In this episode, I’m to share with you one of my failures in real estate. This was more than a single deal; it was a separate business that I set up with a partner to do a very different kind of investing than what I had previously attempted. There were some successes, but ultimately it failed for a number of reasons. I’m going to tell you all about it!
I have tried a lot of different real estate investing models over the last six years. Not all of them have been successful. I do believe in trying different things and seeing what works. What I want to talk about today is a model that I tried and, although there were some levels of success, it really never worked out like my partner and I had intended.
The person that I partnered with on this particular business is a guy that I am still friends with. In fact, we still plan on working together in the future. It didn’t work out the last time around, but that definitely doesn’t mean that he or I did anything wrong.
About three years ago, I was talking to a gentleman in my local real estate investing market, and he was telling me about the influx of foreign investors coming to Detroit looking for turnkey rental properties. Now, I should say right off the bat that although I was born and raised in Michigan, I have no real knowledge of the city of Detroit in terms of the neighborhoods and areas that are decent to invest in or better to avoid. For this reason, I never really had a desire to invest in the city of Detroit. I know people who do it and are doing quite well; they’re doing it right and they’re doing ethically. But even they will tell you that investing in the city of Detroit is unlike investing anywhere else in Michigan. It’s almost a completely different business.
I think the main reason why people invest in Detroit is that they are lured in by the low cost of houses versus the relatively high rent that you can charge for those houses. This is precisely the reason why foreign investors are so interested in Detroit. The problem is that they have no idea where the good neighborhoods are and where they should be staying away from. This is also how people are able to prey on foreign investors who just have more money than good sense sometimes.
Like I said, three years ago I was talking to a gentleman in my local real estate investing market who knows that I flip houses and am a pretty good salesman. Not necessarily in the traditional sense of hard sales, but I am pretty good at talking with people and creating a rapport. As far as my eventual partner, I was aware of him and the fact that he was a good overall businessman in the area and had started and run a couple of different companies successfully. He also was born and raised in the city of Detroit and had a very strong knowledge of the area. He knew the good neighborhoods and the bad neighborhoods. He also had some pretty good connections to folks who renovated properties in Detroit. Like I said, working in Detroit is almost a completely different business. Not all contractors can be successful working in Detroit. For example, when you’re renovating a house, it’s a pretty good idea and fairly standard practice to hire someone to actually live and sleep in the home during the renovation. You do this to deter thieves from breaking into the house and stealing everything of value during the night. As you might imagine, it would be difficult to get someone who already has their own comfortable, safe home to do this for you. Therefore, it is also fairly standard to pay a homeless person to stay there and perform this duty. It’s sort of a win-win if you think about it. They get somewhere to live for a couple of months, and make money in the process. I know this sounds completely strange to anyone who has not invested in a city like Detroit, but it is very standard practice within the city.
So my partner and I decided to start a company. We were going to buy, renovate, and then rent houses in Detroit. We would then take the fully renovated and occupied house and sell that property as an investment vehicle to overseas and out-of-state investors. The houses would be valued based on their ROI. They would be all-cash purchases, so it made the transactions very easy and smooth. We were only going to buy in the better neighborhoods and really create value for our investors.
My partner and I decided on a division of labor as follows: I would be responsible for marketing our business and talking to potential investors. When they came into town I would be responsible for bringing them around to various properties to show them the types of investments that were available. My partner would work with his contacts in order to get the houses renovated and ready to sell. We would both be involved in marketing the home to renters and then eventually placing renters into the property.
The model made sense, and the division of labor seemed fair. We did in fact sell properties to overseas and out-of-state investors. Things were going well in the beginning. But the wheels began to fall off when we started rehabbing multiple properties at one time. We didn’t have contractors that were familiar with the area, and we ended up dealing with a lot of break-ins and squatters. The final straw for me was when we finished renovating a property and, before I could meet the contractor at the house to do a final walk-through, someone had broken into the house, changed all the locks, and began living there. I assumed that since they broke in and were trespassing on private property it would be very easy and quick to get them out. That was in fact not the case. Michigan law says that once they establish the property as their home, I have to evict them. The process ended up taking 90 days, at which time I had to go back in and re-renovate parts of the house that had been damaged. I was completely fed up and disillusioned with the business model. I decided that investing in Detroit properties was definitely not for me.
Like I said, my business partner and I are still good friends to this day. We have actually done other business together and plan to do more in the future. What I learned from all of that is that, even though I’m successful flipper in Michigan, that doesn’t necessarily translate into every single market, and especially not Detroit. It’s a completely different way of doing business that I am neither familiar with nor interested in anymore. I did learn when to recognize a bad situation and cut my losses.
Unfazed, I picked myself up and successfully went back to flipping houses in the suburbs. You have to realize that you are going to fail from time to time in this industry. Don’t let it scare you and don’t let it keep you from pushing forward. Success is around the corner for those of us who continue to take action!