"In growing the platform, we’ve come up against many of the trials and tribulations that newcomers to real estate investing may be facing in scaling their own platforms."
Published by: Forbes
Five years ago, my company started out with the purchase of a small, 1,432-square-foot house. As of today, we have completed 30 apartment acquisitions and our portfolio is approaching 500 units in Southern California. In growing the platform, we’ve come up against many of the trials and tribulations that newcomers to real estate investing may be facing in scaling their own platforms. In reflecting on those growth experiences, certain topics tend to appear over and over again.
When building a real estate investment platform, below are five mistakes that are often made but if avoided, can free up an organization for scale, speed and efficiency:
1. Hiring Quickly Without Guidelines Or Standards
You have your first deal. You need to raise capital, and you need to hire your team. You need to find your first employee, and quickly. But a too-quick hire can have costly implications. Culture and performance need to work together to elevate you and your team. You can’t have an employee who is a great fit for your culture if there is not the appropriate level of performance. But beware of the high performer who is a poison to your culture — this situation can rip the seams of your team apart. More time will be spent on political jockeying, and less time will be spent working at a high level if employees don’t enjoy their co-worker experience. And if the office is an environment your people dread, it can deal a big blow to your aspirations. Pro tip: When hiring, go beyond the interview, and conduct an audition where you actually have the person perform the tasks required of the position.
2. Short-Term Thinking
Not only is real estate a team game, but it is also a long game. You aren't day trading in front of a computer; deals can take months to procure and years to exit. There needs to be a long-term mentality and approach to all aspects of the business. It may be easy to take a quick deal at a cost to a counter party or vendor, but the reality is the short-term view could have long-term impacts. When segmented by asset class and geography, real estate is a surprisingly small world, and long-term reputation and relationships can be key to a successful career. The people and skill sets required for any one deal are vast: legal, accounting, architectural, engineering, political, suppliers, construction. The list goes on, and the web of different disciplines and people is what make real estate so endlessly fascinating. Are you sensing a trend? Relationships are incredibly important.
3. Taking The Low-Cost Provider
This is an easy trap: You receive three bids from three contractors, and they all appear to be the same on the surface, so there is a tendency to accept the lowest-cost option. Often, there is a reason for the variation in pricing, and you get what you pay for. When building your real estate investment business, take the time to dig a layer deeper, go below the surface and uncover the nuances so you understand why each provider is priced the way it is. There is often a good reason, and paying a little more upfront tends to save capital later in the investment.
4. Short-Circuiting The Diligence Process
Some investors do this due to time constraints. Others do it because of capital constraints. And others do it because the seller doesn’t like an army of consultants going through their asset. A fatal blow could be dealt to an aspiring sponsor if their deal hemorrhages capital due to lack of thorough upfront diligence. Think of due diligence as a bank where time and resources are invested today to save time and money tomorrow. Bonus: it’s often in due diligence where you learn of an opportunity that at first look didn’t reveal itself — and it can pay off handsomely at a later date.
5. Lacking Systems And Processes That Help Mitigate Risk
These processes might not be fully developed early in an investment career, but a focus of the early stage real estate entrepreneur should be to get them in place as quickly as possible. An example is a good due diligence checklist or a thorough punch list after work is completed by a contractor. These systems and processes can be obtained through experience, education and reaching out to peers or mentors in the industry who have systems and checklists in place. Constructing appropriate guardrails is not only vital to mitigating risk, but it also frees an organization up and allows it to gain speed, efficiency and scale.
As you embark on your real estate investment journey, be sure to prepare yourself to avoid these common setbacks.