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I am writing this article as a follow up to last weeks article “5 Steps to Building Your Real Estate Investment Business” and I think the two go hand in hand.

I first wanted to define how a business should go about finding their ture core competency.

They need to know what they do best and attract ideal clients.

On the other hand, this article is all about the investor correctly defining their WHY.  Why are they investing in real estate in the first place.

When an investor matches their WHY with a company looking for them as an ideal client.  It can be a very rewarding and profitable experience for both!  The real challenge is getting everyone to get on the same page.

As with any trend, you can see spikes in interest and activity among real estate investors based on the media and news cycle.  Since 2004, the housing market has been a constant story in the media as the markets have followed a roller coaster curve.

No matter what the story from the media or the spin on the data, housing has been front and center.  Recently, investor activity both big and small has been front and center and for the past 3-4 years much of the media focus has been on the impact that investors are having.

That naturally attracts more and more interest to real estate investing and I think that leads us to the #1, biggest mistake real estate investors are making.

It has nothing to do with timing or choosing markets or even choosing how to invest.  To many investors cannot give you a definitive reason for investing.  The #1, biggest mistake is that too many investors have no idea WHY they are investing in real estate!

Do Not Mistake Activity for Intelligence

The real estate investment world is riddled today with horror stories from seasoned investors recounting how they first got started.  I am one of those investors.

I was a typical entrepreneur who the Colby test showed was great at creating ideas and poor with follow-through to completion.  I knew how to create and define and plan and I needed to surround myself with doers and finishers.

I built a tremendous sales company in Denver, CO. and found myself with plenty of cash resources and constantly hearing about the heating up housing market.

For me, in the early and right through the mid-2000’s real estate was the cool thing to do and it seemed like everywhere I turned someone else was talking about how great they were doing in the real estate market.  I began to buy real estate before I even knew what was going on in the real estate market.

Much worse, I mis-took activity (activity by me and other investors) as knowledge, know-how and intelligence.  When it came to my core business, I knew every detail and my purpose for jumping out of bed everyday.  I was building my company ( it was a grocery arbitrage company by the way).

When it came to real estate I thought I knew what I was doing, but I had no idea why!

Defining your Why!

There is a reason we invest our hard earned money.  For most investors it boils down to three pretty standard answers that don’t really define much of a reason at all.

Cash Flow ~ Retirement ~ I know someone making a killing in real estate
The sad reality is that these are not reasons to invest in real estate.  They are catch words and fleeting ideas with no conceptual grounding in real estate at all.

New and old real estate investors alike will only be satisfied and successful when they have defined exactly WHY they are buying investment real estate and they take specific steps to achieve that why.

We All Want Monthly Cash Flow

A simple answer like “I want monthly cash flow” could lead an investor down a disastrous path.  You do not invest in real estate for cash flow.  You invest in real estate to meet a specific need that revolves around generating cash flow.  Otherwise, there are probably hundreds of ways to generate cash flow with your time and money.

Real estate may not be the right method to use to meet your needs.  You might need a solution that is more liquid or short term.  You might need a solution that is more varied and widespread whereas a real estate investment may only be in one property.

Simply saying I am going to invest in real estate because I want monthly cash flow means you possibly have not defined your true reason for needing to invest in real estate.

I Am Going to Retire on Real Estate

I hear a lot of generic talk about retirement.  Many investors say they want to buy real estate for retirement. I think real estate is a great tool to be used in retirement planning, but what about the other methods of income during your retirement years?

Too often, real estate investors can talk about real estate as if it is the only option for retirement and the rest of the plan…the part that should all ready be put in place…is non existent.

Retirement planning should take thought and time and will encompass many variables, not just investments.  Variables such as personal residence, vehicles, other tangible assets, investment accounts, pensions, retirement income, social security, age, spouse/no spouse, etc….

No one should simply say to themselves, I hear that real estate is great for retirement so I think I am going to go buy some single-families!  The WHY for buying real estate is that it fits into your retirement PLANS.

You have a very specific retirement plan that needs an asset that can produce a monthly income or hold value for the future and be a possible levering tool.  Possibly it is already levered on day one or possibly it is owned in a cash position, but the real estate serves a purpose in the over-all retirement plan.

I am a big believer in real estate as a tool used for retirement planning, but just make sure that thorough and detailed plan is thought out and worded through before buying.

I Know a Real Estate Rockstar!

This may be the worst reason of all and yet, it is a very popular reason for people to buy real estate whether they admit it or not.  I think we all know that person that gives off the vibe that they are the absolute best real estate investor that every lived.  They talk the part and look the part and everywhere they go there could be two or three groupies wanting to invest in real estate too.

Has anyone ever thought, I want to invest in real estate after seeing that guy?  Has anyone ever thought, what a jerky!  If they can invest in real estate and make money then I know I can!

In reality, it is very difficult to know if someone has their head on straight or not when it comes to investing in real estate really well.  One person’s true success does not always translate into another’s success.  I say true success, because the flip side to that coin is that the person show boating and wanting everyone to recognize their success, is not always what they seem.

You could be following and trying to emulate someone who is a total sham artist.  Worse than that, you could be listening to someone who has already failed and has no idea how spectacular their fall will be.

Just because you think someone is a successful investor does not mean that you can copy them or follow them and it sure does not mean that their WHY matches your WHY!

Knowing what our needs are is a huge piece of the puzzle when you are deciding to invest in real estate.  It is not the right investment for everyone and every situation.

Real estate investing cannot solve each liquidity, cash flow, retirement and lifestyle problem.  It takes patience, education and honesty to evaluate your WHY and to keep yourself on the right road.

I started out with a very clear goal for investing in real estate and soon found myself neck deep in the mud of my own bad decisions.  I did not stick to my WHY and it cost me in more ways than one.

So my advice for every real estate investor, new and experienced, is to spend a little time at the beginning of each year evaluating where you are in life, what your expectations are for the year and if your current or even future plans should involve real estate investing.  You will find yourself in a much more comfortable and confident place!
Photo Credit: Alex E. Proimos

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