Top 4 Beginner Mistakes in Passive Real Estate Investing: What to Avoid | Ep 36

James: Welcome to the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing. And our mission is to equip people to invest wisely in both property and residency. So that together we can build our wealth while improving communities. I'm James and this is my wife, Jessi.

Jessi: I'm here and I feel like we've arrived. We've arrived. We've arrived at adulthood. Okay. Our daughter needs braces. Oh yeah. It's like, I just, I remember playing cashflow and like you get the kid and you're like, ah, like you pull the braces card and it's just like, ah.

James: Yeah, but in the game, the braces card is only 2, 000.

Jessi: That's true. In real life, it's a little bit more.

James: Three times more. So that's exciting. Yeah. Well, yeah.

Jessi: We're adults. Woo.

James: I just gotta, I gotta flip another property. That's alright. Yeah. That's all. We'll get there. We'll get there. Exactly. Oh man. Yeah. That's been, that's been interesting. Trying to figure out how to get her to also have some ownership in this process while fully knowing she can't pay for it.

It's gonna be interesting. It's all right. We're there. We're there. But today, what I want to talk about are some common mistakes that beginners make when passively investing in real estate and then give some practical steps that they can take so they don't

Jessi: make the mistake. Help them

James: through that beginner stage.

Yeah, exactly. And I specifically thought of four Big ones that people make. I don't know if you looked at my notes ahead of time. So I was going to ask, what do you think are some beginner mistakes?

Jessi: They don't do their research.

James: Ah, they just throw

Jessi: their money willy nilly at

James: people. So the way I would phrase that is there's a lack of due diligence.

They, they get sucked into it, right? They don't actually, like, like you just said, they don't research the property or the real estate market. And so the way to do that is, well, to download my guide of 196 questions. That's a good way to do it. But the idea is to look at all the different parts of the deal.

Look at the sponsor, look at the property itself, look at the market, look at the construction plan, look at the financing, look at the pro forma, look at the lending piece of it, look at the legal side, like actually look at it before being like, yes, I'm all in. Now you can be like, yeah, I'm interested. I would like to commit.

But. Before you fully do it, like, you want to look at all of that. So yeah, that's doing your due diligence piece as a passive investor. I think that's a huge mistake that investors should make. You're one for one, want to keep trying?

Jessi: There's some other

James: ones.

Jessi: I'm trying to remember what I read, but I think one of them was like investing emotionally?

James: Yeah, which is very similar. But I think it's also different. Right? Like so, it's saying it's exactly what it sounds like, right? Like you just, you fall in So one of my favorite quotes is Adolphe Theroux's quote that says, you don't fall in love with the property, fall in love with the deal. And his whole thing is like the, the house, the property doesn't matter.

The numbers, that's what matters. Fall in love with that. And that's something we talk a lot about with beginning investors just in general. Dude, don't fall in love with the property. And I think that happens with passive investors as well. It's a cool story. It's a cool narrative. I try to write really cool stories and narratives and pull out the interesting facets, the story behind the property that has nothing to do with the property, right?

It doesn't matter, but I know people like, you fall in love with those stories. So I tell them and they're genuinely interesting and cool and people want to know how did you get in and how to get here? Why are they selling? Right? That's always the question. But I think people make that mistake of the emotional investing.

Jessi: I think I have. interpreted it slightly different as I, as, as I was glancing through that list and how I read it or what resonated in my brain was more like the motivation behind like wanting to invest was this, like, I don't know, almost this, this, this rush of like, I need to, I need a source of income or like, I just, I just need to put my money somewhere, you know?

And it's like, I don't care where I put it. I just need to put it somewhere, you know? Which is just like, okay. It's not necessarily like the best way to proceed with passive investing. Okay.

James: That could have, yeah.

Jessi: I feel like that could be a mistake. Yes. It's similar. It's similar to the deal one and yeah.

James: Alright, number three, another mistake that beginner passive investors make is overestimating returns. I

Jessi: think this happens all the time and

James: I have fallen victim to this one, where I get told like hey, the plan is to do X, we're expecting to get a 15 percent IRR, cool, they go, but, they There's a possibility that this other thing might happen, in which case we'll goose it up to a 25 percent IRR.

And I go, woo, 25 percent IRR, that sounds great, I'm in! And then the project gets going, and they go, yeah, so it's actually gonna, like, that magical thing didn't happen, so we're back down to 15. I'm like, aw, man, okay. Or, the timeline, right? This could be anywhere between, again, I fell I fell with this one.

We're like, well, this could be a three year project, but there's a chance that someone's going to buy it super early. And this is only like a six month project. Oh dude. 25 percent IRR six month project. I'm in. And then, then that six month, oh yeah, that thing fell through. So can't do it. I'm like, ah, I feel like that is an

Jessi: optimist dilemma

James: because

Jessi: as a pessimist, I'm like, okay, it's probably going to be more than three years.

Or I'm like 25%, no way. So we're

James: going, what's the bare bones? I know. Which for me is like the way that you counteract that is to say like, look, when they tell you a best case scenario for the most part, ignore that.

Jessi: Yeah.

James: And if a worst case is still good. Awesome. Like that genuinely needs to be the way that you think about it and you got to remind yourself and I got to remind myself to do that as far as some sort of discipline.

The fourth really big one that I thought of is just a lack of diversification. I think is, is a newbie type of mistake. Is that

Jessi: an investor mistake or a sponsor mistake or? No,

James: it's a, it's a passive investor mistake. Like you say, I don't know, let's just say you've got $200,000 to invest and you go, I'm all in on all $200,000 on this one property.

Oh, on this particular, yeah. Cause you wanna like, cause you're all excited about it and it's got, like, really good returns and all that stuff. I think As much as I would, as a sponsor would love for you to give me all of your money. I don't think that's necessarily a wise thing to do for someone who's new, still trying to figure it out.

Instead, I think, which eventually be one of my steps is like, nah, spread that sucker out, like do the minimums and it's okay. Get to know what it's like to work with this sponsor and this sponsor and this sponsor, or for this type of deal or this type of deal, get a sense for what it is that you really like.

And so I think that's, yeah, you just don't diversify. That could be a problem. So. Those are the four. I mean, that's like, those are four really big ones. I'm sure that there's a lot more. And if I spent more time thinking of it, I could, but I really think that idea, like you're not doing your due diligence instead, you are basing it off of your emotions, how it feels.

And part of that is you're overestimating the returns, not looking at them like really, what is the worst case scenario? What are the risks here? And then finally, because of all that, you're not diversifying. You're just going all in on this one property, which could turn out great. Honestly. But I don't think you should.

So I think those are some big mistakes. Okay. So we've done that. Now the question is, what are some steps that you can take to overcome

those

issues above and beyond kind of like the little things that we just talked about? So the first one ginormous, I bet you can guess what it is. Do your due diligence.

Well, it's a broader umbrella than that.

Jessi: Educate yourself. Oh

James: yeah. Yeah. Well, I think that's like, as I said, broader envelope, right? So it's not just, educate yourself before a deal happens. Learn what is the due diligence to do? What are those types of things that I need to do? You want to understand, Like market trends just in general for this place where I'm investing, where is it?

And you don't have to be an expert in it, but you should have an idea is this market going up, going down, what's employment like, what's population like, like you should have some of that, like, understand.

Jessi: Just out of curiosity, do you, like when you're sending out your monthly newsletters or updates or do you include information like that?

James: It's nice to know that you read those thoroughly when I send them to you. I sometimes do, I don't do it every single month just because. Well, I

Jessi: do read them, but I haven't noticed like a trend of. Including that kind of stuff. But I'm like, that would make it super easy for a passive investor to be like, yeah, nice.

I can rely on this source of

James: information. I've, I will sometimes include some economic stuff. I generally, when I have a specific deal, we'll include some economic stuff in, in just within that particular area. Where is a good

Jessi: resource to learn about your market?

James: Good question. So from a, just like from city standpoints, I think data.

USA. io or dataUS. io, something like that. Or usdata. io? Oh shoot. Something like that. It is a very good website where you can type in any sort of city, any municipality, and it's got all the census data aggregated in a very cool looking way. I use it all the time on my stuff. I just take screenshots of their stuff because it's great.

Can

Jessi: you link it

James: somewhere? I could try. And then I think too, just for like general market data, oftentimes like real estate agents love to do that kind of stuff. Like I'm subscribed to a couple of newsletters that give me economic updates just in general, but those are often like national level, which isn't super helpful because it doesn't like real, it's all local.

Yeah.

So I think that's, that's a harder one to do. I, something, I don't know. I might be able to, that's a good suggestion to create more like, Hey, here's what's happening in these specific cities. That could be cool. But yeah, those are, I mean, that's where my head goes is like, yeah,

Jessi: it would be good to get that information.

I have no idea where I would look for that. Yeah,

James: that's fair. You know, Google, that's your that's your starting spot for stuff. That's what I would do. The next one is financial literacy. I'm not saying you need to become a financial whiz, but you should be able to look at a, a an income statement, look at a balance sheet and just understand, especially the income statement.

What's the money coming in? What's the money coming out? Yeah. Do those trends look similar? Like, again, you don't have to be an expert, but you should kind of understand how they work.

Jessi: Yeah.

James: And you should understand some of the key terms like return on investment and cash on cash. Yeah. IRR, internal rate of return, those kinds of things.

I do have emails that do that. Teach on all that stuff, because I think it's important. I think you need to have some tax knowledge as well, because that definitely plays into it. What about depreciation and how are you affected as a passive investor? What about K 1s versus 1099s? When you get those, I think those are good things.

And that's the kind of thing where it's like, maybe just talk to your tax guy or find someone and just say, Hey, I'm thinking about investing in this. What are some things I need to think about?

Jessi: Yeah, I

James: think you're good. I think you need to get good at risk assessment.

Jessi: Hmm.

James: And, and just understanding what are, different risks of investing in a property.

And, and so you look for a sponsor who talks about them. And I think that's the kind of thing where you just want, you want to get good at like thinking those things through. Cause honestly, as sponsors, I hate talking about risk stuff.

Jessi: God, this isn't fun.

James: It could happen, but you have to. It's good to know that they're thinking about it and planning

Jessi: for it and what they're

James: doing to mitigate it.

Yeah. Yeah, exactly. And I, and my stuff, I always include a risk section and I. Try to be fair. Yeah. About it. Yeah. I don't try to be doom and gloom. I try to be fair.

Jessi: My. I think I, if I were to create like a report, I think it would be like too much risk and then, okay, here's the upside.

James: Yeah. That'd be interesting to balance each other out.

I think another thing that's really important is you develop your own investment strategy in the sense that like, what are you going for? Are you going for cashflow? Are you going for appreciation? Sure. Yeah. What is it that you want to get out of this? Is it long term? Is it short term? All that stuff.

Sure. I think it's super important to agree on. And I think the last thing before I get to my other things is you just want to develop a patience and long term perspective. That's the thing about real estate. It's very rare that things are quick turn. It's more like wealth is created over a very long horizon.

Now you might do a bunch of deals within there, but it's a long term horizon. Especially if you're doing a syndication, that's a five to seven year deal. If you're doing a short term loan, yeah, okay, fine. That's three to nine months, but still like, Yeah. You want to have that long term perspective on things.

Mm hmm. I also think practical steps for beginners, do some sort of networking. Get to know some sponsors. Get on their email list. Start reading their stuff.

Mm hmm.

I've got an email list. You should get on it. Ha ha. And just start, start to take it in. I think that's important. If there's a local real estate investment group, go there.

Check it out.

Yeah. Ask questions. Oh man, it's

great. Most importantly, talk to the guy who's leading the group.

Mm hmm. That's the

guy who's connected and knows a lot.

Mm hmm.

Great way to do it. I used to be that guy. I'm no longer that guy. Someone else does it. And I'm okay with that. We've already talked about this, but I think it starts small,

right?

Start with smaller investments, build your confidence, build your experience with it before you really jump all in on stuff. And then I think the other thing to remember is you just want to monitor it. You want to stay up on it which you're a little bit at the, at the whims of the sponsor and how often they report with you, but like when they send an email, read it.

Jessi: Yeah.

James: If they call call. them back Or if you don't

Jessi: hear from them, like, reach out.

James: Right. Be proactive. Which is what I've had to do. It's quite annoying. But you gotta do it. Because I want to monitor it. I want to see where I'm at. Right. And, you shouldn't

Jessi: just set it and walk away.

James: Correct. Yes. Be

Jessi: involved.

James: Yeah. And again, it doesn't have to be a crazy amount.

Right. As a matter of fact, you can't be involved with it a lot. But, yeah. You just want to know what's going on and ask questions. Be interested. Yeah. Be proactive. I think it's the way that I would say it. So yeah, I don't think I'm missing anything on how you should get started. It really is this idea of like, educate yourself in a bunch of different ways.

Just get to know the entire investment process. Hang out with other people who are doing that kind of thing. Don't go all in. Start small. Build your experience just like anything else. And while you're doing it, like, just pay attention

to

what's happening, what's going. How do you feel when you get a bad update?

Oh man, I hated this for that time. You know, like. Because you may have an investment strategy walking in, and very quickly go, Ah, I wasn't into that.

Jessi: Oh, yeah, that's Like, for

James: example,

Jessi: That's good to point out. We

James: flipped a piece of land once in Indiana.

Jessi: Mm hmm. I remember that. Made a

James: lot of money off of it.

Like, a lot of money.

Jessi: Yeah.

James: And I felt like I didn't help anybody.

Jessi: Yeah.

James: All I did was I, I took advantage of asymmetric information in the market. Because I had enough cash to just buy this land. Straight up. And then I had the patience to list it and then resell it to someone else who was willing to build and get a mortgage on it.

And yeah, I mean like, I made like 35, 000 on it. Yay! But I didn't do anything. Yeah, you didn't improve it at

Jessi: all, or? Yeah,

James: I just, I just, it was some arbitrage was all it was. It's kind of the equivalent of you find something at a garage sale that someone's just getting rid of. You go, oh cool, like, I'll buy it, and then you don't even clean it, you just re list it.

Yep, you just re list it. Like, that's what I did. Like, that's exactly what I did. Yeah. Just on a much bigger scale. Yeah. And, I got done, I was like, eh, it was, it was cool, I mean, I like making money, but, also I don't feel like I helped anybody. And so I ultimately took all those funds and I put it into, you know, A long term rental, where I'm actually helping out tenants and helping improve the community.

So, you know. And so I think that's just important to know about yourself. And that's one of the benefits of starting small. Is you can kind of hone in on, what is my strategy? What do I like? What works for me? I think that's it. So, hopefully, that's super easy. If you're a beginner, it's not that hard if you're passively investing.

If you're active investing, That's a different game altogether. So I mean, yeah, that's but if you're doing it passively, I think it's pretty easy and I think there's a lot of resources out there to get you started so that you understand the basics of what's going on. So there you go. Nice. That's what I got.

I like it. Awesome. I'm glad. And if you liked this and enjoyed listening to it, we would really appreciate it if wherever it is that you listen to podcasts, you left a rating and if you would like to learn more about investing with us and check out some of those cool downloads, like the 196 questions, you can find us online at furlo.com and so with that, thank you so much for listening and have a great day.