Evolving Focus from Simply Profit to People
Writing for BiggerPockets is a lot of fun. One of the best parts is interacting with all the readers as they share feedback, criticisms, and thoughtful questions. The following topic is an example of such a question.
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Question: How does your work give back or contribute to the community?
I found this question extremely insightful as it conjures up multiple possible answers. I believe the answer for each investor will actually evolve over time as they gain experience and work on more deals.
In the beginning, most investors start out solely focused on the numbers and profits (At least I did). This could manifest itself in several different ways. You might force an agent to write 100 low ball offers hoping for someone to say yes. You might skimp on repairs or offer rentals as-is.
While some investors might stay in this frame of mind for a long time I believe most investors will mature out of this approach as it is not a lot of fun. I believe people that start in this mold and then step out of this framework do so because they realize that real estate investing is a people business and you can’t keep grinding people over and over again for your profit long term.
Real Estate Investing as a “People Business”
After 10 years I have evolved my model many times and unfortunately, as I admitted, I started solely focused on numbers as I described above. I did some deals and made some money, but it was a lot of work and absolutely no fun.
My business didn’t take off until I learned from my mentor, Tony Alvarez, that profitable long term real estate investing is based on great relationships. Once this light bulb went on, my business changed drastically, for the better.
I still think about profit, but now I also think about the community, neighborhood, tenant, and lender.
When I buy a property that is distressed, I am taking an asset that needs work, may owe back taxes, and might have other liens and issues recorded against it. When I buy the property, it ensures that it is going to be put back into the mix for the community. We will pay our taxes, we will fix all the issues, and we will do the correct things by the community and address any issues in a timely manner. The community as a whole will be better off when I turn a distressed asset into a functioning long term rental.
The neighborhood might be the most obvious winner given the before and after state of these distressed assets. If you drive by one of the properties I buy the day I close, and then 3-6 weeks later, there is a good chance you won’t recognize the property.
Every property needs its own “get well plan”, which can include the simple things on the outside like yard work, new fencing, new roof and new exterior paint. Work inside the property could include things like new wiring, new plumbing or the creation of an extra bedroom. It will always include new paint, new flooring, and new window fixtures. The house goes from worst on the block to at least middle of the road, which helps raise the value of all surrounding properties.
Lastly, properties that are eyesores attract crime, squatters, and other trouble. We insure the quality is returned and a happy renter is installed in our performing units, reducing the concentration of neighborhood problems.
My business model is focused on only owning rental properties that are safe and secure. On occasion this means I have to blow up my initial budget because of an unplanned issue. Sometimes I can simply ignore or put off the issue and artificially increase my yield by lowering the repair cost, but that is not good business in my opinion. If you are going to follow my model, you will need to provide a safe and secure property. Please keep in mind that this does not mean you need to add all the extras if the rent will not support it, but you need to make sure the basics work.
Don’t ever buy a fixer-upper and simply stick a “for rent sign” in the ground and then rent As-Is. This is a bad business model and in my opinion reflects very poorly on your personal character.
Whether the lender is a bank or a one of my passive investors looking for a secure and decent return on their cash, I believe they are only looking for two things.
First and foremost, they are looking to understand if the asset will produce the income with room to spare to pay the mortgage each month. The second thing they want is downside protection. If they are lending on an asset that was purchased at a distressed price and repaired producing a large equity spread, they may very well pray they don’t get paid back.
Think about it from the bank or passive lender’s perspective. They are in position with around 20K-40k to control an asset that has had 10K or more in work done, is now producing income, and is in livable condition, and is thus a lot more valuable than the distressed purchase price. I like to joke that our passive lenders hope we forget to pay them so they can take our assets at insane prices and laugh all the way to the bank.
In summary, I believe that real estate investors may start out by focusing simply on the numbers but they won’t become really successful until they realize that real estate is a people business.
Photo: Murray County Medical Center