Here are some bits of Investor wisdom which I have seen to be true from my own experience.
1. Buy more, sell less
When I look back at deals didn't do, and properties I have sold, this is what hits me. I could have sold less and still bought more. Particularly in these times of very tight credit it can seem necessary to sell one deal to gather cash for the next. Sometimes it's a good option, but many times there are other ways to achieve the same goal without selling.
A few years ago I bought a warehouse by refinancing an office building and cross collateralizing with a small retail place. Neither one was sufficient on it's own but together I got the loan for the warehouse. Last year I got the bank to remove the lien on building #2 so now it's again free to use for another deal.
This also holds true for your home. When you want to buy a new home you should try to keep the current home as a rental. Not all homes make good rentals, but it's always an option I want my Clients to consider.
2. Live where you want to live, invest where the numbers make sense.
Investing in properties far from home goes against everything I always believed. It's really common sense that you can't properly control your investments if you are far away.
A few years ago I had 3 properties in my neighborhood and wanted more. It struck me that, if an earthquake struck me, I would be totally wiped out in 11 seconds. I expanded my search to areas within a 1 hour drive. As I went further and further I realized that I was already too far to fix toilets and drive by to make sure the car isn't parked on the lawn.
At this same time I had the epiphany that changed me from being an owner of investment real estate into being a real estate Investor. I did a simple calculation of the return on investment (ROI) compared to the return on equity (ROE). I realized to my horror that my true return on equity was only about 2% or 3%. I could do better, with less risk to just dump it in the bank. This is what pushed me to look out of state for better returns. As soon as I started treating my investments as a business, I started getting the benefits of time leverage and economies of scale that businesses enjoy.
3. Buy a beautiful spreadsheet, not necessarily a beautiful property
I love real estate, it's one of the reasons that I am a Realtor. Part of the process of becoming an Investor is to separate the love of real estate from the love of the deal. I have found many properties that I really wanted to buy, and looked to be really good deals. Unfortunately most do not stand up to careful, dispassionate, analysis with an APOD or similar spreadsheet.
Even the most beautiful property will not make you smile if it's eating your cash flow every month. If you want a vacation home, or a horse property you should buy them when you have profits from your true investments. Don't let some time-share salesman convince you that it's an investment.
4. It's better to loose 5 good deals than to get one bad deal.
For those of us who love real estate it's hard to pass up what seems to be a good deal. Unfortunately there is often not enough time to get information or to verify information you already have. In fact some real estate agents and sellers use time pressure to make sure a buyer doesn't find out everything they should.
One really bad deal can wipe out the profits from 4 good ones, and might even knock you out of the game for good. It's a hard balance because in the end you need to do deals (see #5 below) to make money and many potential Investors get stuck in the analysis stage and never actually buy anything.
5. Take action! Be accountable.
You must take action to make money, it's that simple. That action might be to buy, sell, hold, or something else. The point is that the world is always changing, opportunities arise where none were before. An effective Investor is constantly looking for hidden value, and protecting what they already have.
Accountability is not what you think it is. Yes, accounting is important, you need to know your numbers to succeed. Accountability is about something else.
If you have a goal or target it's critical that you have an accountability partner who helps you to stay on track. The goal is yours and it can be simple or grand. The only requirement is that it's a specific, measurable target. "I want to buy more properties" is useless, but "I want to own 5 more properties before this date 2 years from now" is something which can be broken down, subdivided into tasks, and tracked against a timeline. Your accountability partner never forces you to do something you do not want to do. They help you achieve what you have decided you want. It's not about blame if you fail, it's about "what can I do to help you succeed?"
6. Making good decisions comes from wisdom, wisdom comes from making bad decisions.
I love this because it frees us to make mistakes. If you limit your damage, mistakes are usually the cheapest form of education. I rode the dot-com stock bubble up to a fortune...and back down to nothing. That experience helped me to bail out of California real estate at the top. I lost a lot in the dot-com crash, but made much more by timing the real estate crash correctly.
Remember that you can also learn from the mistakes others have made before you. Ask friends, family, or Investors for advice. All mistakes and bad decisions have already been made by someone.
Eric Haggin,
Realtor and Investor
925 388-6462
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