I was at a coffee shop over the weekend and ran into a guy named Dave that I met there several months ago. When we met, he had just gotten interested in real estate investing and was eager to buy his first investment property.
We got to talking and he started telling me about a deal that he almost closed but luckily backed out right before closing.
He contracted a deal and commenced doing his due diligence. Everything looked good . . . until, he got a quote for the insurance on the property. Due to the location, flood insurance was required and the estimates that he got ranged between $3,500 and $6,000. Thus, turning an otherwise good positive cash flow deal into a negative drain.
But, he said that all in all, it was a great experience. All he lost was the $450 he spent during his due diligence.
I then told him that I had not been so lucky. Two properties come to mind that I purchased in the last few years where I did NOT make the decision to back out of the deal when I ran into exceedingly high insurance costs. I decided that I would go ahead and purchase the properties based on the equity position regardless of the negative cash flow.
I think that’s one of the biggest mistakes that I’ve made over the years . . . thinking more equity and net worth based when investing rather than cash flow based.
Lessons to Pull Away From These Experiences
1) Take Action
When I met Dave, real estate investing was just a thought, an idea. But, it wasn’t that way for long. He ventured out into the market, negotiated a deal, made an offer, and did his due diligence.
2) Don’t Become Emotionally Attached to a Property
Dave also walked away from the deal when he realized it wasn’t what he thought it was. Even though he had spent considerable time and energy putting together this deal, he compiled his numbers and made a business decision to let it go.
3) Keep a Positive Attitude
He learned from his experience and came out of it with a positive attitude. Those are two of the most important things successful people do . . . learn from every experience and maintain a good resourceful mind set.
4) The $450 Was an Opportunity Cost
That money wasn’t lost. It wan’t simply an expense. It was an investment. There may not have been a monetary return on that investment, but there was an educational return. You can’t get that kind of return by reading books.
5) Buy Based on Equity Position AND Cash Flow
This is even more important now than ever. If you have loads of cash reserves and cash flow already coming in, this may not apply to you, but for everybody else, it does.
You always hear “Make sure to buy right!” That doesn’t just apply to what percentage of value you’re buying at though. It also applies to the property’s cash flow.