We grow the most through the pain because when we figure out that we’ve fallen on our face, we never want to do that again. At the height of the market, before everything crashed in 2006, Brad Weimert bought a couple of multifamily units in Indianapolis, Indiana. Everything looked like it was going to go up forever, and the banks were happy to loan him the money for what he thought was a great deal.
It took Brad a little while to figure out that just purchasing real estate wasn’t building a passive income. The quad barely cash flowed even when it was full, and he certainly hadn’t taken into account the cost of repairs or capital improvements. If a property is only bringing in money when it’s full, that’s a massive red flag for any functional investor. But as a newer investor, Brad didn’t have a mentor to point that out.
Is it reasonable to think that the value of the property will increase? Sure. But it won’t increase forever, and if it starts out overvalued, then it won’t ever increase enough to make up for the overvaluation. Now if a property is cash flowing, then what the property is worth is irrelevant. Still, Brad held on hoping things would turn around for the property.
For 8 years, Brad paid tenants to live in his units. He worried that if he stopped paying, then his tenants would get evicted. He thought that he should keep his word to the bank. And he lost tens of thousands of dollars a year.
Avoiding an expensive mistake like this is in your best interest. Don’t take advice from some 23-year-old investor, no matter how confident and smart he sounds. Older investors can help you see the market cycle and avoid the trap of properties that suck the profits out of your business.
Watch and Learn:
Listen and learn:
- In the lending world, the appraisal can send your loan in the wrong direction.
- Does morality figure into paying off the banks on an overvalued property?
- Taking advice from a seasoned mentor can help you see a property through the lens of the market cycle.
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