As I listened to a real estate podcast while driving today, I heard a speaker talk about how she used equity from properties she had purchased previously to buy new properties later on. It caught my attention because I too have done this. I’ve also sold a few properties I thought I would keep as rentals—and kept a few I thought I would sell. I had my plans change, rents stall, rents rise, values skyrocket, and values flat-line.
What I learned is, sometimes the plan we set out with isn’t the plan we end up executing. Markets shift, our personal lives change, and new opportunities transform what we once thought was best for us. In short, I’ve learned it’s much better to play the hand you’re dealt and to reevaluate at each new turn than it is to stubbornly stick to a strategy.
I’d like to talk about how this is similar to poker, how to pull this off in the real world, and how learning different investing strategies gives you the tools and opportunities to increase your holdings!
In my upcoming book for BiggerPockets, I share a lot of the strategies I have used to build my own wealth in real estate. I’ve become a huge proponent of playing the hand I’m dealt rather than wishing I had different cards and letting a bad hand become my excuse to not build wealth. This article will include a sampling of some of these strategies that can help show you how to play your cards like an expert.
Texas Hold’em is a popular form of poker made even more popular when televised poker became a “thing” 10 or so years ago. The idea is to put your hand together using two cards only you can see and use, with five cards everyone else can see and use. As each new card that everyone can see and use is turned over, a new round of betting takes place. What ends up happening is new opportunities, strategies, and techniques become available with each new round, while old hopes, plans, or strategies become no longer open to you.
Sometimes just one card can change the entire strategy you had moving forward.
How I Bought, Rehabbed, Rented, Refinanced, and Repeated for 14 Rental Properties
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The Best Don’t Rely on Luck
In the movie Rounders, Matt Damon’s character Mike McDermott points out that poker isn’t just a game of luck. Every year, the same talented players end up at the final table, competing for the top spot. He notices it’s not just the cards you’re dealt that matter, it’s more so how you play them.
That line has always stuck with me. I believe it’s applicable for more than just poker or real estate. It’s not uncommon to turn the news on these days and see a new narrative of entitlement and whining while someone claims life is too hard or unfair. People with this mindset tend to be quick to point out how the cards they were dealt have affected their ability to be successful. They always have a myriad of reasons why someone else made it, while they didn’t. This line of thinking can become addictive if you let it, but like most forms of addiction, it is rarely beneficial.
The best poker players have learned how to play the hands they are dealt. So have the best businessmen—and the best athletes. The best of the best don’t have the ball bounce their way every time. They aren’t always born into privilege. They don’t get the best hand every single time. They learn to minimize their losses and maximize their strengths.
That’s why, regardless of the cards, the best poker players are always at that last table competing.
One of my favorite examples of this is BiggerPockets’ own Josh Dorkin. Josh has built an incredibly successful company, a category king, with virtually no equal in the world of real estate investment education. And he built it all after unsuccessfully investing in real estate himself.
How is that for someone who played their cards right? Josh could have taken the easy road, blamed the system, blamed real estate, blamed the gurus, blamed the market, blamed the economy. But he didn’t. Josh learned from his mistakes, regrouped, and came back to build a website so the rest of us could avoid his mistakes.
Josh is one of my favorite examples, but he’s not the only one. Learning to play your cards is what separates the successful from the excuse-makers.
So how does this apply to real estate? Consider how a poker player’s mind thinks and adapts with each new round of betting.
Good poker players are constantly reevaluating odds. They see the cards in front of them and come up with a strategy for betting. Depending on who else bets and what the next card is, that strategy can change. Poker players all have to play by the same rules. They know what cards they have, but they don’t know what cards are coming.
Lack of Understanding Creates Lack of Confidence
Real estate investing is similar in the sense that you don’t know what the market will do. This question might be asked more commonly than any other in real estate. “What’s the market going to do?” No one can answer it with any certainty, yet everyone wants to know. Why is that?
I would propose it’s because the less confident you are, the more you feel the need to know what’s coming.
Think about that. Would there be any anxiety in poker if you had x-ray vision and knew what the next card would be? If you could see, poker would be a lot less stressful, but also a lot less fun.
The same goes for being an entrepreneur. If you knew what to expect, you wouldn’t need the skills, courage, or drive to start a new company. While this may sound good to some people, it would actually be horrible because everyone would do it! Part of what makes the unknown such a positive is the fact it creates opportunity for those who have the boldness to venture into it. It’s moving into unknown territory that creates new skills, talents, and abilities that ultimately make the entrepreneur successful.
If you find yourself worried about what the market is going to do, might I propose that your problem might be a lack of confidence in understanding real estate? The best poker players don’t fear what the next card will be because they understand the game well enough to be comfortable that whatever the card is, they know the best response for it.
Maybe if more real estate investors understood the discipline they wanted to make them rich, they wouldn’t fear what they couldn’t control about it quite so much.
In my experience, confidence comes from knowledge and experience. You can’t just “have” confidence. You have to build it. Learning what you will do when various scenarios hit you is the fastest way you can create confidence when it comes to understanding your options with real estate investing. The more you learn, the better you’ll feel.
I’d like to share a few real world examples of how markets shift and strategies change—and how to pivot to keep up.
7 Situations That Cause Real Estate Investors to Pivot
I think it’s wise to have a strategy in place when you first get started. Only a fool embarks on a journey without knowing their destination. Sometimes the road you take to get to your destination changes. Sometimes bad weather, unsafe roads, or other changing circumstances affect the plan you had when you started. Being able to adapt to these changes (like a poker player changing their strategy with each card) will not only get you to your destination more quickly, but will also make the journey more enjoyable.
Obviously, in this example, the destination is financial freedom. Who wouldn’t want to get there sooner? Let’s talk a little about how we can make that happen by playing the cards we are dealt in the best way.
1. Equity rises faster than you expected.
This is one of the best things that can happen for a real estate investor. When your home’s value increases faster than you anticipated, you can find yourself with beneficial options at your hands you didn’t think you’d have. Like catching a lucky card that gives you a great hand, sometimes the universe just rewards us even though we had nothing to do with it.
While we didn’t necessarily “earn” the benefit of higher home values, we can definitely cash in on it!
In short, when we find ourselves with unexpected equity, there are basically three options at our disposal.
- Do nothing and feel good about it.
- Sell and move the equity somewhere else where it performs better.
- Take out a line of credit against the equity and re-invest that.
Option one needs no explaining, as you’re not doing anything that requires a decision.
Option two is typically the option most people will exercise. When played correctly, it allows you to supercharge your returns and benefit from both another potential run-up in values, paired with a higher return on your initial investment from a cash flow perspective. Think of it like buying a stock low, letting it run up in value, then selling and making a bunch of money to reinvest in a new stock you are also buying low. When that stock runs up in value, you’ve now made very good returns on your investment.
Related: Newbies Beware: Failing to Adjust to Market Tides Could Leave You High & Dry (or Underwater)
Real estate investing is unique in the sense that not only do we look for asset appreciation, we also look for cash flow. When you find your property has appreciated much faster than you expected, it’s almost always the case that rents have not increased as fast. Oftentimes, selling and moving your equity into a property with a better price-to-rent ratio (sometimes in another market or another part of the country) is an extremely fast way to build up your passive income efficiently. I talk at length about this strategy in my upcoming book for BiggerPockets.
If you’d like to get a more detailed description of how this strategy works, check out my previous BiggerPockets article here.
Option three is my favorite strategy, though it is usually the toughest. The hard part is finding a lender that will allow you to borrow against the equity in a rental. Most lenders will allow you to do so if it’s your primary residence, but investment properties can be tough. My recommendation is you start with credit unions or small banks you already have a relationship with.
If you can find a way to do this, it’s an incredible advantage, especially if you think your property could continue to rise in value. Basically, you will be pulling equity out of your property at a low interest rate (4-5% at current rates) and investing it at a much higher rate of return. Not only will this increase your cash flow, but it will also give you the added benefits of potential appreciation with the new properties and eventual equity build up from loans being paid down.
If you make sure that your initial property (the one you took the line of credit against) provides enough cash flow to cover your initial costs as well as your new line of credit payment, this is a very safe and prudent way to invest more capital and make it grow. The best businessmen look for ways to tap into the equity they’ve created—and invest in new opportunities with it. We as real estate investors should follow this model.
2. Rents stall.
Not everything is an unexpected bonus. Sometimes, we start off with a good hand and it gets worse when more cards come into play. Stalling rent growth is an example of this.
When you find your rents aren’t growing at the rate you projected, there are a few options:
- You can hang on and do nothing.
- You can evaluate if your equity would earn you a better return elsewhere.
- You can look to increase rents by adding value to the property somehow.
If you hang on and do nothing, rents may increase in the future, but they may not. Make an effort to understand why rents aren’t increasing and if that is likely to change at some point.
Option two is a good, solid option. While your home value may not have increased dramatically, if there has been enough steady growth, you may have more equity than you think. Sometimes a good hand starts off good and then never goes anywhere. There is nothing wrong with folding and investing that money somewhere else where you’re likely to get a stronger return.
I did this myself with a property I bought in Arizona. Rents hardly increased over a 4-5 year period, but values did. I sold this house and took the chunk of money I pulled out, combined it with some savings I had, and it became my seed money going into a new market. I was able to BRRRR this capital several times over and buy four new properties with it. Those became my test runs to ensure this was a market I wanted to be in. Once I felt good about it and had the right pieces in place, I started buying homes much more quickly in that area. This allowed me to take a stalling asset and basically turn it into a portfolio of over 10 homes and counting.
Option three can be the trickiest, but it’s still worth looking into. A different property in Arizona I own has seen very modest rent increases over the last five years. Although it’s in a fantastic area, it’s a 2-bedroom, 1-bathroom floorplan. Once I looked deeper into it, I saw that 3/2 models are renting for over 35% more.
After speaking with a contractor, I learned I could add another bedroom and bathroom for about $11k. This will also increase the square footage of the property from 900 to 1,200. Once completed, I can refinance the house (which already has a lot of equity not being used) and recapture the full $11k I spent on the rehab. Then, when my lease expires, I can raise rent by several hundred dollars.
This allows me to increase the value of my property, increase my rent, increase my cash flow, and pull back more than the money I put into the project to do all this. It’s a no-brainer play based on the cards I have in my hand, with very low risk. Sometimes reevaluating the highest and best use of a property is a great way to improve your hand.
3. Home values stagnate.
Thinking you were going to see appreciation and then not getting it can be disappointing, but it really shouldn’t affect your bottom line. Experienced investors know not to bet on appreciation, so when assets fail to appreciate, it doesn’t affect their financial health. In general, if a home stops appreciating, you bought in an area not experiencing an increase in demand.
If you find yourself in this situation, the best thing you can do is learn from it. Could you have seen this coming? Should you have?
If you kept raising your bet hoping to “catch a card,” you got caught up in playing the luck, not playing the odds. Learn from this mistake, and don’t repeat it. Everyone at some point has to learn this lesson. A few of the common reasons investors make this mistake are:
- The 2% returns you saw on a spreadsheet caused you to stop thinking and get greedy.
- The ease of finding a property that met your cash flow requirements got the best of you and you took the easy road buying in a market that was convenient to buy in for a reason.
- You had a 1031 you didn’t properly plan for and found yourself with very limited time to make a good decision.
- You didn’t research the individual market you were buying in and incorrectly believed “real estate is real estate” and it doesn’t matter where you buy.
- You listened to a turnkey provider who told you everything you wanted to hear and sold you on their product.
- You bought close to you, in an area you know, because you felt that was safer.
There are many reasons why people buy in markets that aren’t likely to appreciate. Learning from your mistake, so you don’t play those cards the same way again, is the best way to protect your wealth moving forward.
4. Your rehab goes terribly.
This one happens a lot—probably more than most of us want to admit. While rehabs can go terribly, there is always a reason why. Contractors typically get blamed for this, and it becomes an easy way out for the investor who hired them. Want to know the truth?
It’s the investor’s fault.
We choose who we hire. We choose how we communicate with them. We choose the amount of research we put into these people. If you aren’t happy with how your contractor did their job, learn from it and get better next time.
Sometimes you play the whole hand correctly and catch a bad card at the end. Sometimes you should have seen it coming. If you can learn from your mistakes and see why you chose the wrong person, you can usually learn more than just how to hire someone better next time—you can learn a weakness in your own self that caused you to make that mistake. Improving that weakness can make improvements in the rest of your business as well.
5. Your rehab goes swimmingly.
This one is great. It doesn’t happen too often, but sometimes the rehab of your house goes even better than you expected. When this happens, you can find yourself faced with options you didn’t know you’d have.
The biggest one is the opportunity to flip the house and earn more money than you thought you could. Even if your goal is to become a buy and hold investor, sometimes flipping houses is the better option. If you turn $100k into $150k, you may find you can now either buy more rentals or BRRRR better houses. In my upcoming BiggerPockets book, I talk about how to save money on rehabs or add value in ways many investors miss. Managing rehabs successfully is a crucial skill you need to learn about real estate investing. When you do it well, doors open in financial ways you couldn’t have anticipated.
6. Your home’s too expensive for the market.
Sometimes you’ve got all the knowledge in the world, but there is no way to apply it to where you live. When this happens, you need to go where the fish are biting, not to the fishing hole that is closest to your house.
If you want to buy rentals and the houses near you are too expensive, you need to find a new market, period. Luckily, with today’s technology, this is easier than ever. Over 80% of my personal portfolio are homes I have never, and likely will never, see. There’s no reason for me to.
Related: Why You Don’t Need to Time the Market to Make Money in Real Estate
If homes in your area are too expensive, find and learn about a market where they are not. If you wanted to get your feet wet playing poker, but the only people near you were professional poker players, would you go and allow them to take all your money, or would you find a place to play where there were other beginners who weren’t very good? Quit giving your money away by looking for what is comfortable or convenient. Go to the area that has what you want instead.
7. Your market is experiencing distress/a foreclosure crisis.
Every so often in the real estate cycle, we find ourselves in a market where home prices are dropping, not rising. During these periods, there will be a lot of pessimism towards real estate investing and real estate investors. While the common folk will tend to withdraw and batten down the hatches during these times, the wise investors recognize these are rare opportunities to grow big wealth.
When everyone else is zigging, it’s oftentimes the best time to zag. Knowing how to evaluate a property, to determine if it will cash flow, is the safest thing you can do to make sure you don’t lose money in a falling or distressed market. Knowing the demand for the area, quality of schools, and if there is room to build more (hopefully there isn’t) is the next best thing you can know.
By understanding the markets you’re interested in before a crisis, you’ll already be armed with all the research you need to be ready to move when the crisis hits. This means you’ll be able to evaluate properties and write offers while your competition is just getting started doing their due diligence and trying to learn the area. If you already have a strong network of agents, contractors, and property managers ready to support you, imagine the damage you can do once you start buying!
Sometimes everybody else at the table has a bad hand, and you can tell that. In times like this, it’s best to go big and take a huge pot. I like to be most aggressive when my competition is the most discouraged—and to hold back when everyone else is feeling aggressive.
Playing the Cards You’re Dealt
We can’t all get the best cards every time, but we don’t need to! The best poker players are getting the same hands we are, and statistically, everyone is on the same playing field.
Everyone says they are waiting for the next bear market to invest. Don’t be that guy. There is money to be made in every market, if you know what to look for. The majority of poker players wait for the perfect hand and then go big. They usually don’t win much. The best poker players do the best job playing the cards they have and adjust their game plan as more cards come into play. Be like these guys. Become a master of poker, not just a master of the hand you wait the whole game (or your whole life) for.
What situations have you encountered lately that have caused you to switch your strategy or reevaluate your deal?
Leave your comments below!