7 Life Lessons That Real Estate Will Teach You
“It is a comfortable feeling to know that you stand on your own ground. Land is about the only thing that can’t fly away.” ~ Anthony Trollope
After Hollywood, real estate is one of the most tempting industries that people would like to try their luck in. What could be better than a tangible asset that made so many millionaires in the country? While there is no doubt about the fact that real estate is one of the primary methods for wealth creation in the long-term, it is also accounts for a large number of failures as well.
If you would ask a successful real estate investor about his/her primary takeaway from real estate investing, the answer is quite likely to be the “experience.” Real estate is an excellent teacher, and we are going to find out some lessons that apply to every single investor, irrespective of their experience.
On Strategy: Adapt or Perish
“Adapt or perish, now as ever, is nature’s inexorable imperative.” ~ H G Wells
Much like any other industry, you will need luck, hard work, and a solid strategy to succeed in real estate. There are three primary strategies in real estate: buy & hold; wholesaling real estate; and flipping houses.
Irrespective of the strategy you choose, there is no guarantee that the one which worked perfectly for your colleague will work for you too. The key is to respond in accordance with the result, and keep evolving with every single deal.
For some investors, buy & hold might work, whereas flipping might work for the other, and there could be a group using a hybrid strategy, profiting from each of the strategies. At the same time, it is likely that none of them might work for you, and if it doesn’t, accept it and get some expert advice.
On Cash Flow Dilemma: Expecting Is My Favorite Crime
“Expecting is my favorite crime. Disappointment is always my punishment.” ~ Cassyael
The primary difference between successful and unsuccessful investors is their understanding of the cash flow, and the due diligence in calculating it. Never over-estimate the cash flow of a property; and try to be as conservative as possible.
When calculating the income, list all potential income sources, including rent, application fee, and even the late fee for an accurate estimate. You have to be really comprehensive while listing down the expenses, including mortgage payment, mortgage insurance, or any other insurance covering natural disasters/accidents, property taxes, supplies, repair and maintenance along with every single dollar that you will shell out to earn the rental income. You can use Bigger Pockets’ rental property calculator for adetailed analysis.
On Financing: Investors Are Employees You Can Never Hire
“Investors are employees you can never hire. We made sure to pick investors that thought like us.” ~ Biz Stone, Co-Founder, Twitter
Financing is going to be a crucial aspect of real estate investing, and it will continue to be so throughout your career. If you rely on banking institutions, make sure to maintain your credit scores in the “desired zone,” otherwise elevated interest rates will chip away your profits easily.
On the other hand, if you have had some investing success, and have some investors backing your purchases, make sure to choose investors that understand your strategy and have faith in you. It is important to understand their investment goals and return expectations upfront. The last thing you would want is to answer an impatient investor every couple of days.
For small business owners and self-employed professionals, you can choose Solo 401k retirement plan for real estate investing. The IRS allows real estate investing through Solo 401k plans, and considering the large annual contribution limits (up to $59,000 in 2015), you can accumulate funds quickly. Several full-time real estate investors leverage the flexible credit structure of a Solo 401k plan for investing.
On Balloon Payments: The Red Pill or the Blue Pill
“This is your last chance. After this, there is no turning back. You take the blue pill -- the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill -- you stay in Wonderland and I show you how deep the rabbit hole goes.” ~ Morpheus, The Matrix (1999)
Unlike Matrix, where Neo (Keanu Reeves) had an option to choose between the red pill and the blue pill, a lot of beginner real estate investors don’t enjoy that luxury while choosing financing methods. The truth is, when you are starting out with limited money, you will have to take Balloon loans, and if you’re not aware of them, they can be tricky, especially while resetting the interest rates.
Balloon loans can help beginner investors get the necessary financing with a comparatively lower down payment, and if combined with a well-thought strategy, they can help you grow your real estate portfolio. However, if processed without much thought, these loans can haunt you for the rest of your financial life. Always seek expert help in financial matters, especially when you have a limited understanding of the same.
On Purchasing A Property: Quality Is Never An Accident
“Quality is never an accident. It is always the result of intelligent efforts.” ~ John Ruskin
The choice of properties in your real estate portfolio will govern your overall success. While talking to some of our expert investors that use Solo 401k to purchase real estate, we found the secret behind property selection.
The key is to buy a property that will appreciate and provide a positive cash flow over the next several years, irrespective of the quality of property management. Avoid falling into the latest market trends; and purchase properties that are available at discounted rates.
For beginner investors, finding properties at a discounted price could be a challenge, but the hard work that you put into it will cement your profit margins. A good investor understands that profit is made when a property is purchased at a rate below the market value.
On Tenant Selection: Looks Can Be Deceptive
“If the roof caves in and the tenants are sitting in the debris, they will laugh like hell. They will endure any hardship as long as it means trouble for the landlord.” ~ Harry Golden
If you are not already treating landlording as a business, there’s little chance of being successful as a long-term investor. It doesn’t matter how good you think you’re at apprehending people; tenancy is a complete process in itself.
Quick list for tenant selection
- Hire a lawyer to review tenant policy and agreement
- Understand basic tenancy laws
- Scrutinize tenant application; cross-check references
- Invest in tenant screening reports, which includes eviction records, credit information, and any criminal history records
- Run separate credit and criminal background check
- Hand over the apartment only after the process is complete
If you are planning to hire a property manager, your time and involvement would still be required.
On Real Estate Education: Only The Educated Are Free
“Only the educated are free.” ~ Epictetus
The best thing that you can do in life is to educate yourself, with the same rule holding true in real estate. Learn as much about real estate as possible. Start with online material, podcasts, EBooks, online forums, and real estate magazines.
One of the best ways is to find a mentor and make your first few deals under their supervision. However, don’t get stuck to the educating part only, and once you’re ready, go out and make that first deal. The best experience comes from your initial dealings, so make sure to keep an open mind.
“It takes a wise man to learn from his mistakes, but an even wiser man to learn from others.” ~ Zen Proverb