stays and one who recommends his or her friends to move in the complex. Trying to build a community at your property. A tenant will more than likely extend his lease if he feels that he is living at a nice, safe community. 2. 3. 4. 5. When we sent out surveys to our tenants, we were pleasantly surprised at the comments we received. One tenant told us that whenever he arrived at his apartment, he felt like he was “home.” This is our mission at JakeAndGino.com, to offer modern, safe, affordable, housing.

12. Other comments we received from our surveys were complaints that people were not picking up their dogs' feces. We dealt with the situation immediately. We constructed dog stations for the tenants and now, we are considering building a small dog park on the property. Surveys allow you know what you're doing right and how you can make important improvements to keep your tenants happy. ALLOWING PROPERTY TO FALL INTO DISREPAIR, NOT PERFORMING DEFERRED MAINTENANCE. Some landlords allow their property to accumulate deferred maintenance, and are unwilling to reinvest money to maintain the asset. These types of landlords are generally referred to as slumlords. Their main objective is to milk the property and not spend a dime on maintenance or improvements that should be made. DISREPAIR PROPERTY FALLEN INTO 23 We look for these types of properties to purchase because it doesn’t take much effort to add value to the asset. There are countless reasons to maintain the property, but I think the two most important reasons are: retain quality tenants, and maintain the value of the asset. Sometimes maintenance issues can be inexpensive, such as replacing shingles on a roof that leaks, rather than replacing the entire roof. Set up a cap expense account and fund it every month to pay for your capital expenditures, such as paving parking lots and replacing roofs. For example, we deposit $250 per apartment per year in an account to help pay for these big-ticket items. If we have a 20-unit building, we deposit $5,000 per year or just over $400 per month. Doing this will help an investor pay for any unexpected expenses. Once we had to replace an entire septic system, and were fortunate that we had the money in the bank. HAVING A SUBPAR TEAM. Any great businessperson will tell you that the key to their success was the ability to assemble a superb team and then follow the recommendations of the team. It is impossible for an entrepreneur to be an expert in every facet of his business. He has to rely on his team for expert advice and be willing to act upon that advice. At JakeandGino.com, we have assembled a team of key HAVING A SUBPAR TEAM 24 members and the value they bring to our business is instrumental in our success. Do not let your ego get in the way of assembling a good team.

13. NEVER STOP LEARNING. Some investors believe they know everything they need to know about investing, so they stop learning. Laws change, regulations are revised, and strategies change. Don't ever get complacent—thinking that you know everything you need to know about investing in real estate. You can never read or learn too much. NEVER STOP LEARNING 25 My passion for real estate makes it easy for me to read books, attend seminars, and learn everything I possibly can about investing in real estate. I continue to grow as a person and everything I learn makes me a better investor. After I master one area of real estate investing, I move on to learning everything I can about another area of investments. Don't ever stop learning. Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate. ~ Andrew Carnegie Join us at JakeAndGino.com and we'll help you on your journey to becoming a successful real estate investor.