Types of Investments
Investing starts with you. Any investment has inherent risks. You need to know what those risks are, and what that means in terms of what could happen if a deal doesn’t happen the way you hope. Parachutes aren’t the worst thing in the world, even if your investment firm needs to use it.
There are many types of investment that will provide better returns. In this blog, we explain the 20+ Types of Investments that will give 3 times more profit in 2019.
Residential real estate investing in single-family residences is a very classic real estate investment.
The last few years, of course, have witnessed major decreases in the values of homes across the country along with a flood of foreclosures (now abating) and short-sale activity, and although recovery is underway, the single-family still represents an extremely attractive investment.
Continued tight lending standards, following the wave of foreclosures, should also help keep the rental market robust in the foreseeable future. A steady supply of renters combined with low home prices is an excellent formula that can make this type of investment in a self-directed account a success.
Multifamily (apartment) investments:
Multifamily is one of the best real estate investments you can make in today’s market. Historically, multi-family has low vacancy rates and unlike other commercial sectors such as retail or office, multifamily has shorter-term leases that help the owner quickly capitalize on changing market conditions.
Multi-family is also well-known for providing stable cash flow as long as you invest in the right types of multi-family properties in the right locations.
Recent years have proven to be a great time to invest in multi-family. As the current economy, still in recovery, continues to take its toll, the impact on long-term multi-family investment properties is positive.
Demand for multi-family housing is expected to double in the next few years as homeownership rates remain soft due to continued tight lending standards and poor credit scores.
Also, the next generation of renters, the Echo Boomers, are projected to increase the renter pool by nearly five million people over the next ten years. More renters in the market should help keep cash flow trending steadily upwards as property values continue their recovery climb.
Trust deed investments:
Less known as a type of real estate investment, but under the right conditions an effective use of investment funds, you can lend other people money for their real estate transactions.
In this case, the loan is secured by real property and you are loaning money on specific terms and conditions for a specific property.
Tax lien investments:
This type of investing involves purchasing “liens” on residential and commercial properties levied by counties for the failure of others to pay property taxes. Once the late bill is settled (and most are), the government will contact you and pay you back the amount you originally paid plus substantial double-digit interest.
Investing in tax liens, however, is a labor-intensive process and can benefit from the help of an expert.
Create and Protect Wealth with Real Estate
Through this work, I discovered that I was particularly talented at looking at the structure of a business deal and finding ways to increase revenues and decrease costs. This is a skill I use to this day in each of our deals (and we’ll talk more about how you can do this too, later).
They put me in their real estate division and it was there that I learned:
Why and How Wealthy People Use Real Estate as a Vehicle to Protect and Grow Their Wealth. First, landowners throughout the history of modern civilization have been power brokers. It has been a proven asset class for centuries.
Second, one of the most popular investment philosophies for the preservation of wealth in the world’s wealthiest families is to invest in companies that provide basic human needs. The need for shelter is primal. For centuries, wealthy families have utilized residential real estate to protect and grow wealth and enjoy passive returns.
Third, for someone with $5 million or more to invest, 10%, 20%, and even 30%+ annual return deals were easy to find (I was shocked when I first learned this). Those with under $5 million couldn’t get in on the game (this is something I would eventually make my mission to change).
Fourth, there are incredible diversification opportunities inside real estate to ensure you’re cash-flowing during both the good times and the tough times - there’s always a play in every market (this is really an incredible science).
Fifth, when purchased properly, real estate represents the most secure investment opportunity and best inflation hedge available. It turns out these wealthy families were playing “Lincoln Logs and Legos” on a much larger level.
My first project was negotiating the lease space for Camelot Music in the city of Houston. This is back before the digital age, a time when music stores actually existed and were thriving.
I had no idea what I was doing with the negotiations, but I understood what the numbers should be to make the deal successful. My mentor at the time told me - “Jeff, most people will go out and just sign the contract.
After Seven Years in the “Vulture Capital” Industry, I Was Burnt Out and Distanced from My Faith - It Was Time to Move On.
The 80-90 hour weeks had taken their toll. The selfishness in the Vulture Capital industry was toxic. I had really started falling away from my core beliefs as a Christian and I felt I had to break free while I still could. I remember the moment like it was yesterday. I was sitting in my apartment one day after work.
The System I Use - Step-By-Step
Here’s the simple formula to the success we have used:
First - you need to avoid big mistakes. Many people that work with us are in a position where they can’t afford to take losses or strike out, so avoiding the mistakes can help keep your investment safe and secure.
Second - you need to understand the core principles that allow you to spot the properties that’ll grow at 8%, 10% or 20%+ per year rates.
Third - you’ll need to plan your immediate next steps (if you’re taking things to the next level or just getting started). So let’s get going...
The Four Biggest Mistakes That Cause People to Fail with Real Estate
The Four Biggest Mistakes Are:
1. Lack of Discipline on the Purchase
2. Over-Leverage Due to Lack of Capital
3. Poor Asset Management
4. No Access to Great Deals
Let’s dig deeper into each one...
Mistake #1 - Lack of Discipline on the Purchase
Two of the most important lessons you need to understand about real estate are:
A. “You Make Your Money When You Buy”
B. “Buy When Everyone Is Selling, Sell When Everyone Is Buying”
I’m not sure where I originally heard those two quotes, but whoever first said those was a very intelligent individual.
The first lesson above is a crucial part of the real estate process. When you purchase an asset you should understand exactly how the deal is going to play out.
What I mean by this is that before a single dollar is spent, you must take the time to analyze all the costs of acquiring, modifying, upgrading, managing, and selling the asset to ensure that your purchase is sound.
Too often people buy an asset hoping for something to change instead of knowing they’ve made a great investment.
When we evaluate a property, we run a simulation that calculates exactly how much we expect every piece of the deal to cost. It calculates exactly how much we’ll have to outlay over the deal from the moment we take title to the moment we place it in one of our portfolios or sell the property.
Too many new investors purchase a piece of property without knowing exactly what they’re getting into. If you’re getting into this industry, you need to do it with expert guidance.
You need to put in the time required to learn the industry. You need to understand the complexities and the disciplines of the real estate game.
Wealthy families have developed an extremely effective way to make sure that their children don’t lose the family’s money from one generation to another. Anytime the family makes an investment, they bring in a board of independent consultants to help them make the purchasing decision and ensure that it is a sound financial investment.
I recommend you do the same when you’re purchasing real estate. Convene your own board of experts who can help you crunch the numbers accurately and make the right purchases.
These should be people who have the results you desire and the willingness to assist you in achieving the same success. Now does this mean that you’ll always get exactly what you projected? Unfortunately, no.
However, I can tell you that because of the way we buy, we’ve never lost money on a deal. I’m going to say that again because it’s a key part of our system - we’ve never lost a dollar.
Sure we’ve missed projections a few times and not ended up with the full projected profit, but the disciplined nature of the way we buy makes sure we’re getting deals with enough padding to support any bumps in the road.
The second lesson in Mistake #1 is...
Getting Caught Up In a Buying Frenzy
Unfortunately, human nature can sometimes get us into trouble when it comes to investing. This is why it’s important to have a process for taking emotion out of these decisions.
In 2004-2006 in Austin, Texas - where we’ve done a lot of work - the market was booming. Prices were skyrocketing, but our participant owners and I were off-loading our properties during this time... the returns were incredible.
Some of my friends heard we were selling property in Austin and thought we were crazy. We weren’t crazy, we just understood the market! Everyone was buying which meant it was time to start selling.
We’d list something, and by the end of the day have multiple offers over asking price. As an expert in real estate, I can tell you that the real estate was building itself into a bubble. Anytime you hear of a situation like this and you’re considering investing, think BUYER BEWARE!
Many people even use these ‘frenzy’ opportunities to take advantage of people. One of the many unfortunate examples of this is a woman who thought she purchased seven duplexes. Unfortunately, they weren’t performing. She had heard of us through a friend and gave us a call to see if we could help out.
We went out and took a look at these “duplexes.” It turns out they were mobile homes. Never in my life have I seen a mobile home billed as a “duplex” until then. On top of that - they were in a terrible neighborhood.
It was so bad that when one of our maintenance men was there checking out the property, he heard a “pop, pop, pop”, went out to his car, and saw a man shot dead in the street. This is clearly not the type of asset we want in our portfolio.
Unfortunately, she had purchased the property through a realtor without looking at it herself or having someone she trusts to look at it. She ended up in a position with an equity value that reflected a loss of over 80%.
I can’t even begin to tell the number of stories we hear like this; we could fill books with stories of people who just want out of the property because it’s such a nightmare. Don’t end up in this position.
Don’t think there’s a way to shortcut the process and get rich quick. Real estate is an incredible vehicle to build and protect wealth, but like any investment, you must respect it and use it properly.
Be disciplined when you purchase, completely understand your numbers and exit strategy, and make sure you review your plan with someone who truly understands the industry and has your best interest at heart.
Mistake #2 - Over-Leverage Due To Lack of Capital
Leverage is one of the biggest multipliers available in the world - it makes a good decision better and a bad decision worse.
Here’s the golden rule for leverage: Leverage is great if and only if the asset is stable and performing.
Typically when we structure deals, we bring leverage in as the last piece, once the asset is already performing. Many think leverage is the best way to expand your buying power, but if you start off your project fully leveraged and one thing goes wrong, you’ll lose the entire property and your equity.
It’s also possible to get so upside down on your first property that you never get a chance to invest in another.
This would be a good time to mention the “No Money Down” Get-Rich-Quick Real Estate Schemes out there. While this is cute marketing, I’d suggest you run in the other direction if someone is pitching you one of these “opportunities.”
In our expert opinion, you need a minimum of $50,000 to start doing real estate the right way. The right way to start is not to leverage your capital to buy a $200,000 or $500,000 property.
Mistake #3 - Poor Asset Management
A good asset management company will not only pay for itself (they usually charge 8-10% of collected rent), but they’ll actually make you money and eliminate the stress from the situation. Just like with finding a great deal, finding a great asset management company takes some work.
Let’s face it - nobody wants to get the call in the middle of the night that the toilet has broken, the apartment is flooded, the AC is broken, or the heat is not coming on.
Management companies are the ones that take that phone-call (24/7/365) and use their relationships in the industry to get your tenants taken care of quickly and cost-effectively.
When we first got started, I opened the yellow pages, called an asset management company, and turned over the keys. I was shocked when I saw the way they managed my properties... It was terrible.
Expenses were up over 300% at times, renters were leaving properties, rent wasn’t being collected, equity value was decreasing due to poor maintenance, and the rents they were getting were below market value. They were calling me asking for a check instead of sending me one.
This was the opposite of a home run; it was a strike-out.
So, We Formed Our Own Management Company - One That Was Built for Protecting and Creating Wealth, One That Understood the Investor’s Mindset and Goals
Mistake #4 - No Access to Great Deals
Before coming to work with us, one of our participant owners (who’s a brilliant brain scientist) invested in two pieces of land priced at $1 million when he heard a large Fortune 500 company was considering moving to the area. He put 20% down and had a mortgage on the rest.
He figured that this influx of jobs and capital would make the land out west more valuable. If it had happened, it would’ve been a great play. Unfortunately, Fortune 500 Company picked the other side of town and only moved half of the jobs expected.
Now, he’s had his money tied up in this property for years and has been in a negative cash-flow situation for years. On top of all that, he’s stuck with two pieces of land that likely won’t be built on until his kids or grandkids are his age!
When you don’t have access to a great deal, the best thing you can do is keep your cash in hand and wait for the next one. Do not try to manufacture or force a great deal.
The problem many people have is they can’t ever find a great deal because:
They’re not sure how to tell which ones are great deals.
The deals they’re seeing have already been sifted through by companies like ours.
We’re fortunate that our 15 years of over-delivering for our partners have built a track-record, Rolodex, and reputation that gives us access to extraordinary opportunities.
Our office receives hundreds of opportunities each week in addition to my staff of six individuals trained to go out and find us deals. (We call that “bird-dogging” in the industry). Oftentimes, we see these opportunities months before they’d hit the typical online websites or MLS.
Out of 1000 potential deals, about ten will make it to my desk and we’ll execute on one or two, and that’s if it’s a great batch of opportunities.
To make this easy for you - I’ve included the information about our brokerage that is built by investors, for investors below. If you’re looking for opportunities or help to find great properties, feel free to give us a call.
When you’re financial future is on the line, you should not be speculating. Be disciplined and wait until you find a great deal. At this point, I hope the discussion on avoiding these four mistakes will keep you from making the most common mistakes I see people make. Now it’s time to get into the fun stuff...
My Five-Pillar System to Create and Protect Wealth with Real Estate
This system is something that’s taken over 20 years of experience in the industry to create and I hope you find it valuable.
The Five Pillars to My System Are:
1. Focus on the Fastest Growing Real Estate Markets in the World
2. Focus on Residential Real-Estate
3. Out-Hustle and Out-Research the Competition
4. Cut Out the Middle-Men
5. Understand Market Dynamics
Pillar #1 - Focus on the Fastest Growing Real Estate Markets in the World “A rising tide lifts all boats.”
Pillar #1 is extremely simple. Many people like to invest in their backyard - because that’s the area in which they are familiar.
I think it’s extremely important that you’re investing in the right areas. I believe in an investment philosophy that maximizes our probability of meeting and exceeding expected returns - that means focusing on the areas expecting to see population growth over the next decade.
Once a city begins growing, it can really gain momentum and allow you to recognize extraordinary gains.
At the time of this writing, areas to look closely at our Austin, San Antonio, and Dallas, Texas, Oklahoma City, Oklahoma, and North Carolina.
Because of these areas being widely known as growth areas - they’re the ones most likely to go through frenzies, so invest wisely. Make sure you take your time, study the trends, and know the right time to buy and sell.
Pillar #2 - Focus on Residential Real-Estate
As I mentioned above, one of the most popular investment philosophies for the preservation of wealth is to invest in companies that provide basic human needs. The need for shelter is primal.
While many people like commercial real-estate (and I understand the allure of a triple-net lease), we’ve always seen more success and opportunity with the residential real estate.
Here are three cardinal rules for the residential real estate:
Usually, the types of properties you want to live in are not the best ones to invest in.
The people who often make the money on new construction are either the builder or the second owner (to be one of those positions unless you’re purchasing a primary residence).
Anything under four doors is a huge risk.
Let’s expand on that final point a bit because it’s really important. A four-plex is an OK situation but duplexes are dangerous.
Let’s imagine if half of a duplex is vacant... guess what you get? Half the income, which means you’re now in a negative cash-flow situation each month. (Instead of cashing a check each month you’re now writing a check each month.)
People buy single-family homes all the time because they’re perceived to be “safe,” but you’re suddenly in an all-or-nothing situation - a lack of diversification is never a good situation to be in.
Even if you’re just getting started, there are ways to avoid being in these bad situations. Investing in the residential real estate, done right, opens up the door to much higher returns.
3. Out-Hustle and Out-Research the Competition
Insiders know the majority of new investors fail because they underestimate the task at hand. While the concepts of investing in real-estate are simple, the execution is a full-time job requiring due-diligence every step of the way.
It’s easy to make a mistake that puts a project upside-down. Experience is the best, and also the most expensive teacher.
Our team has over 100 years combined experience in the business and an impressive track-record so if you’re just getting started, reach out to us, or a company like us, to help you get started. I always have loved the idea of standing on the shoulders of giants.
With that said, when you begin your investment, whether alone or with an advisor, two of the most important metrics you need to be looking at are the CMA’s and the indexes.
For anyone in the industry, the CMA’s are very standard. CMA stands for “Comparative Market Analysis” - basically it’s an analysis of what the other properties in the area are selling for.
It’s very important that you look closely at CMAs. Different states have different rules, and it’s easy for two properties to look the same but be very different (i.e. built in different years, different quality construction, or different neighborhoods even though they appear to be across the street).
The second major metric is indexed; these tell you how much real estate is renting for. These metrics are available and accurate since they are prepared by the government so they know where to funnel federal assistance programs.
Indexes are usually provided on a $/square foot basis (i.e. if it’s $1/ sq. ft., a 900 square foot apartment would rent for $900 per month).
These are actually extremely well-prepared documents and are free for you to access! Whenever I’m considering investing in a new city, I start by studying the patterns in the indexes over the past decade and projections for the next decade.
In the process of reviewing a deal, I’ll typically go through 400 or so pages of data and information to get a good feel for the property.
When you plan on investing in real estate, make sure you’re taking decisions seriously and properly researching the situations. Please do not jump into these investments without knowing exactly what you’re getting into.
4. Cut Out the Middle-Men
The world of investing is full of “fees.” I hate fees. Be very careful with fees when you’re investing in anything as it’s a way your profit is vultured out of the deal.
I recently saw a deal that came across my desk from a highly-recommended commercial real estate investment firm. On top of the 80/20 profit split in favor of the house, there was a 2% asset management fee and a 1.5% financing fee. Ouch.
Fees don’t belong in real estate, so be careful when people start lining up their fees. Even 1% or 2% over the course of your investment can add up to a lot of money that should be in your pocket.
To eliminate fees, optimize ROI, and maximize efficiency, we cover every critical area - from sourcing deals to planning and construction to manage in-house.
It’s a “no fees” model that allows the community to do more with their dollars. I recommend you look to build or invest in companies that have a similar model and take a very close look at any fees with your investments.
5. Understand What Type of Market We’re In...
As I mentioned above, there are incredible diversification opportunities inside real estate to ensure you’re cash-flowing during both the good times and the tough times. This is really where the magic happens.
By specializing in small fast-growing regions, we’re able to fully understand the pulse of the market months before the big-box investment funds.
This ability to see market trends and act on them keeps our partners protected and enjoying healthy returns throughout every season. When you’re in the industry you can tell when one area is softening and one is becoming more robust. When areas change, you simply switch gears.
It’s taken 20 years to develop a system where we can easily shift from buying to selling to building to rehabbing. If you told me I just had to buy properties I’d be bored and disinterested.
If you told me I just had to build or rehab, I’d be bored and disinterested. But seeing how the different areas of the game all work together is fun to me. It’s exciting and it opens up incredible investment opportunities.
Opportunity for more copy on the formula - buy when selling/sell when buying. This marks the end of the five pillars I have used to create financial freedom for myself and have taught hundreds of others to use as well. I hope that you’ve found this information valuable and it helps you take the right next step for you with your investments.
There is one final lesson I’d like to leave with:
“You Can Either Work For Money or Money Can Work For You. “
Very early in my career, a mentor shared with me the quote above. Investing in real estate is about putting your money to work for you. It’s about generating passive returns that are hands-off and tax-advantaged. It’s truly the vehicle that allows you to take your wealth-building to the next level.
Strategy for Real Estate Success
Investment choices today are as varied as the people making them. Regardless of what flavor investment you’re looking for - and the level of risk you’re willing to accept - you have a number of choices to make that will determine the kinds of returns, you’ll see.
Real estate has been the consistent choice of people looking for tangible results from an investment that they can touch, see, and feel, as opposed to more volatile and subjective paper-based investments.
But, if you’re considering investing in real estate, there are some distinct challenges to overcome and pitfalls to avoid if you want to make the experience a positive one - and reap rewards that will last.
The residential real estate market is ever-changing and recent events have made turning a profit a bit of a challenge for investors that aren’t ready to roll with the punches.
In this report, I’m going to teach you some principles that will help you survive, thrive, and begin to turn the corner towards achieving your goals and your dreams.
Regardless of where you’re at in your investing career - a brand-new, starry-eyed investor or a seasoned veteran - you either have discovered or will soon discover that there’s one big reason that real estate investors lose money.
They make mistakes.
It doesn’t matter whether a mistake is large or small. Each has the potential to cost you money, and over the course of a real estate investing career, even the smallest of mistakes can cost you tens - even hundreds of thousands of dollars.
This blog is dedicated to helping you avoid mistakes that can cost you money. I want you to make as much money as you possibly can, but in order to do that, you need to avoid mistakes and also settle on a strategic investment plan that can be replicated for continued success.
Decisions are based on bad reasoning, questionable logic, and general assumptions. A lot of people like to fly by the seats of their pants in everything they do, but you can’t do that with real estate.
If you pay too much for a stock, you can lose money, but it’s even more critical that you invest wisely in real estate. The stakes are high - and the potential profits can be awe-inspiring.
The “What if” Concept
Unsure how to go about real estate investing, the average investor adopts a business model that makes sense to them that is based entirely on assumptions - many of them flawed (although they don’t know it yet). When you do this you’re playing with fire.
Instead of using sound logic you’re probably following what I’ll refer to as the “What if” concept.
Be honest with yourself for just a minute and tell me if this sounds familiar: when you analyze a potential investment property, you’ll run the numbers, make a series of assumptions, and decide that it will work if (pick one):
the property will rent for the amount you’ve estimated
you can find a buyer immediately and convince them to pay the market price
you can rehab the property and find a buyer within a reasonable period of time
What if you find an investment property you like and the market rents will support a rental rate of $1,200 per month? If your monthly expenses are only $1,000 you’ll be able to slip $200 into your pocket every month and begin to smugly think that real estate investing is one of the easiest games in town.
What if you locate a property for 60%-70% of the market price? If you can buy this property, you could flip it faster than your local IHOP restaurant could flip a pancake. Surely somebody would jump at the chance to save 30%-40% off retail prices. Real estate is really simple - and anybody can make it work.
What if you take out a mortgage on a property that you can gut and fix within 90 days? If you can get it fixed quickly and get it back on the market, you could sell it, make money - and repeat the process. Could there possibly be a quicker, easier way of making fast money?
There’s a problem with approaching real estate investing with these thought processes. They’re flawed and will lead to almost certain failure.
It doesn’t matter how militantly you’ve followed your strategy, if you play the game like a rookie, you’re going to get rookie results. Rookie results will kick you to the curb as a real estate investing failure in no time flat.
These “What if...” situations are common real estate investing scenarios. Thousands of novice investors try these strategies every year. A lot of investors make a whole lot of money using one or more of these strategies. These strategies may work...for a while.
Then...”What if...” turns into “What now?” When you base your ability to turn a profit on a singular investing approach you can still make money as long as all the trains are running on time.
You know as well as I do that eventually the best-laid plans can be turned on their ears. “What if...” really can become “What now?” because you’re overlooking a universal truth about real estate investing - actually several.
Three Fundamental Truths
The reason that this strategy is flawed is that you’re overlooking a few fundamental truths about real estate investing. Here they are as I see them:
The real estate market is just as susceptible to changing conditions as any other investment opportunity. Generally speaking, real estate gains in value year after year.
However, just like the broader economy or the stock market, real estate runs in cycles. It’s not unusual for a real estate to enter periods of appreciation or depreciation. If you assume that investment will always gain in value, you can and will lose money.
You might purchase a property expecting that you’ll always be eligible for specific tax credits. By the same token, you may expect to be able to participate in the federal Section 8 housing program.
If you purchase a property with the expectation that you can supplement your rental income from tenants based upon receiving federal rental assistance checks on behalf of tenants and the eligibility rules change, you might find yourself shut out of an income stream that you depend upon for a fair amount of real income.
Failing to be cognizant of changing laws can cause the profitability of property to evaporate.
What will you do if your spouse sours on the idea of investing in real estate or one of your children require specialized medical care for some dreaded disease?
The circumstances in existence when you initially purchased property can change in the blink of an eye. Failure to be aware of the possibility that circumstances can and do change on a daily basis can be financially devastating.
I’m going to give you three examples of how real estate investing mistakes can derail your plans and destroy your dreams very quickly. Imagine yourself in the following three “What if...” situations. These situations will give you an idea of just how quickly you can go from being in charge of your destiny to hanging on for dear life.
Plan A: Bubble Investing
Until the real estate bubble burst in 2007, it was almost impossible to not make money in just about any market.
For instance, in Florida, the market was expanding so dramatically that you could buy a property based almost entirely on a fairly accurate verbal description and - even if you had negative equity to start - could hold it for a few months and still turn a profit.
More than one real estate investor who didn’t know any better would jump into the market, take a call from somebody describing their property, and decide whether to move forward. So how did some of these investors make a decision if they couldn’t see the property?
They would ask for a description of it.
As long as the market was skyrocketing northward at breakneck speed, the ability to analyze a deal was optional. It made millionaires out of novices who were clueless about how to make money and who were simply the beneficiaries of favorable market conditions. So what happened?
As you know, the market fell apart and the guaranteed profits went the way of the dinosaur. When that happened, all these “What if...” investors became “What now?” investors and their existence was jeopardized. Not knowing what to do, they began falling one by one like little dominoes.
These investors weren’t bad people - nor were they stupid. They just didn’t know what they were doing. Instead of being able to roll with the current market conditions they were rocked by conditions beyond their control. Why did this happen to them?
In short, they were well-positioned to continue making money as long as the sun kept rising every day as it had since they jumped into the market. The market, like the sun, kept going higher and higher.
In their experience, there was no such thing as a rainy day. Plan “A” was making them so rich that as long as the market continued to rise the need for having a Plan “B” never occurred to them. Do you know what else never occurred to these investors? It never occurred to them that their Plan “A” was also flawed.
When the rains came, as they inevitably will, the only option they had was to fall to the wayside as real estate failures.
Real estate investors can make tactical errors for a variety of reasons. Unfortunately, they frequently don’t realize they’ve made a tactical error until it’s too late to change course. By then the train has left the tracks in a massive financial derailment that could take years to clean up.
When real estate investors are first starting out, many of them will rely on the guidance received from a real estate investing course, a blog they’ve read, or a series of articles that they’ve seen on the Internet for advice about how to succeed as a real estate investor.
If you’ve ever bought one of these resources, you’re very aware that they almost always universally recommend that you have or develop a working knowledge of your local real estate market.
As a result, a lot of brand-new real estate investors will purchase property very close to where they live with the erroneous thinking that because it’s in their local real estate market that it is a good investment.
That’s not always the case.
Just because a property happens to be in your neighborhood doesn’t necessarily make it a good investment. However, partially out of laziness and partly because of an honest misapplication of the above principle, far too many real estate investors purchase property just down the street or around the corner from their own residence.
A Certain Future?
The reality of life is that we don’t know what the future holds. If we did, we’d all be professional athletes, ballerinas, police officers, or princesses, and these decisions would have been made by the time we were five years old.
Since we know this isn’t true we have no choice but to conclude that accurately guessing the future is as difficult as solving a Rubik’s cube in the dark.
“What now?” is a scary place to be because it forces you to acknowledge that you don’t know the answer and that you will likely be losing money - a lot of money - on what you had thought was a foolproof transaction.
If you want to move beyond the uncertainty of not knowing if, when, or how much money you’re going to make it a real estate transaction, and you also want to avoid the mistakes inherent to thinking about real estate in terms of “What if...” it’s absolutely essential that you set yourself up so you’re never left asking the “What now?” question in the first place.
In order to avoid being left with the money-losing question of “What now?” you must redefine the way, you look at real estate investing. Instead of entering a real estate transaction with a single strategy, you go in with your eyes wide open to the reality that life very seldom goes the way we have it planned.
As a result, it’s of paramount importance that you have a real estate investing strategy built around always having another move up your sleeve that will allow you to make money on a deal.
No Matter What
I call this the “No matter what” strategy. It truly is a comprehensive strategy because if you buy a property with the intention of renting it out and you find that you can’t make money despite your best intentions, you move on to “Plan B”. If your alternative falls apart, you go to “Plan C”.
The “No matter what” concept doesn’t say that you don’t have a preferred strategy or method of attack. What it does say, however, is that no matter what you do, there are a dozen different ways you can make money on a real estate investment.
If each plan falls apart despite your best efforts, you don’t miss a step because you always have another move you can make.
Because you have so many effective strategies available to you, you’re never going to get caught in public with your pants around your ankles looking for a graceful way of exiting stage left.
If every single strategy turns out being a loser, you can smile, shrug your shoulders, and sell your property. Even then, you’ll make money because it is a contingency for which you have planned - even if the specific situation is a surprise.
That’s the raw real estate power of being a “No matter what” investor.
Because you go into every investment with a solid game plan and an exit strategy you’ll never have to worry about where your blood pressure pills are. You’ll have the flexibility of knowing that sleep will come easily to you each night because the question of what you’ll do if a specific strategy fails will have already been answered.
The No Matter What Strategy Defined
If you want to avoid making mistakes you need to have more than one option available to you. One specific strategy will help you make money no matter what you do. The way you make it happen is by redefining what you think of as a good deal.
If you pay retail or near-retail prices for property, you limit your options. For instance, if you pay 90%-95% of retail for a property you intend to rent out, you limit your options.
You may have every intention of putting a renter in the property and holding it for 5-10 years. “What if...” real estate investing strategies say that it will work if all the trains are running on schedule.
There’s no room for error, deviation, or any of the other life situations that can derail your ideal investment opportunity. However, when you buy property with the “No matter what” mindset, you’ll make money regardless of what happens.
You can still make money when every possible investing strategy fails. While highly unlikely, you should plan for every possible contingency to cover your assets and guarantee that making money is still in the cards.
If you recall the example I gave you of John, the novice investor who bought property near his home, he was able to turn a small profit by doing his own property management and handling all of his own maintenance.
While he made more than one mistake along the way, the biggest mistake he made was in the price he paid for the property.
If he had been able to pay less for the property he would have opened up a world of opportunity for himself. When he made the initial discovery that he couldn’t turn a profit on his investment without doing his own maintenance and management, he could have implemented another strategy that would have allowed him to make money.
Then, later on, when he was notified by his employer that he would have to pull up his roots and relocate to Portland, Oregon, he wouldn’t have been left with the terrible choice between staying with a property that was just barely profitable or transferring out of state.
He could have just switched gears and moved on to another strategy that would still keep him in the black.
Finally, when the mother of all financial insults took place and he discovered that his too-good-to-be-true tenant had badly damaged the property, he had no good alternatives available to him.
All he could do at that point was trying to scrape together a monthly payment and tread water financially on a month-to-month basis with a property that was generating no income.
Had he had more options he could have done something about it.
The “No matter what” strategy would have covered his backside. He could have quickly sold the property for what he could on the open market, put the property behind him, and still put money in his pocket when it sold.
The way he could have done that is by controlling how much he paid for the property when he bought it. If you can buy a property cheap enough, you’ll make money regardless of what happens.
You have the peace of mind of knowing that a hundred different things can simultaneously go wrong with your property, your tenant, or your strategy, and there will always be another weapon in your arsenal that will make it possible for you to make money.
The real estate market has fallen apart in many parts of the country. Strategies that worked well when values were rapidly rising are no longer possible. Instead of lamenting what might have been, you could simply move on to something that will work given the current market conditions.
Buy your property cheaply enough to make money and you can use whatever strategy that will work in order to make money instead of playing “What if...” and hoping for the best. It’s a huge mistake to do otherwise.
Keeping Your Emotions in Check
The key to avoiding the mistakes and pitfalls inherent to novice real estate investing is to give emotion its proper place at the table when purchasing real estate.
Allowing emotion to control your investing decisions is to real estate what allowing a five-year-old child to make all discipline-related decisions in your household is to domestic tranquility.
Neither one should have a position of authority or you’ll experience a disaster every time. Emotional considerations are the root causes of any number of bad decisions. A lot of them can’t be avoided, but when you’re buying real estate for investment purposes you can’t afford to give emotion a place at the table.
When you’re buying real estate that you intend to live in, emotion can and will sneak in the side door and command a prominent place in your thought processes. That’s only natural.
Your primary residence is in many cases an extension of you and your personality. We decorate our homes to be pleasing to us. We like it when people praise our home and tell us how much character it has. In these cases, emotional considerations are a good thing.
But investment property is radically different. You’re not planning on living in investment property for thirty or forty years. You won’t be raising your children in your investment property, debating important family issues, or doing any of the other things that make a house a home.
Emotion tugs at our heartstrings and can cause us to do things we normally wouldn’t. Emotion can lead you to pay more for a property than you should or to pay more for a property than it is worth. So you’ll be doing yourself a favor if you can keep emotion out of the decision-making process of your real estate investments.
The question you have to answer, though, is: how do you keep emotion out of the real estate investment decision-making process? The answer to this question is important, but there’s an even more important issue I need to address first.
What if...John Was a No Matter What Investor?
In the three examples, I told you about, including the example of John, “What if...” investors formed a real estate investing strategy, but I would almost bet every dollar I have that they let emotional considerations enter into the equation.
Let’s take a close look at John’s ill-fated investment property just down the street from his house.
What do you think his primary reason was for buying so close to home? It was familiarity with the area closest to his home and the fact that he could point his investment property out to his friends. That’s an emotional consideration.
He could have bought something that would have made a better investment if he had taken the time to really analyze the investment, but instead, he fell in love with the property. He liked the property so much that he set aside logic and bought a property that would only be profitable under tightly controlled circumstances.
In other words, he let emotion take over. By letting emotions take over the abandoned logic and ultimately lost his shirt by making a bad investment.
There is a better way of thinking about real estate that can help you to avoid the mistakes and pitfalls facing real estate investors of all experience levels. This strategy will work every time you even consider an investment property.
The reason it will work is that it strictly limits the access that emotion has in the way you go about the process of deciding the relative merits of any investment you’re considering making.
We’ve already established that excess emotions can suck the life and the profits out of your investments. Do you know what one component will help you make an unemotional decision?
Good Numbers Tell No Lies
This one-word answer has huge implications for the future success of your real estate investing career. Numbers. That’s it, nothing more. By taking emotions out of the investment property equation and inserting numbers in their place you can eliminate many of the mistakes that imperil your future.
You can use specific mathematic equations that can tell you in very simple language whether or not an investment makes sense. If the numbers are there, you proceed - if they’re not you simply walk away.
Effectively limiting your exposure to mistakes begins when you’re considering making a purchase. Numbers don’t lie. They tell a story about whether or not you’ll make money with a particular property.
The ingenious thing about this strategy is that you don’t have to pull the trigger and put your financial security on the line in order to decipher whether or not you’ll make money.
There are 24 hours available to you today. There are thousands of properties out there that you could conceivably invest in and possibly make money. You have several options you can utilize in deciding whether a property is possibly worth pursuing.
With the first model, you go look at each property to ensure that it meets quality standards, you do your due diligence, and you meet with each property owner before making a decision.
That’s a daunting, time-consuming process that can fill your days with an unproductive activity that won’t get you any closer to buying a single property.
This method involves doing a cash flow analysis and working up a sample budget and determining whether you’ll have a positive cash flow if you buy the property at a specific price.
While you always need to know if a property will make money, you only need to know if certain properties will make money. The only property you care about is one you will buy. None of the other properties matter.
A better way is for you to find out in advance what the numbers are and quickly make a decision. By putting my strategies to work with mathematical formulas you can analyze a property within minutes.
You’ll know right away whether you can make money with a property. Instead of wasting time on a senseless activity that bleeds all the energy out of you, you could be doing things that will build real sustainable wealth.
There are a whole host of mistakes you can make as a real estate investor that will take the wind out of your sails and will cause you to doubt your commitment to pursuing real estate investing as a wealth-building mechanism for your future.
You can choose to follow the low road and still reach real estate investing success. It will require that you make a series of mistakes and commit some costly blunders. You’ll take longer to get where you’re going, but you can still get there.