Why Inexperienced Investors Think They Can Raise a Million Dollars in Real Estate

A few months ago while on vacation in Hawaii, my wife Suzi and I had just sat down for breakfast at one of our favorite restaurants. As we were perusing our menus, a man walked by our table talking on his cell phone and was seated at a table nearby. I saw him but thought nothing of it. Suzi, without even looking up from her menu, immediately recognized the man’s voice and looked up with wide eyes and whispered to me, “Oh my gosh, that’s Magic Johnson!”

I’m not good with faces and names, and I don’t follow sports except NASCAR, so my failure to recognize one of the most recognizable sports figures of all time sitting just feet from me comes as no surprise to me. It’s also not surprising that Suzi would recognize him without even looking; she can pick out anybody from anywhere, and she’s been a sports fan her whole life.

Would you recognize a good deal if it were right in front of you?

I get asked a lot about how to raise money to buy apartment buildings. The question usually goes something like this: “I found a great deal on an apartment building. I don’t have the money so how can I raise a million dollars to buy it?” I ask about their previous experience in multifamily. “I don’t have any experience, but I found this really great deal…”

Ugh.

Here is the problem. I don’t follow basketball, and thus I didn’t recognize the most famous basketball player of all time right in front of me. If you have no multifamily experience, chances are that you wouldn’t recognize a great deal if it was seven feet tall. When you have reached a certain experience level, you will know a good deal instinctively, just like my wife can recognize a famous person without even looking up from her menu.

Cut your teeth before your investors cut a check.

It is easy to think that you know everything there is to know and have learned everything there is to learn, but the truth is that every year you will be proven wrong when you realize how much better you are at what you do than you were the year before. This is why organic growth is the key to long-term success. As you get better at investing in real estate and after you’ve made your mistakes, you can grow into larger deals in a safer manner. Going too big too soon means you’ll make your mistakes on larger deals, where they will cause you (and perhaps your investors) greater injury. So my advice is to mess up small so you can grow big.

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