Examining the Governing Principles of Real Estate Investing

Having invested in, analyzed, brokered and consulted for real estate since the fall of 1969, I can say one thing with ultimate confidence: No technique, no strategy, or any other factor which has emerged in the years since, has trumped the positive impact of a successful result. Captain Obvious? Of course. But many real estate investment books, seminars, and so-called breakthroughs, have tried and failed to overcome the simplicity of the positive result — the attainment of a wise and intelligent goal.

The thing is, what worked last time may or may not work this time. As discussed here before, circumstances are nearly always in a state of flux one way or another, but the principles governing investing as a concept don’t change. The strategy whose agenda is capital growth is worlds apart today when compared to even a decade ago. In fact, what worked as predictably as the sun settin’ in the west from the 70’s through the first few years of the new century, is now failing miserably.

Yet the reason for its success is also the reason for its abject failure now.

Capital growth from roughly 1974-2006 was a product of — buy properties to a break even cash flow. Bake till sufficient appreciation acted as yeast, raising value. Sell for an impressively large, and usually quick capital gain. Take credit for the genius that was your essence. 🙂 Capital growth today?

It involves far more inherent risk than ever before for most investors.

That’s the paradox faced by investors counting on the above mentioned scenario to produce the results it did before the infamous bubble finally burst. We can bake bread till we die of old age. But if we’re denied the use of yeast in the recipe, it’ll never turn out the way Grandma’s bread did. And there’s the rub. It’s about results — and sometimes when one ingredient is removed, the recipe becomes de facto worthless.

How did Grandpa grow his capital in the days where a 10% increase in value over 10 years was reason to party hearty? He ‘created’ the missing yeast himself by way of paying down the property’s debt sooner rather than later. Any viable alternatives are fraught with easily demonstrated increased risk. On that topic there is no debate. Many, however, are not convinced, or impatient to make things happen more quickly. To them I pose a question.

Why are you still tryin’ to bake Grandma’s bread without the yeast?

Instead of using a strategy with demonstrably higher risk, why not simply hunker down and create your own yeast the same way Grandpa did? It’s far safer, due to its significantly (massively?) reduced risk. It’s as predictable as rain. It doesn’t put your family’s future at risk. It doesn’t cause years of sleepless nights.

And it doesn’t crush your spirit.

Though I’ve generally viewed my job as a very positive addiction, and talkin’ with folks about real estate as fixes, there is one huge downside. Whether it’s once a month or twice a week, I regularly speak with people who’ve found themselves over 40, often over 50, with all their invested capital gone, like steam in the wind. Almost always the mistake was completely avoidable, the results almost as predictable. Being mindful of those two facts doesn’t change anything. They’re still 52 with a job, a house, and not much else. These days some don’t have their house now.

The batting average for makin’ bread these days other than Grandpa’s way is below the Mendoza Line — while at the same time unnecessarily risky. Bakin’ bread might be boring, but retiring well isn’t.

Generate real results. Do it the old fashioned way. Make your own damn yeast.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.