I talked to a newbie the other day. He is a highly paid young professional who’s seen the light and would like to invest in real estate – the right way. However, he sees beyond the hype and knows it’s somewhat more difficult to do things right than what is easily obvious. He wants the truth!
His opening comment to me was something like this:
I’ve read a lot of things on BP, but you always talk about the “other side of things.” This really appeals to me because, as in my profession, most things that get you in trouble are the things that are less obvious and more difficult to see…
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Are You Wise or Just Smart?
There is a big difference between he who is smart and he who is wise. Being smart is characterized by a capacity to rationalize. However, this rationale is based on something — what?
Success in this game requires perspective, otherwise known as wisdom. Wisdom is one’s ability to be smart in a less static kind of way. Wisdom is not merely an ability to look at the numbers and read a story about what happened yesterday, or even what’s happening today. Nope, wisdom is the capacity to project what will happen tomorrow — and how, why, and what to do about it today.
This is what the caller was telling me, that my writing is evidently an attempt to explain wisdom, not merely smarts. He is attracted to this, and therefore he is now my client.
A Real Life Example
Suppose you’ve purchased a triplex. It’s in a good area with all of the desirability characteristics. Currently the rents are very low and vacancy is high because the building needs a lot of work. But all of the numbers are to your satisfaction, so you went ahead and bought it with the intent of remodeling it and hiking rents. It’s a classic value-add deal.
It’s your third rental building, as you already own a house and a duplex, and while this is a little bigger than anything you’ve done, you can’t see any reason why anything will be different this time.
You are planning on doing a lot of things, but the biggest exterior item within the scope of work is to replace all of the windows. The windows are original to the building, wood-frame, single-pane windows with a pulley system. But the ropes in the pulley system had been ripped years ago, and most windows are painted shut.
You know that you can’t possibly attract reasonably well qualified tenants if you keep these windows, so you know they need to go. Thankfully, you’ve done it before on your other buildings, and you figure replacing these windows shouldn’t be any big deal; you’ll just drop a reciprocating saw into the siding and cut the old window out and replace it. No big deal…
While your two previous flips were sided with cedar shingles, this one is asbestos. Oops. There are very strict EPA regulations in place relative to how asbestos can be disturbed, and dropping a reciprocating saw into the siding and creating a bunch of airborne asbestos dust certainly does not qualify.
Indeed, properly licensed contractors with vacs and other appropriate equipment must be used in this case, at least if you are going to pull permits and do the job in the light of day. Forget $300/opening – these replacement windows will blow your budget!
Side-note: I am using asbestos siding as an example, but please understand the greater point, which is that those of us who’ve been around for a little while could make a mile-long list of structural and economic elements in any and all transactions, which can have dramatic impact on the very worth of the asset. However, being around for a while is requisite to visualizing those.
I have no idea how much more replacement of windows costs when asbestos siding is involved, since I wouldn’t buy an asbestos-sided house if it was the last house in town that I could buy. But you didn’t know this. You figured that replacing a window is replacing a window is replacing a window – it ain’t!
You are smart and you did all of the numbers right, with the exception of those numbers that you knew nothing of. You were smart, but not wise!
You’ll be wiser next time.
What wisdom have you gained from investing experience? When has lack of wisdom gotten you into a bad situation?
Be sure to leave a comment!