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Skate To Where The Puck Is Going

Skate to Where the Puck is Going

Earlier this week, I spent time with a guy who has been investing in real estate for the past four years. This fellow deserves a combat medal. He began his investing career in 2006 - the year the real estate bubble burst - and he's still around to talk about it!

He wanted to discuss his deals and determine why his properties aren't cash-flowing the way he estimated they would when he bought them.

This investor is a buy-and-hold (single-family rentals) guy. He buys houses at below-market values and then rents them to qualified tenants.

When I analyzed his holdings, it was obvious that when the deals were initially done, they were good, solid investments, but as the real estate market has continued to slide south, they became marginal investments at best.

His mistake was this: When he bought the properties, the purchase price was based on each property's CURRENT fair market value, as well as the amount for which it would CURRENTLY rent. He failed to buy them based on property values (and cash flow) in a DEVALUATING market!

I was reminded of a story Mary Ann, my proofer, once told me about Wayne Gretzky. During an interview, Wayne was asked the secret to his hockey greatness. His answer was enlightening, yet so simple. He said, "I skate to where the puck is going - not to where it is now!"

The lesson: As real estate investors, to be successful, we must continually look and think about where real estate values (and rents) are going - not just where they are now! In other words, we need to skate to where the puck will be!

How do you learn where the market is going? First, and this is true for any businessperson, become a closet economist. With the internet, this isn't hard to do.

Second, meet regularly with other experienced investors. When I say "experienced" investors, I mean they should have grey hair, a bald head or both. They need to be able to remember when a Pinto was a car (that could explode upon impact) and a joint was just a bad place to be. In other words, they need to have been around for awhile. They need to have been through some market downturns before…and survived!

One last piece of advice: When buying an investment property, structure the deal thinking about the worst-case scenario. Give yourself A LOT of margin for error. If the property barely works at a sixty-cents-on-the-dollar price, then either lower the purchase price or pass on the deal. Don't do the deal just to do the deal!

Remember, with real estate investing, it's not about the seller's asking price. Rather, it's about what you can comfortably afford to pay and still make your minimum acceptable profit and cash flow.

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