Real Estate from a New Investor Perspective

By

Investing in real estate is, and has really always been, a hot topic. Opinions on the health of a specific real estate market often come from all ends of the spectrum (from boom to bust) even though the facts and data are exactly the same.

A market pessimist will see data and say the market is about to crash (often stated as Run for the hills ), while a market optimist will see same data and interpret it to say that the market will never go down (often stated as This time it is different ).

The strategic investor quickly understands that the market reality, over a long term horizon, is usually right in between The Goldilocks position: Not too hot and not too cold. Not perfect and not horrible.

Real Estate Investing Can Be Life-Changing Positively or Negatively

It is true; real estate can change your life forever. It can be positive if you do it correctly; horrible if you don t.

It takes a great deal of due diligence and preparation to build the proper foundation for your enduring real estate portfolio, but the reward of setting up a future for you and your family is greater than any effort you put into it. For higher rents and a vast amount of wealth, you might want to have an apartment in cities like New York, Los Angeles, etc. But before starting a search for an apartment in nyc, you can make a well-laid plan that might help you to start your real estate business with success. It might be a good option to invest in apartments that can provide you with sustainable wealth and residual cash flow to fund all or a part of your life. However, many beginning real estate investors get stalled at the starting line, unable to take those first critical steps due to confusion, misinformation, and let s be honest, Fear of making a mistake.

There are some key market conditions to pay attention to as a first-time investor. For instance, you may come across real estate ads like “We Buy Houses Las Vegas” or something similar. Instead of blindly following suit, doing little research beforehand can help. Also, drivers, influencers, and cycles may all seem like gibberish or jargon at this point, but trust me when I say it will become your language of every day once you are comfortable taking those slow, yet, deliberate steps it takes to create long term success. Each step leads to increased perspective until you feel yourself coming out of the darkness of confusion to find yourself in the light of awareness. Just like driving a car, in the beginning, you had to pay attention to every single process, pedal, and control and now this many years later, it is automatic and you probably don t even think about all the processes you are controlling as you drive down the highway.

As an investor, your view will continually grow as you are forced to make continual decisions. For instance, if you were to provide bridge financing options for your client so that they can invest in a property, you might automatically know all the process beforehand and you can guide them effortlessly. The prior knowledge helps to make decisions faster and more effectively. That is why arming yourself with unbiased and un-spun information is so critical. If, while driving, you made decisions on whether to stop/start or turn-based on hope or someone else’s biased opinion, you wouldn’t last long before your next ride will be in an ambulance (thankfully driven by someone who IS paying attention). The same goes for real estate investing. Moreover, if you think you can face issues as a new real estate investor, you can look for guidance through an agent proficient in such investments as well as hire a real estate attorney who can provide legal advice. Moreover, it could be beneficial to stay prepared for any issue that comes your way since investment troubles might lead to financial disaster.

Learning the Hard Way

As a new investor and landlord, you ll be faced with one of the realities of investing success takes time. There is no true get rich quick approach to real estate (despite the many empty promises and stories of massive results you may have read about). When you begin, just prepare yourself that it is a long road, a fun road, an exhilarating road, and, at times, a boring road. Once you understand this in advance, it can remove a whole lot of performance anxiety from the real estate equation. A realistic view such as this also helps to manage your expectations so you are not disappointed by the unrealistic expectation of multiple thousand dollar cheques rolling in after 6 months.

Here are four of the most common pitfalls new landlords face:

1. They treat investing as an opportunity to get rich quick, rather than treating it like the long-term sustainable wealth and income business that it truly is.
2. They forget about (or don t fully understand) the importance of investing for positive cash flow from year one. Unfortunately, many investors chase the almighty home run deal, thinking that it is investing, and eventually strikeout. Home run swingers are speculators, who unnecessarily add risk to their portfolios. Sure, swinging for the big home run and connecting can be fun, but why not wait until you have that strong financial foundation already in place and have capital that you designate as risk capital. That way, if you do strike out, it does t completely collapse your portfolio. My philosophy is that you can have an amazing life hitting constant singles and doubles.
3. They don t have the patience to run their investments like the business it is. For instance, not using a bookkeeper to keep things straight, skipping the critical piece of getting a lawyer involved during the due diligence phase, or screening all tenants to make sure they are perfect for their property. Patience is said to be a virtue and, in long-term real estate investing, it truly is.
4. They live in the old world of thinking that Tenants are always bad and are going to make it hard on me. Strategic investors quickly understand that tenants are actually customers of their business and they should be treated as such. Thanking them for their business, using them for referrals, and providing them a wonderful product (i.e. a nice, safe home for rent) at a price that works for both parties are ways to be a great landlord and great investor.

Patience, patience, patience (not location, location, location)

If there is one idea that all sophisticated investors should adhere to, it is this: be patient. Reduce the risk of investing in real estate by doing your homework in advance. Find an area with an economic future (not a past) and buy cash-flowing properties in that area and manage those properties to the best of your ability. Your job as the CEO of that property is to find ways to increase revenues and decrease expenses all while keeping a well-maintained property that tenants (clients) love. Market values will fluctuate up and down, rents will follow the market, and costs will fluctuate; the key in it all is to have a long-term view and be pro-active at all times.

Debt: How Comfortable Should It Be?

New investors need to understand how to use debt, how to manage it and how to negotiate it. A simple rule for too much debt is when your revenues (rents) are not able to sustain all of the operations/payments of the property AND pay you for your effort. There is a massive difference between non-deductible consumer debt (non-deductible debt you pay with after-tax dollars ) and for business mortgage debt (business expense paid for with before tax dollars). Unfortunately, the usual school of thought is to lump consumer and business debt into one pile and call it debt. Investors must understand the big difference: one is used to create income and sustainable wealth, while the other is often just to keep up with the jones and, in fact, makes you work harder.

It is also important for investors not to run around with rose-coloured glasses on. We know that eventually interest rates will go up, so you need to build this into your budget and stress test your portfolio to see at what point of an interest rate increase will the properties go from positive to negative cash flow. This will help you to determine when it is time to lock into longer financing or sell the property altogether.

The Exit Strategy

Many times investors will ask the question, Do I need to plan my exit strategy from day one of purchasing a property? Should I stick to this throughout holding the property? The answer in simplest terms: it depends ?

Pretty lame answer, but once again, there is no black and white when it comes to investing in real estate. Each individual has their own goals and the reasons they want the long-term income or equity growth. Your overall financial plan – including real estate as part of your portfolio – is going to determine your eventual exit strategy.

I have met many strategic investors who do not want to sell their properties, ever. They want to buy in a region with a strong economic future and then slowly pay off the mortgage, hold those properties as their retirement income source for the rest of their lives, and then pass them along to their family as a legacy. Others want to invest, sell everything within 5-10 year and take the cash they ve made to do something completely outside of real estate.

With that all in mind, selling time is really determined by the long-term economic fundamentals of the market combined with your long-term financial strategy. Strategic investors study their markets and even take it a step further they become geographic specialists. They know their target city/town/neighbourhood and they watch for changes in the job growth and population trends so that they can make strategic moves (sell, increase marketing for renters, etc.) to counteract any shifts in the marketplace.

So after all this, does real estate investing still look like an option for changing your financial future? You bet it does. Nobody wants to go into something blind you ll quickly understand that there is a commitment of work and due diligence that comes with investing in real estate, but the sophisticated investor understands this is but the cost of long term freedom.

I encourage you to keep your vision pointed forward you wouldn t drive a car while looking in the rear-view mirror the whole time. Real estate works under exactly the same principle. Start asking questions of fellow investors by visiting the discussion forums at www.myREINspace.com the answers will provide you a new perspective that will help you make solid decisions on what step to take next.

began his investing career in 1985 with a house purchased in Mission, BC. He is Founding Partner and Senior Analyst at The Real Estate Investment Network and currently owns nearly 200 doors in BC and Alberta. A seven-time best-selling author, Don s expertise and passion for teaching Canadians how to create wealth through real estate are far-reaching and have made an impact on the lives of thousands. You can follow his daily thoughts on Twitter www.twitter.com/ and on Facebook at www.facebook.com/thereinman.

{{cta(‘6e2c21ed-ae85-40ce-88b6-ead94cc39541’)}}