Real estate is often pushed as a lucrative hobby, but as long as you see it that way, you’ll always … [+]
Photo by Tierra Mallorca on Unsplash
“Where should I invest my money?” is one of the most common questions I hear.
People often look for magical investment opportunities.
Some people believe a diversified portfolio over the long haul is the way to go. No effort, automatic payments each month and they quote long term averages in the stock market. This has been synonymous with investing, yet 95% of people are not economically independent at age 65 according to the US Department of Labor.
Others think that real estate is the best investment because it provides tax advantages, potential cash flow, leverage by borrowing from the bank, equity, and a way to build sweat equity if you personally fix it up.
What’s not to like?
The problem is, most people are more speculators and part-timers in real estate, rather than investors that treat it like a business. This creates a disadvantage when going up against Real Estate Investment Funds (REIT’s) or people that invest in real estate for a living and have a team to support them.
One of the first investments I made was real estate. At the age of 19, I purchased a townhouse, rented out a few rooms to my college friends, and lent money to family and friends that were doing real estate.
I was excited to make money, and I did. But I also learned a lot of lessons from the school of hard knocks.
I ended up with just over 100 doors where I owned 20-100%. I did a hard money lending fund as well as bridge financing for real estate deals before they secured long term financing.
At first I felt like a genius. I was making great returns on my first deals! This had more to do with luck and timing over skill and economics. I went into it, perhaps, with the same thought processes many others do.
I heard so many investment gurus saying that there was an abundance of wealth held up in real estate. That the wealthiest people in the world made their fortune either in real estate or stored their fortune in it. I was sold on it being “the thing”, and that I would be foolish not to get involved in something so seemingly simple, yet lucrative.
But in this excitement no one ever really explained to me the downsides and I rarely heard them say what type of real estate they were ever referring to.
What is your opportunity cost?
Will it take time away from your business, your family, your hobbies? What about additional stress which has the potential to cause harm to your personal health?
It is common for people to see it as an opportunity without taking into consideration the parts and pieces that are a distraction. Lots of hopeful people discover it is easier to buy real estate than it is to cash flow it or sell it at a profit.
So often, gurus sell it as passive income, but if you treat it passively, expect income and opportunity to pass you by. If you aren’t willing to invest the time to gain knowledge, become a better investor, and treat your real estate portfolio as a business, you are likely to lose out on the “great wealth” that graces so much of the hype in real estate.
You’ll lose time, money and energy; which is the cost of doing something outside of your expertise and passion, when your main focus is solely on making money.
Making money is critical, but it may not be enough for you to deal with deferred maintenance, property managers, renters that may not take care of your property, the process of securing financing, and a myriad of time consuming items that come with owning this active investment, that is sold as a passive miracle.
If you choose to invest in real estate, consider these things up front to secure better results.
Risk Is In The Investor
Risk is in the investor, not the investment.
It’s very important to set yourself up with proper strategy and direction in the beginning (like all good investments) to keep yourself from the major pitfalls that can come to beginners. Real estate is like any other skill or business and it requires time and patience to learn the in’s and out’s of it, whether through experience or proactive education.
If you are going to invest in real estate, it may be to own a building you house your business in, or residential or commercial rental properties. These real estate investments will require completely different skills.
Don’t over diversify; focus first. Choose your lane. Will it be syndication? Fractionalized ownership? Fix and flips, long-term buys or development?
Once you have chosen your area of focus, immerse yourself in developing your skill set and building relationships that lead to deal flow.
Who can you learn from?
What can you study?
Who can support you in due diligence?
Who already has the connections that can save you both time and money?
One of the most difficult parts of investing comes down to being selective and saying no to deals. Look for ways to make money on the buy, cash flow from day one or discover a distressed person or situation that you can offer a solution to.
Buyer Beware: The Market
Interest rates have been so low, for so long and it has created inflated prices.
In today’s world, people buy homes on the payment they can afford more so than the actual purchase price. With low rates, minimal down payment requirements, and extended terms that allow interest only or 30 year loans, prices have substantially increased. It’s similar to college tuition continuing to increase based upon the amount of student loans available.
Knowing why a deal exist is crucial to making a smart buy on real estate.
Sometimes people buy what they think is a great deal, and go on to find out after the purchase that there are a lot of issues with the house. It’s not very livable or workable, and the investment ends up going towards maintenance, and other needed repairs, additions and updates.
But sometimes there are good deals based on the type of real estate instead of the condition it is in, just as there are other types that don’t perform as well. For example, luxury homes usually get annihilated, especially when they are 2nd homes and 3rd homes during recessionary times.
Another can be extraordinarily hot markets where more investors are buying than homeowners, which drives the price up. Others get caught in speculation thinking that they will buy and in a few years sell due to appreciation. This approach can be quite risky because you are depending on the price going up in the future, but it may be other speculators running up the price more so than value or economics.
I saw this when I bought a property in Las Vegas in 2005. In this location, there were mostly investors driving the market and you could drive through new neighborhoods where every third home was for rent for ⅓ of what a mortgage payment would be. Eventually, home prices decreased quickly and investors were left holding a home they couldn’t rent for a positive cash flow.
If you are going to buy, know your exit strategies: seller financing, fractionalized ownership, auction, corporate retreat rental, AirBNB, plus others.
Again, treat it as a business.
Real estate can be a good investment IF you’re a good investor.
Is investing in real estate something you are going to pay attention to, willing to invest time in, and ultimately treat as a business? Are you going to build a skill set, invest in your education and develop a team? Do you have the right attorneys around you to structure deals properly? Do you have the right asset protection in place? Do you have great brokers, bankers, and technology to find and finance the deal? Have you properly considered the downsides and come up with any contingency plans? How can you make money on the buy? Can you find a situation where you know it’s already a great deal where you can buy and immediately turn a profit?
Ultimately it’s about your investor DNA. What type of investor are you? Do you have the drivers and competency to invest in real estate? Is real estate a good investment for you?
In the end, it is important to know your life’s vision and to stay focused. This is where success happens. If real estate is an integral part of that life journey you are on as an entrepreneur and you feel that it is in line with your goals, while bringing out the best in you, then so be it. But remember, that the real estate business is just that- a business. When we treat it like a hobby or a side job, then we run a high risk of losing time and resources on it.
Focus on your vision, so you can live the life you love along the way.