{"id":98928,"date":"2018-05-08T14:30:47","date_gmt":"2018-05-08T20:30:47","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=98928"},"modified":"2024-02-24T13:00:08","modified_gmt":"2024-02-24T20:00:08","slug":"6-life-lessons-school-of-hard-knocks","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/6-life-lessons-school-of-hard-knocks","title":{"rendered":"6 Life Lessons from My Personal School of Hard Knocks"},"content":{"rendered":"<p>People always talk about &#8220;the School of Hard Knocks.\u201d If you haven\u2019t enrolled in this school yet, you may be drafted whether you sign up or not.<\/p>\n<p>In fact, it\u2019s nearly certain that at some point, you will be.<\/p>\n<p>I\u2019ve learned a lot through hard knocks, pain, and loss. As I reflect back on my years as an entrepreneur, I realize that trials and failure are almost always better teachers than success.<\/p>\n<p>It usually seems easier to avoid the mistakes of others than to replicate their success.<\/p>\n<p>I heard a story about an inventor who made chit-chat in an airport lounge. His new friend (a fellow passenger) was really intrigued with his product idea, and he later sent him a check for a million dollars to build his new company.<\/p>\n<p>Does this mean I should sit around in airport lounges\u2014looking to chat with entrepreneurs? How do I replicate that success?<\/p>\n<p>But when I heard the grueling story about a guy who ignored five signals that the real estate market was over-heated in 2007, which led to his financial demise, now that\u2019s something I can learn from. And not repeat.<\/p>\n<p>Anyway, after entrepreneuring (I just made that word up and I\u2019m struggling with pride right now) for decades \u2014 and doing a podcast for the past 18 months \u2014 I thought I would summarize some of the key lessons I\u2019ve learned.<\/p>\n<p>Hopefully these lessons will encourage you in your journey, help you avoid a pitfall or two, and move you toward the success you\u2019ve always dreamed of.<\/p>\n<h2>Lesson 1 \u2014 Realistically Appraise Risk and Return<\/h2>\n<p>Higher risk does not lead to higher return. Higher risk leads to higher <em>potential<\/em> return. And higher potential losses. Perhaps even the loss of all your principal.<\/p>\n<p>For years I failed to see the difference between investing and speculating. When your principal is safe and you have a chance to make a profit, that is investing. When your principal is at risk, and you have a chance to make a profit, that is speculating.<\/p>\n<p>And to take this further, when your principal is at risk and you actually expect to <em>lose money<\/em>, that\u2019s gambling. A form of entertainment.<\/p>\n<p>At this point in my life, I\u2019m done with speculation.<\/p>\n<ul>\n<li>When I sent $50,000 down a hole in the ground in North Dakota, hoping it would spew out ten to twenty times as much in the form of black gold, that was speculating.<\/li>\n<li>When my friends and I scraped together $250,000 to start a wireless internet company from scratch, that was speculating.<\/li>\n<li>When I overpaid for a five-acre waterfront parcel that could <em>probably <\/em>be subdivided into five premier lots and sold for double, that was borderline between investing and speculating. Leveraging it at 80 percent put it squarely in the speculation category.<\/li>\n<\/ul>\n<p>Thankfully, at least the last of these three ventures paid off, and I made more on this real estate deal than I lost on the other two. As I\u2019ve said before, ground-up developers are typically either the wealthiest or the poorest people in the real estate world.<\/p>\n<p>I want to be clear that it is ok to invest, and it\u2019s ok to speculate. As long as you are clear on the difference, and can accept the outcome.<\/p>\n<p>The problem comes when you\u2019ve convinced you\u2019re investing, but you&#8217;re really speculating. Or even gambling. I\u2019ve written about Warren Buffett <a href=\"\/renewsblog\/warren-buffett-mentor-simplicity\/?utm_source=newsletter\" target=\"_blank\">elsewhere<\/a>. This is one thing he\u2019s really good at. We would be wise to follow his lead.<\/p>\n<p><em><strong>Related:\u00a0<\/strong><a href=\"\/renewsblog\/things-i-wish-i-knew\/\" target=\"_blank\" rel=\"noopener noreferrer\">7 Lessons I Wish I\u2019d Known When I Started Investing in Real Estate<\/a><\/em><\/p>\n<h2>Lesson 2 \u2014 Don\u2019t Fall in Love With A Property or Project<\/h2>\n<p>Instead, look for reasons to <em>just say no<\/em> (rather than yes). Some of the best investments are those you never make.<\/p>\n<p>Donald Trump said this in an interview I read in grad school (circa 1987), years before I got into real estate. I\u2019ve never forgotten it. But sadly, I\u2019ve broken my own rule on a number of occasions, and it usually cost me dearly.<\/p>\n<p>Around the turn of the century (I\u2019ve been waiting to say that for years), I was smitten with Cape Cod\u2013style homes. I was looking for my fourth flip, and when I happened across a classic Cape Cod, I was in love before I even walked inside.<\/p>\n<p>I didn\u2019t care that it was in a declining part of town. I reasoned that other buyers would likewise appreciate it\u2019s beauty and pay me a premium once it was restored to its potential.<\/p>\n<p>That beauty cost me months of headache and thousands of dollars.<\/p>\n<p>Bad idea. See Lesson 1 above.<\/p>\n<p><em>Fall in love with the numbers. Not the property. <\/em><\/p>\n<h2><strong>Lesson 3 \u2014 Look For Flies Buzzing Around; Run Away If You See Any<\/strong><\/h2>\n<p>I was meeting with a wealthy Texas oilman some years ago, and he explained his commitment to look for signs of bad character, or lies, in those he partnered with.<\/p>\n<p>He put his weathered boots up on the desk and in his Texas drawl said, \u201cWhen I\u2019m looking at a deal, no matter how good it looks, I\u2019m watching for flies buzzing around.\u201d<\/p>\n<p><em>Huh?<\/em><\/p>\n<p>Sensing my confusion, he went on: \u201cIf I see flies buzzing around above, I know there\u2019s some BS down below. And I show that person to the door.\u201d<\/p>\n<p>This wise man had learned to follow his gut. And you need to do the same thing. Our brains can reportedly perform <a href=\"https:\/\/www.quora.com\/If-the-human-brain-were-a-computer-it-could-perform-38-thousand-trillion-operations-per-second-The-world%E2%80%99s-most-powerful-supercomputer-BlueGene-can-manage-only-002-of-that-But-we-cannot-perform-like-a-supercomputer-Why\" target=\"_blank\" rel=\"noopener\">38 quadrillion operations per second<\/a>. One of the world\u2019s most powerful supercomputers, Blue Gene, can only manage 0.002 percent of that.<\/p>\n<p>This means that our brains can translate thousands of body language, tone, and other signals that our conscious brains cannot explain.<\/p>\n<p>Do not ignore these warnings. Would you go to a mechanic and order him to shut off your red check-engine light without trying to find out what caused it?<\/p>\n<p>Follow your gut.<\/p>\n<p>In 1998, I had more cash than sense. My wife and I had sold our company and we were looking for places to park and grow our funds.<\/p>\n<p>We had invested $100,000 with a brilliant guy in Charlotte who was making investors 3 percent monthly through a proprietary foreign exchange trading program.<\/p>\n<p>A year later, I met with him to consider doubling my investment. Something seemed wrong. I couldn\u2019t put my finger on it.<\/p>\n<p>The good news was that I refrained from sending another $100,000. The bad news was that he still had my first $100,000 a few months later when the FBI caught up to him.<\/p>\n<p>He still won\u2019t tell the FBI where he hid $18 million of 2,000 investors\u2019 funds. (I guess he hopes to enjoy it after his 153-year prison sentence. Hopefully the prison food is organic.)<\/p>\n<p><em><strong>Related:\u00a0<\/strong><a href=\"\/renewsblog\/mentor-lessons\/\" target=\"_blank\" rel=\"noopener noreferrer\">4 Life-Changing Lessons My Real Estate Mentor Taught Me<\/a><\/em><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-98974\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2018\/05\/architecture-building-center-27406.jpg\" alt=\"\" width=\"702\" height=\"466\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2018\/05\/architecture-building-center-27406.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2018\/05\/architecture-building-center-27406-300x199.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<h2><strong>Lesson 4 \u2014 Buy A Great Property in A Great Location at A Fair Price.<\/strong><\/h2>\n<p>I\u2019m co-authoring a series of articles on Warren Buffett\u2019s advice for real estate investors. One of Buffett\u2019s concepts is that <em>it is better to buy a great company for a fair price, than to buy a fair company for a great price<\/em>.<\/p>\n<p>BP\u2019s <a href=\"https:\/\/www.biggerpockets.com\/users\/ScottTrench\" target=\"_blank\">Scott Trench<\/a> helped me translate this into language for real estate investors. He said something like, \u201cIt\u2019s better to buy a wonderful property in a wonderful location at a fair price, than to buy a fair property in a mediocre location at a wonderful price.\u201d<\/p>\n<p>I play in the multifamily investing space. Because of the crazy overheated nature of this space right now, buyer-operators are regularly tempted to buy \u201cgreat deals\u201d in questionable locations.<\/p>\n<p>My partner and I briefly looked at a run-down apartment in a tiny town with a small college that was planning for an influx of 300 new students. The dean told us they would all need a place to live.<\/p>\n<p>It made sense, if the students actually came. But what if they didn\u2019t? Or what if they moved somewhere else? <em>Scratch that deal<\/em>.<\/p>\n<p>I believe about two-thirds of the success of a multifamily investment is based on the location and the hiring of a professional property manager.<\/p>\n<p>So choose well, and vet carefully.\u00a0No matter how great a deal or property, if it is in a city that has declining population, you probably won&#8217;t win.<\/p>\n<p>And even if you can make a go at improving income, your eventual buyer will see it through the lens of the population decline and discount it. Maybe a lot.<\/p>\n<h2>Lesson 5 \u2014 Pursue True Wealth<\/h2>\n<p>Wealth = investments that produce income.<\/p>\n<p>Though virtually everyone seeks it, I wonder how many have stopped to consider what wealth <em>really<\/em> is?<\/p>\n<p>I propose this simple formula: <a href=\"\/renewsblog\/what-is-wealth\/\" target=\"_blank\">wealth = assets that produce income<\/a>.<\/p>\n<p>Attaining assets that produce income means owning things that other people are willing to (actually, must) trade a portion of their labor and income to obtain.<\/p>\n<p>The more income-producing assets you have, the wealthier you are. And the more assets you have that are insulated from downside risk, the better.<\/p>\n<p>Attaining assets that produce income is another Buffett tenet. He said, \u201cIf you don\u2019t find a way to make money while you sleep, you will work until you die.\u201d<\/p>\n<p>Most people all over the world trade their hours for dollars. Robert Kiyosaki talks about this extensively in <em>Rich Dad Poor Dad<\/em>.<\/p>\n<p>After selling my company and moving to the Blue Ridge Mountains in 1998, I was considering where to invest my newfound small fortune. I was storing stuff in a self-storage unit, and I thought it would be great to build a similar facility. Metal boxes that spit out money.<\/p>\n<p>So what did I do?<\/p>\n<p>I built a large barn and a pond on my land. I stocked the pond and bought a tractor for the barn. I finished the basement in our new home and I planted hundreds of blueberry bushes. They died within months.<\/p>\n<p>Twenty years later, here I am looking to invest in self-storage units again. I\u2019ve reviewed the track record of some of the top players in the industry, and I have to say I\u2019m blown away by their risk-adjusted returns.<\/p>\n<p>And I daydream about what could have been if I\u2019d known how to build true wealth two decades ago.<\/p>\n<p>I hope my son has learned from these lessons. He\u2019s a 24-year-old with a long-term view toward growing wealth right out of the ground. He\u2019s buying timberland. He makes a nice profit cutting timber when purchased, then he sows seeds for future profits in decades to come. He\u2019s buying assets that produce income.<\/p>\n<h2><strong>Lesson 6 \u2014 Focus On One Thing And Do It Really Well<\/strong><\/h2>\n<p>I was talking with one of my mentors the other day\u2014a dear friend and brilliant business strategist. My friend has made and lost a few fortunes in his lifetime, and he was recently stung by a major gamble in hotel development that did not pay off.<\/p>\n<p>He\u2019s just ran for the ticket for Colorado Governor, and he\u2019s been rubbing shoulders with bigwig billionaires for some time.<\/p>\n<p>He told me that he and I had quite a few things in common with the billionaires. Similar brains. Similar business acumen. Similar training and degrees.<\/p>\n<p>So what sets these billionaires apart from the other 99.9 percent of us? One simple word. One simple concept:\u00a0<strong>focus.<\/strong><\/p>\n<p>These guys were able to obsessively focus on one thing. They went deep on it. They later went wide on it. They owned it and did it well.<\/p>\n<p>When asked about the secret of their amazing success, Bill Gates and Warren Buffett both said one word: <strong>focus<\/strong>.<\/p>\n<p>And to say yes to this one great thing, they had to say no to a thousand other good things\u2014no, ten thousand.<\/p>\n<p>Many of them stayed with their obsession for decades. And with a dose of great timing and providence, they created and dominated markets.<\/p>\n<p>This <em>one thing<\/em> concept applies to the big picture and the tasks of everyday life. In a society with a business climate that tempts each one of us to multi-task like crazy, every study on the topic points to the importance of laser focus instead.<\/p>\n<p>In their wonderful book, <em>The One Thing,<\/em> Gary Keller and Jay Papasan ask, \u201cWhat is the one thing you can do right now that will make all other tasks easier or unnecessary?\u201d<\/p>\n<p>I am a serial entrepreneur. I have not obeyed my own counsel here for the majority of my career. This counsel actually came through years of toil and pain and mistakes.<\/p>\n<p>It\u2019s ironic that entrepreneurs love starting <em>new<\/em> businesses and jumping from task to task. We are pioneers and cowboys, and a lot of us are functionally ADD \u2014 whether we\u2019ve ever been diagnosed or not.<\/p>\n<p>No wonder the business startup failure rate is about 80 percent in the first few years \u2014 and the majority of survivors will fail after that.<\/p>\n<p>But this doesn\u2019t have to be your fate! You can learn from the failures and successes of those who\u2019ve gone before you to enjoy success\u2014 and to leave a permanent on society mark for good.<\/p>\n<p>You can\u2026<\/p>\n<ul>\n<li>Realistically appraise risk and return<\/li>\n<li>Stop falling in love with properties and projects<\/li>\n<li>Look for flies buzzing around\u2014and run away if you see any<\/li>\n<li>Buy a great property, in a great location, at a fair price<\/li>\n<li>Pursue true wealth<\/li>\n<li>Focus on one thing and do it really well<\/li>\n<\/ul>\n<p><a href=\"https:\/\/www.biggerpockets.com\/real-estate-investment-calculator?utm_source=renewsblog\" target=\"_blank\" rel=\"noopener noreferrer\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-91220\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-02.jpg\" alt=\"\" width=\"700\" height=\"85\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-02.jpg 700w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-02-300x36.jpg 300w\" sizes=\"auto, (max-width: 700px) 100vw, 700px\" \/><\/a><\/p>\n<p><em>So how about you? <\/em><\/p>\n<p><strong>Tell our community (of over a million!) about the best lessons from your school of hard knocks. Share below!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>As I reflect back on my years as an entrepreneur, I realize that trials and failure are almost always better teachers than success.<\/p>\n","protected":false},"author":214608,"featured_media":98973,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7358],"tags":[],"class_list":["post-98928","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-stories"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/98928","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/214608"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=98928"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/98928\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/98973"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=98928"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=98928"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=98928"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}