“Every day is a new life to the wise man.” — Ancient Chinese Proverb
It should go without saying that real estate investing has a lot of highs and lows. There aren’t a lot of other businesses where things can feel as great in one moment or as catastrophic the next. It’s basically a roller coaster ride. If you flip a house and make $50,000, it’s a high unlike any other. On the flip side (pun intended), if you put months of hard work into a flip and then end up losing $20,000, it’s hard to get much lower. We’ve done both, so I can tell you from experience.
Furthermore, it’s not just the experience of these things happening, but the anticipation or worrying that precedes that loss (or even profit) that can be emotionally exhausting.
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The Secret to NOT Burning Out
Such rollers coasters can burn people out. That’s why, if you’re in real estate for the long haul, a critical skill to work toward is level-headedness — in other words, the ability to not get too high in the good times or too low in the bad times. It sounds simple — but is not that easy to achieve.
My brother is a former poker player, and he likes to bring up variance and how much there is in poker (and real estate, for that matter). Namely, no matter how well you play a hand, sometimes the cards won’t fall your way, and you’ll lose. Statistically, you will win more often than not if you play by the law of averages (and know how to read people a bit), but it won’t always work out that way.
You have to be prepared for this variance (which is one of the reasons learning poker can be helpful for real estate investors). You have to accept that sometimes you will lose, even if you play everything perfectly.
The temptation is to change your strategy if you lose. But while it’s critical to constantly be monitoring how you’re doing and adjusting your strategy, you don’t want to respond in an ad hoc fashion to any given stimulus. Basically, you don’t change your strategy just because you lose. And on the other side, you don’t change your strategy if you win, either. Daniel Kahneman emphasizes this concept when discussing stock brokers in his great book Thinking Fast and Slow:
“Individual investors like to lock in their gains by selling ‘winners,’ stocks that have appreciated since they were purchased, and they hold on to their losers. Unfortunately, for them, recent winners tend to do better than recent losers in the short run, so individuals sell the wrong stocks. They also buy the wrong stocks.”
In other words, people try to hang onto their mistakes in hopes they will get better and sell short their good investments because they’re afraid of it turning into a loss. They’re getting off the roller coaster in the middle of the ride.
So stay true to your strategy in good times and bad. Again, that obviously doesn’t mean that you shouldn’t adjust your strategy. You should. But you should do it in a controlled manner based on good evidence and careful reflection, not as a reaction to what could just be variance.
Make More Mistakes
More importantly, you also have to be prepared to make mistakes. No matter how good you are, you are going to make mistakes. Don’t fear them, expect them, and even go so far as to embrace them. My brother has a sign in his office I love to reference. It simply reads, “Make More Mistakes.”
Mistakes are often just a sign you are trying something new or challenging. Learn from them and move on.
Indeed, as I wrote in a previous article:
“More than once I’ve bought houses with broken sewer lines that I didn’t know about. More than once I’ve missed that a house had galvanized plumbing that was so rusted out it needed to be replaced. More than once I have misjudged the HVAC or windows or roof or missed knob and tube wiring or substantially underestimated the necessary budget of a project or used bad comps when analyzing the LTV of a property. I’ve hired a receptionist with a severe drinking problem and used a contractor who was uninsured unbeknownst to me. I’ve passed on deals I regret. I’ve bought deals I regret.”
But we’re still here despite all of that.
My dad likes to tell me he regrets selling every property he’s every sold other than flips. There are some exceptions, of course, but he’s found it to be generally true. He once sold his percentage of a $2 million apartment that later appreciated to about $3 million over the next few years. We have the habit to hunker down or get out when we make mistakes, but that temptation doesn’t make it a good strategy.
And, of course, sometimes it’s just good or bad luck and has nothing to do with making a mistake or making a great decision. But not matter what the cause, it feels like it was a mistake or a great decision.
Regardless, as Jim Collins showed in his fantastic book Great By Choice, hunkering down after bad luck or a mistake is exactly the wrong way to do things. He calls the appropriate strategy “20 mile marching,” which amounts to consistent, solid growth, or:
“… [An] unwavering commitment to high performance in difficult conditions, and […] the discomfort of holding back in good conditions.”
And the other side is just as important. After a large refinance a few years back, we had a lot of capital and felt very good about ourselves. And, well, we got a little cocky. We ended up buying an apartment that we shouldn’t have that turned out to be a money pit, while simultaneously expanding too quickly in Kansas City. Before we knew it, we had drained our capital reserves and had to scrape our way back out of it.
Being level-headed is absolutely critical to avoid both the mistake of hunkering down too much after a big loss or leaping ahead carelessly after a big win.
Mistakes, luck, and variance happen. Don’t just go with the ebb and flow of the tides; be prepared for the bad times, and while you should go ahead and celebrate the good times, make sure to always keep things in perspective. Stay consistent and stay level-headed. That mindset is your seat belt. Without it, the roller coaster of real estate will throw you right off it.
Investors: What have YOU learned from the highs and lows of real estate investing? What do you believe kept you hanging in there when the times got tough?
Let me know with a comment!