After spending my last article
sucking up giving much deserved praise to Josh, Brandon and the rest of the BiggerPockets team, this week I will turn to my father.
It certainly hasn’t been easy for him and progress hasn’t gone in a straight line, but I believe my dad’s journey can be very instructive to new and seasoned investors alike. From humble and uncertain beginnings, he has built a company that now owns over 800 units in four states and has seven partnerships in various real estate-related ventures. And, of course, he has had the honor of being on the BiggerPockets Podcast.
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Humble Beginnings and the Long Game
The first thing that becomes crystal clear when looking at my dad’s story is that real estate does not bring with it overnight success. It’s a get-rich-slow scheme, as I like to say. And there is no better illustration of this than my dad.
My father made his first foray into real estate investment in 1981 in Portland, Oregon. He had virtually no business experience, and, well, it showed. Indeed, he basically failed in Portland and didn’t have any success until he started again in Eugene, Oregon in 1989. Even still, it took until around the mid to late ’90s before he could say, “I’ve been successful in real estate.” Don’t expect overnight results, folks.
By the way, here’s a tidbit likely from my dad’s lack of business background — his unorthodox way of gauging success. Other than for banks, he doesn’t calculate his worth by number of properties owned, net value, cash flow, or even net worth — but by his “net debt.” His perspective: As long it’s good debt (debt on appreciating items), the more he has, the better off he is. “It’s not the one with the most toys that wins,” he says, “it’s the one with the most debt.” That’s the long game perspective.
My dad also says he fears regret more than he fears mistakes, and that’s another tidbit worth contemplating. If you sit on the sidelines, worried and waiting, what are your opportunity costs? Which deals are you missing, and could they have helped you build a financial foundation of success that is still waiting to happen? You will undoubtedly make mistakes — I’ve made a ton, so has my dad, and so has every other investor that has done well. Learn to embrace mistakes as a learning tool instead of dreading them. That fear will just keep you paralyzed and unable to make the next step.
In fact, one of the biggest mistakes my dad has made was just selling properties. He has told me more than once that “every property I’ve ever sold [other than one’s we planned on flipping from the get go], I’ve ended up regretting.” This is best illustrated by the story of one of the properties he sold in Portland back in the mid-1980s. As he described it on the podcast:
“I bought a property near Mount Taber, [a]beautiful area in Portland… I bought it for $60,000. I put some money into it, about $70,000 I had into it. I sold it for that amount, and the couple that bought it from me was named Michael and Julie. This is interesting… I happened to meet them, my wife and I — just a couple of years ago. They sold it at the very bottom of the market in Oregon… in ’84, I think, it was for $66,000. They lost $4,000. Then they turned around and told me, ‘Would you like to know the rest of the story?’ And I knew what was coming. I said, ‘I don’t think so.’ ‘Ah we’ll tell it to you anyway.’
‘The property recently sold for $950,000.'”
One property would have all but made him a millionaire!
There are certainly those on the BiggerPockets Forums who don’t approve of the “buy and hold forever and never sell” model, but I think there’s a strong case to be made for the “buy and hold and only sell if there’s a really, really good reason to” model. After all, if you don’t need the money, why sell? If you need to raise money for another great investment, OK, that makes sense. Although, if you can raise it another way, I think that’s preferable. Or if you’re sure there’s a major recession coming, that would also make sense to sell (although, these are usually not easy to predict).
But given all time and energy it takes to find a new property as well as the transaction costs and taxes involved, is it really worth it? Furthermore, if you have long-term debt, the principal pay down will accelerate each month you make a mortgage payment. If you sell the property and finance a new one, you start over at the top of an amortization table. (On a side note, one of the major influences on my dad to get into real estate in the first place was looking at an amortization table and the corresponding concept that your principal will reduce over time as the cash flow pays for the mortgage.)
Simply put, buying and holding real estate for the long-term is a great way to become wealthy.
Treat Real Estate as a Business (and Not a Hobby)
It has been stressed on this website many times that you need to treat real estate investment as a business and not a hobby. But it’s worth saying again. And my dad’s story perfectly illustrates this. Again from the podcast:
“I had an informal relationship with my tenants…. sometimes I didn’t even do rental agreements. My construction skills were less than lousy, and I needed to hire people out to do certain things, so I made so many mistakes in starting out in Portland… reading [a book on property management] kind of said you got to treat this — even if you only own one property — from day one, you treat it as a business…
“[So my tenants] didn’t realize I was out, you know, from my regular brick and mortar office, just happened to be out that day and I could meet them at a restaurant, but that was my office. That’s where I’d meet tenants so it wasn’t so informal as to you know, hey, you know, meet them at my house and bring them there. That wasn’t a good thing. It wasn’t business minded. I was entrepreneurial in nature, but in college, I never took a single business class, and that’s when I realized I needed to treat real estate from the first property on as a full blown business.”
From day one, you need to start moving in the direction of systematizing your business and treating your tenants, contractors, sellers, and the like in a friendly, but professional manner. For example, when I first came to Kansas City and started investing here, we started in areas of town that were rougher than we expected. We made the mistake of being too lenient on late rent, partial rent, payment plans, and the like. In this case, it was fear that if we didn’t, we’d have a mass exodus of tenants and a bunch of empty buildings in rough areas to deal with.
But as you might expect, the tenants started to walk all over us. In the end, we had to systematize our approach and become less informal and more professional to right the ship; no more breaks for late rent, 72-hour notices go out on the 12th with no exception, only one payment plan per tenancy, etc. Shockingly, once tenants realized they couldn’t get away with shenanigans anymore, the shenanigans, for the most part, went away.
The Riches Are in the Niches
While it may not sound like it from a guy who has seven partnerships going on, my dad’s company is where it is today because of its focus on mastering a niche. Remember, he’s been doing this for 35 years, so those partnerships were built up over a long period of time. It’s not that you should never do anything other than your primary niche. It’s just that you shouldn’t move on to another unless you’ve either mastered the one you’re in or have decided to abandon it.
As Jim Collins noted in his book Great by Choice: Uncertainty, Chaos, and Luck — Why Some Thrive Despite Them All, when entering a new niche, you should “shoot bullets, not cannon balls.” In other words, move slowly and carefully into a new niche.
My dad started by placing an ad in the local paper saying “Save the Commission.” As he puts it, “The first deal I got from that ad will pay for that classified ad for the rest of time.” The house was a campus rental around the University of Oregon, where my dad worked as a campus pastor at the time.
From there, he became an expert in student housing and focused almost exclusively on mastering that niche. He approached it by drawing concentric circles around the campus and labeling them A, B, C, D and F. Here’s how he describes the strategy,
“A is… in walking distance of campus. B is like a half a mile walking [or] biking distance. C is maybe a mile to two miles, say biking, driving distance. D is driving distance, and F would be in another area of town, which I’ve even tried and once in while got away with renting to students in a whole different area of town. Those make a difference in terms of how much you can charge for rent obviously and how good your occupancy is going to be, but what I’ve tended to do is not buy in A areas because they’re so expensive, but look for the C and B areas that are a little farther away from campus and to focus on those where you have home owners who aren’t thinking about campus rentals, but their house would make a perfect campus rental. It’s a little farther away, but if you made it attractive to students by thinking with them in mind as you rehabbed… if that would make a great student rental, and so you’ve saved by not spending so much in the purchase price, but you still get the advantage of having higher rents than you would normally get.”
This model allowed him to add value by transitioning non-campus housing into campus housing and thereby charging more rent for them.
In addition, while student housing is usually rented by the unit, students typically think in terms of rent per bedroom (i.e. a 4-bedroom house would be listed as $600/bedroom, not $2,400/month). There’s a huge opportunity in adding bedrooms. And my dad is basically the Houdini of bedrooms, making new rooms appear out of thin air!
Thoroughly understanding a niche allows you to take advantage of such opportunities, whereas a broad understanding would not. Remember, a jack of all trades is a master of none.
Stick With Your Principles
In my last article, I mentioned that Eugene’s biggest property management company recently collapsed in what turned out to be a massive Ponzi scheme, losing owners $4M. When diagnosing what happened, a friend of mine astutely noted that “it all started with the willingness to lie.”
There are and will always be temptations to make the quick buck by taking ethical shortcuts. Indeed, we’ve all heard of investors who flipped houses that weren’t really done, turnkey operators who sold junk to out-of-state investors at overvalued prices, or gurus who used sleazy sales tactics to up-sell novices on multi-thousand dollar boot camps and the like that they didn’t really need.
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My dad named his company after the Biblical concept of being a “good steward of what we have been entrusted with.” For us, it’s a very good reminder of the importance of being honest and fair in all our dealings. And this is not just important with regard to being ethical, it also makes for good business. In the long run, reaching for the quick buck will cost you, particularly as your reputation falls apart.
The concept of being a “good steward” has been a great reminder to us brings us back to a mission that goes beyond just making money. I think it was Jim Collins who said, “Money is like air and blood are to the body. We need it as a business or we will die. But do we live for the air we breathe or the blood that flows through our veins?” The larger mission for us is to provide our staff/partners with increased opportunities and to serve our residents in their housing needs.
In the end, my father has been a great mentor and inspiration to me, and in my opinion, his story provides a solid model for how other real estate investors can succeed: Treat real estate investment as a business, stick to your principles, pick a niche, and play the long game.
Do you know anyone who’s built a real estate business from the ground up who inspires you to be a better investor?
Let me know your story with a comment!