By Don R. Campbell
Real estate is just simply an investment vehicle that is used to transport you to your inevitable financial destination. The problem is that many investors, both veteran and beginner, do not prepare or choose their ‘vehicles’ to ride both the smooth parts of the journey, as well as the inevitable rough patches.
The Storms on The Atlantic Ocean
Imagine taking a boat trip across the Atlantic Ocean with your family. It had always been a dream of yours to do this adventure and you have read every book, you’ve watch all of the on-line videos and you have even attended a number of courses to get yourself prepared. Then it is time to step in and take action. You find a beautiful boat that you got at a great price, and although it is not perfect, you justify it by saying “Yeah, but there really is no ‘perfect’ in the real world.”
You have it inspected by a professional and find it is in great shape; it’s for sale not that far from home and so the purchase is convenient. You’ve done your homework… and got it at a great price, which of course you will tell everyone about.
It’s time to depart. Everyone is excited and probably a little nervous, but they trust you. You’ve “Got This!” Your journey begins and is frankly quite amazing for the first week, then the first storm hits and suddenly you find that despite getting the beautiful boat at a great price, it may not be up to weathering the storms. It is underpowered and the equipment on board is not quite what you expected. You suddenly realize that in your excitement of getting a deal, there are questions you forgot to ask, or variables you forgot to consider.
Everyone is a Great Captain in a Calm Port
This story is, sadly, how many Canadians build their real estate portfolio. The portfolio is supposed to be their transportation to their safe and sound financial destination. However, just like the above boat buyer, many investors read, study, attend seminars take lots of notes in preparation. But in the excitement of taking action, the ignore a lot of what they learned, they invest in good times and think that getting a ‘deal’ is what it is all about. During this excitement they forget to plan for the inevitable economic storms. When those storms hit they quickly discover the short-cuts they took have now taken their family on a financial journey that can sometimes end up on the rocks.
Analysis & Planning Charts The Safest Path
One of the key tenements I live by is “manage the risks you can in advance so when those you can’t predict hit you are better prepared to solve them.”
Managing the risks in real estate investing begins with education for sure, but more importantly it is putting that education into action. No shortcuts, no guesses, no skipped checklists. Each checklist you skip or each question you decide is too difficult to get answered adds unnecessary risks to your portfolio, which will feel fine when the economics and demographics are all good. But each of these risks you have added will be dramatically amplified when the economic storm hits.
Didn’t buy with cash-flow in mind? When the market slows and values decrease, you are in deep trouble.
Thought that it was better to buy cheaper in a smaller city, but didn’t budget for the larger up and down swings in values, vacancies, and rents? When they hit, and they will, you’ll be no position to hang on in the heavy financial head winds.
Decided to buy, renovate, and flip but didn’t have a plan “B?” Yikes, there is nothing like ending up on the financial rocks as the market slows and you cannot sell the beautifully renovated property, NOR can you hang on to it for cash flow.
Be a Real Captain of Your Ship
Investments of all types have risks, rewards, cycles, booms, and storms. The more you do before you invest, the better your ship will be able to ride the inevitable waves of a cycle. In most other investments, your control of results is limited. With real estate, much of the risk mitigation is in your hands and that is great news as long as you follow a proven investment system that forces you to ask the tough questions.
We are investing in historically complicated economic times. I know that a lot of readers have some serious questions about real estate investing and, in fact, any type of investing post the 2008 downturn. The fear of loss is a strong emotion. This concern aside, it is important to note that many thousands of investors more than weathered that storm, despite the rocky conditions it created, by focusing on income (cash flow) and choosing the right geographic area, long before the storm hit.
And therein lays one of the biggest investment lessons investors could learn from 2008 and previous economic storms. “Income focus”, combined with detailed geographic analysis, was the difference between those who made it through the storm and those who didn’t. The real estate investors who made it through didn’t particularly enjoy the ride, but all of the preparation they did....
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