Today I wanted to cover some Real Estate Investing 101 material that I think a lot of people need a refresher on.
Most of these things are fairly “entry-level” in nature, and most of us probably already understand and agree with them… but for one reason or another, these concepts tend to get lost in the shuffle of our daily lives and people break these rules all the time (including me, believe it or not).
Whenever human emotion comes into play, a lot of people start doing some really dumb things (after all – emotions have never been the best decision maker). None of us are immune to it, so as a way to combat this kind of behavior, I thought it would be wise to establish some ground rules.
As we dive in, I want you to ask yourself – do you agree with this stuff? If so – are you actually following these principles?
1. Don't Gamble Your Way Into New Properties.
A lot of people have this idea that if they just buy a property, ANY property, it will somehow make them wealthier. They don't bother to run the numbers and thoroughly understand where their information is coming from. They fail to scrutinize whether the data is accurate and reliable – and when you fail to do these things, your investment decision starts to become more a matter of gambling than investing.
What many would-be real estate investors fail to see is that most properties are virtually guaranteed to lose money, especially if they aren't carefully vetted and scrutinized.
As with anything in life, you need to know exactly what you're looking for – and when an investment opportunity doesn't fit inside the box (which is almost always the case, by the way), you need to say “No” and continue searching for that diamond in the rough.
2. Don't Pay For Things That Don't Add Value.
Don't get me wrong – there are many times when it is very much worth your while to pay for improvements to your real estate or pay for a service that will add value to your business. These things can help your operation run smoother and grow, and they can allow your properties to generate more revenue with shorter turnaround (both of which will be very important to the long-term health of your investment portfolio).
On the same coin, there are MANY temptations that in the world that are constantly working to entice you to spend your hard-earned money on things that look flashy and appealing, but just don't add anything to your bottom line.
Use great discernment with the things you spend your money on (especially in the beginning, when money isn't “growing on trees”). Accept the fact that you're never going to get everything you want. Choose your battles wisely and only invest your cash in the things that will actually bring your business to the next level.
3. Don't Start Spending Your Investment Returns Until You Can Actually Afford to LIVE Off Them.
Most real estate investors get into this game because they want to build wealth faster. They want to retire. They want to get rich. They want more tax incentives and at the end of the day, they want more financial freedom (freedom from a job, freedom from a life of worrying about money, freedom to have peace of mind about their life).
But the funny thing about freedom is, freedom isn't free. You need to invest the time, effort and the blood, sweat & tears required to get there. I've encountered more than a few hopeful investors who were on the right track, they were doing everything right, but they pulled the plug on their day job WAY too soon.
I get it! Everybody desperately wants to start enjoying the fruits of their labor – but the kicker is, the minute you start siphoning off your real estate income to finance your life – the growth of your real estate portfolio will slow WAY, way down (if it doesn't just grind to a halt altogether).
Now, this isn't necessarily a bad thing per se, it's just the price of freedom… wherever your real estate investment portfolio is at (even if it's non-existent), it will slow down significantly (or stop) the minute you start living off of it – so it's also important not to make this jump until you're actually able to start living the life you want from the income generated by your properties.
What's the point of “retiring” if you aren't able to live the life you want? You're essentially just trading one huge inconvenience (e.g. – a job) for another huge inconvenience (e.g. – a severe lack of income to support your desired lifestyle). I'm not saying your investments need to throw off a TON of money, but it should throw off enough to support the life you want (whatever that happens to look like).
4. Got Extra Cash? Invest It!
Have you ever gotten a bonus at work? Ever been lucky enough to receive a large financial gift? Ever inherited some life insurance proceeds, or just been disciplined enough to build up enough savings to do something substantial?
Most of us live life with the mindset that money is made to be spent. I've actually struggled with this quite a bit in my life – where cash has a way of burning a hole in my pocket UNLESS I have a very specific financial goal that I'm working towards (i.e. – buying a new property).
Knowing that this kind of temptation is a problem for me – I always have the ongoing goal of saving up enough cash so I can buy my next rental property. Why? Because every little “doodad” that I waste my money on is nothing more than a financial setback to reaching my actual end goal of financial freedom.
…and let's be honest, it's not that you CAN'T buy fun things in life. You just need to buy the income-generating assets first and let THEM pay for the fun things you want out of life.
5. Don't Buy Properties That Cost More Than They Make.
Again, I know this one probably sounds obvious, but people break this rule all day long… and they usually make this error because:
- They aren't paying attention to the data that matters
- They aren't using the right data (from reliable sources)
- They have no idea how to evaluate a property in the first place
Let's face it – in order for a property to be an actual “investment”, it needs to generate a profit.
In other words, after all of your expenses are paid – how much money will you actually be able to KEEP at the end of each month? Many new investors quickly discover that it's harder than it looks to pull this off.
There is an endless number of things that can (and will) eat away at your revenue and become obstacles to you making (and keeping) your money. If you want to avoid the trap of owning a property that costs more than it makes – be sure to do thorough due diligence before you buy it and leave no stone unturned in the process. It may be tedious work that requires great patience, but when you lay the groundwork properly, you'll thank yourself for a lifetime – believe me!
6. Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.
Real estate investing is one of those games where it's surprisingly easy to get caught up in the “herd mentality” of your market.
When I first got into real estate investing, the entire U.S. market was headed into one of the worst recessions in history. My first 4 years of investing were in a world where real estate was the cheap, easy to get, and it was always a buyer's market.
Today, as I write this – the year is 2014 and the nationwide real estate market has turned around dramatically. There is virtually NO excess inventory of real estate on the market, most properties are selling in a matter of days (not years), and people have a wildly different view of real estate than they did just 24 months ago.
The problem is – the prices of real estate rise and fall based on the opinions of people, and the vast majority of people make their biggest financial decisions with emotion, not logic.
A smart real estate investor needs to have enough discernment to understand when a deal is actually a deal. It has nothing to do with what your realtor tells you, it has nothing to do with what the seller tells you, and it has nothing to do with public opinion.
It has everything to do with your ability to evaluate every aspect of a property for what it is.
- How much revenue will it generate?
- How much is it going to cost you?
- At what price does this property actually make sense to purchase?
As simple as these questions may appear, the actual, factual answers usually aren't going to be obvious and it will take some substantial “digging” in order to find the right information. I've found that in most cases – when someone is trying to feed me this information (as though the answers should be obvious), they're usually trying to sell me something.
7. Put Your Monthly Bills & Deposits on Autopilot.
Something I finally figured out a few years ago was that I needed to automate the heck out of my business. This meant changing a lot of things – and one of the first (and easiest) changes to implement was simply putting my monthly bills and deposits on autopilot.
This means that when I get a cell phone bill, a mortgage bill, a utility bill, or ANY monthly bill for that matter – I'm not wasting my time writing a check and mailing it back to the service provider. I don't even want to log in to some online account to pay it. I want these bills to get paid automatically – without requiring one extra second out of my already-busy day.
It also means that when a tenant, borrower or buyer sends me a check in the mail – I'm not driving to the bank to deposit it (and in most cases, I'm not even whipping out my phone for a mobile deposit). I am ALWAYS setting these things up so that my monthly revenues are also automatically deposited into my checking account – without me having to needlessly go through these extra steps each time I make money.
Implementing these rules has saved me (and continues to save me) countless hours of time. If you aren't doing the same thing, you're acting like a bottleneck in your business and as a result, you're wasting a lot of hours that you could be using to further your business and/or simply enjoy your life!
8. Don't Hesitate to Pay for the Right Expertise.
I've heard an endless number of lame excuses as to why people insist on managing their own rental properties.
I know all kinds of people who have refused to hire a realtor or pay for more exposure when they legitimately needed help selling their property.
I know even more people who adamantly refuse to hire attorneys, even when they desperately need legal help.
It's not because they can't afford the help. It's because they have this idea in their heads that “If I don't do it myself, it isn't going to get done right.”
I'm not saying their excuses are WRONG (because every situation is unique, and sometimes a job actually does require some hands-on attention), but there are WAY too many people who have trained themselves to respond with a knee-jerk “NO” response when it comes to paying for the right help.
Let's just think about this…
Do you take your car to a mechanic when it needs fixing?
Have you ever gone to a doctor when you're sick?
Have you ever paid a plumber, electrician, carpenter or any other subcontractor to repair or upgrade one of your properties?
I do these things all the time! Why? Because I don't have the right skill set to do it myself.
There are MANY instances where you will be in this same situation with your real estate investing business and when this happens, it's in your best interests to hire someone who can help you better than you can help yourself.
The only real trick is to know when it's worth your money to pay for outside expertise. Personally, I like to use Chris Ducker's 3 qualifying questions to figure out what sort of help I should be paying for:
What activities do you HATE doing?
Let's just start out by acknowledging the things that are downright painful for you to do (e.g. – activities that feel like you're slowly being tortured to death). You may be capable of doing it, and it might even be something that needs to be done – but if you HATE doing it, you probably need to come up with a Plan B.
Why a Plan B? Because if you continually force these things upon yourself, it's just a matter of time until you burn yourself out (and just practically speaking – if you there's a feasible & effective way to have someone else do it, why would you not steer things in that direction?).
What activities are you INCAPABLE of doing?
I have a LONG list of these things – believe me. Whether it's performing SEO work on my website or renovating one of my rental properties (two examples of things I have no idea how to do), there is an endless number of things that just aren't going to get done if it's left up to me. Nevertheless, these things are still important and they need to be done.
Take a few minutes to nail down the things in your business that require the help of a professional (and don't be bashful about it). If these things are important, need to be done and you can't do it yourself, what are you waiting for?? Go find the right help and start getting those important jobs done!
What activities SHOULDN'T you be doing?
Are there any daily rituals or activities that you waste an inordinate amount of your time on? Think about the things you do that don't seem to add any actual, quantifiable “value” to your business operation. Do these things even need to be done? What were you hoping to accomplish in the first place?
If you discover activities that just isn't necessary – then stop then! If you discover activities that are vaguely important (yet there are far more important things deserving of your time) – then bingo – this is something you should consider outsourcing.
The bottom line is – you need to pick your battles. You're only one person and you have a finite amount of time to accomplish the things you need to do every day – so think long and hard about which activities you NEED to be intimately involved with. If you're honest about it – there should be plenty of things that don't fit onto your “to-do” list. Once you figure out what these things are, get rid of them or outsource them.