Long term real estate investing is not rocket science. In fact, when you boil it down to its essence, it’s so simple that it’s barely high school science. Here’s the gist of it in three sentences. You buy properties that bring in more income than what they cost you in operating expenses and mortgage payments. The difference between the two is positive cashflow that represents your return on investment. Over time you buy enough such properties that when held over the long term become free and clear of debt and produce enough income for you to retire. Of course, it takes knowledge and experience to know all the expenses and anticipate the unknown curveballs that real estate investments invariably throw at you. But at its very core, the mechanics of long term real estate investing are painfully simple.
Having said that, two questions come to mind: If it’s that simple,
- Why isn’t everyone successful at long term real estate investing?
- Why isn’t everyone doing it?
The answers to those two basic questions happen to be the most important and misunderstood factors in real estate investing.
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The principal reason why investors don’t succeed at long term real estate investing is the Grand Canyon sized gap between their numbers on paper and those in real life. And the main culprit for this gap is the lack of quality in their investment portfolios. In order to fully grasp the impact that quality has on your investments’ performance you must read your income and expense numbers as a conditional statement. Add “if” in front of every line item and you will see the quality or lack thereof hiding in the crevices.
If the gross rent is 18,000 a year and if vacancies don’t exceed 10% and if operating expenses are in fact 36% and if repairs don’t exceed… then (and only then) will you have that positive cashflow.
When you think about it, your ability to secure a certain incoming rent on a consistent basis depends on the quality of the asset you purchase in the first place. Furthermore, your ability to keep that place rented long term without excessive rent losses and turnover depends on the quality of the tenant you placed in that property. Last but not least, your ability to keep operating expenses and maintenance to a manageable level depends on the quality of your game plan and systems. So you see, if any of those facets of your investing strategy isn’t high quality, your actual returns will negatively differ from the ones you had on your cashflow analysis. It is really that simple.
But isn’t quality in the eye of the beholder – One man’s trash another man’s treasure? Not quite. To quote former Sen David Patrick Moynihan, you are entitled to your own opinions but not to your own facts. An investment property derives its quality from that of the school district, the location, the safety and amenities of the neighborhood. A great tenant derives her quality from the proven performance of paying rent on time and taking care of the property like it was her own. And your game plan derives its quality from its propensity to fill your portfolio with great properties occupied by great tenants. Anything short of that is just compromise – which is fine if you’re looking for average results but falls well short if you want to truly succeed.
Focus on quality, got it. So then, why isn’t everyone taking action on an idea so simple? That’s because discipline is a very scarce commodity. In most areas of life, we are full aware of what needs to be done but a small minority of us have the discipline to carry it out. This is the 80/20 rule at work – although I suspect that 20% might be a bit generous in the real estate investing field. We don’t have an information problem, but an execution problem. Long term real estate investing may be simple but it’s by no means easy. Having a solid plan of action is half the work, but you still must be able to execute that plan with focus over extended periods of time. And this is something you can’t phone in or delegate – it requires your purposeful action.
As a parting thought, I want to share an observation with you. When we procrastinate and avoid doing the hard things we know need done, we invariably start looking for a strategies, solutions and shortcuts – anything to avoid doing the work. We convince ourselves that there’s an issue with our strategy and must dedicate all our time and effort to finding this magical solution. Take it from me -that’s an exercise in futility and we all fall prey to it at some point. You just have to do the work. Execute. In the words of Randy Pausch: ” If you have to eat a frog, don’t look at it for a long time. If you have to eat three frogs, don’t start with the small one”.