A Huge Mistake Investors Make when Investing in Private Real Estate Investments
One of the biggest mistakes I have seen real estate investors make when investing in private real estate investments has very little to do with the property itself. The biggest mistake is investing with someone into a property without having the right documentation in place or sometimes any documentation at all. If you invest in a private real estate investment with someone without the proper paperwork (if you even have paperwork) your investment could be at risk
I have spoken to hundreds of real estate investors over the past few years. When talking with these investors, I am always surprised when someone tells me they invested fifty or one hundred thousand dollars or more into someone’s real estate investment but have never signed or even reviewed a single document (Learn the 5 things you need to review before investing in any private equity real estate investment). It happens all the time and it blows me away.
This huge mistake is usually discovered during our conversation when they start asking me questions about their investment and what they should do in their particular situation (usually when something has gone wrong).
The conversation normally goes something like this;
Joe Investor “I have this real estate investment with this guy I know and this happened…. What should I do?”
Me “Well, what does your Operating Agreement (OA) or Private Placement Memorandum (PPM) say should happen in that circumstance?”
Joe Investor after a long pause “We don’t have one” (with a look of terror on their face)
ME “What do you mean you don’t have one? What did he give you before you invested?”
Joe Investor “Well… I know Jimmy from way back and he said this….. I drove by and it looked like a great investment, but…”
Me “Without having anything written down, your investment could be at risk. How well do you know this guy? Do you think he’ll do the right thing?”
After asking that question, I often get that blank stare back. Then, it turns to fear as they realize there is a major problem and there are very few good options for recovering their investment.
The good news is, this potentially catastrophic investment mistake is very easy to avoid.
DO NOT be Joe Investor. DO NOT invest with someone or into a property without the property documentation (even if you know them extremely well). You will regret it if things go poorly. Did you notice the all caps and bold print? Documentation is extremely important and without it your investment could be lost (Learn the 5 things you need to review before investing in any private equity real estate investment).
Documentation should always be provided in any legitimate private real estate investment. It does not matter if it’s your best friend or a family member that is presenting you the opportunity, do not do it without the right documentation. If you make sure you only invest in properties and investments that have the proper paperwork you can avoid one of the biggest mistakes I see investors make all the time.