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If you had the chance to
start over again, knowing what you know now, what would you do differently
the second time around? This question cuts to the core of the essential
lessons of a lifetime of real estate investing. Here is my six-part answer
to this question.
Realize It Is Never About the Property
One of the biggest
misconceptions about real estate investing is that the most critical thing
is the property itself--its condition and location. The truth is that these
considerations are secondary to the motivation of the seller. If the seller
is NOT motivated, then no matter what the condition or the location of the
property you still are not going to get a great deal. But if you have a
motivated seller, then you have a great chance of turning a handsome profit
no matter what the condition or location. When this really sinks in, it
revolutionizes how you prioritize your search for finding great deals. No
longer do you waste time on due diligence and inspecting the house until you
have made sure you've found a motivated seller.
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Finding this motivated
seller becomes the most important activity you can ever engage in. This is
what you must focus your time, efforts, and creativity on. This also means
that the highest leverage activity you have is to be sitting face-to-face
with a motivated seller. Don't allow non-motivated sellers to waste a minute
more of your time listing off the wonderful features of their homes. You
don't care about the house until you've established the seller is motivated.
Understand If You Never
Ask, You'll Never Get
When I got started
investing in real estate I was scared to death to actually make offers to
sellers. The root was my fear of them rejecting me and my offer. In my mind
the two were one and the same. Over time I came to realize that this one
mistake kept me from making offers that, in retrospect, I feel the sellers
would have accepted. This cost me hundreds of thousands of dollars in lost
profits.
Today I see other investors falling for this same trap. Sometimes it is the
disbelief that a sellers would ever accept a no money down offer. Or walking
away with a promise to "get back with them" (rather than making the offer on
the spot). The cost is the same.
The most important lesson I learned is that not asking is an automatic no,
and asking isn't as painful as I'd imagined. Over the years I've asked for
and gotten everything from extensions on the term of a seller carry back, to
money for a repair, to free appliances. If you don't ask you don't get.
Always Maintain "Walk Away" Power
The common denominator for
all the borderline deals I've bought, flipped, or lease optioned is that at
some point in the negotiation, I crossed over to the point where I felt I
"had to" do the deal. If ever you hear yourself saying these words, even if
it is merely to yourself, push back you chair, get up from the negotiating
table, and walk away.
I'm serious about this. If the deal is that good, a small break while you
take a moment by yourself won't stop the deal. And by taking this time you
might just keep your ego and your emotions from pushing you to make a deal
that means lots of work and risk for little real profit. I'd put $3,000 into
a house to fix it up and then find it needed a $2,000 repair I didn't know
about. So I would spend $2,000 so I wouldn't lose the $3,000, only to find
out…You get the idea here. Beware this slippery slope and know when to cut
your losses. Remember, good deals are like buses--if you miss one, another
one comes along before too long.
Beware of the "Rehab" Trap
Have you ever caught the
bug? "Fabulous wealth can be yours if you buy junkers and turn them into
palaces." There are millions to be made in rehab projects, but before you
dive into this type of investing, you need to do some serious soul
searching. Rehabs aren't right for everyone.
I've discovered that rehabs aren't for me. In my opinion they take too much
up-front money, too much energy to complete, and too much time to turn them.
The first causes too much risk; the second cuts into your efforts to find
more deals; and the third eats into your cash flow and turns you into a
motivated seller! I've come up with rule that I follow: If it needs more
than minor cosmetic work, flip the deal to another party. I want to make it
clear here that this is my personal bias and that many investors love
rehabbing properties and are well paid for it. It's is just not for me.
If you are going to rehab make sure you listen to the following rules:
Don't overpay for the property. Build a large profit in by buying right.
Make sure you factor in all the real costs, not just the financial costs to
rehab a property. This means you must factor in the time cost to do or
oversee the project. You must factor in the emotional cost of having to do
the work, having so much of your money on the line, etc. Finally, factor in
the opportunity cost of having your cash, time, and attention tied up for
the duration of the project.
Reprogram Your Beliefs About Self Worth and Money
Collecting money from a
buyer can cause you to confront deeply-hidden pitfalls from your past about
self-worth and what it means to be wealthy. This might be hard to accept,
but in my opinion it's one of the biggest road blocks to making a fortune in
real estate. I've gone through this myself.
On one level or another, I didn't feel good enough about myself to think it
was okay for me to make that much money with so little effort. My beliefs
about money and what it meant to be "rich" made making money a dirty thing
for me. On some of the first properties I sold, I was uncomfortable to even
collect an application fee from prospective tenant buyers. It took years to
clear out this garbage and get comfortable with the wealth that flowed into
my life. My partner, Peter Conti, was instrumental. He was a great role
model for a down-to-earth, ethical millionaire. Who do you know that can be
this kind of positive role model for yourself? Spend as much time with these
people as possible. A great book on this subject is Your Money or Your Life,
by Joe Domingez. I highly recommend it.
Gather as many positive references of people using money for good purposes
as possible. This will help you reprogram your beliefs about what you can do
when you have money. Read biographies about billionaire philanthropists like
George Soros and Ted Turner who have literally given away BILLIONS of
dollars to worthy causes. Tithe 10% (or some percentage) of your profits to
groups you want to support. This lesson deserves your attention and honest
self-evaluation.
You'll Never Know It All, But You Can Learn Enough
I was probably just like
you when you got started investing. I kept learning more and more, but never
felt like I knew enough. Then one day I realized when a person really knows
enough… It's not when you know it all because you'll never it know it all.
It's not when you know all the legal aspects and contract clauses. You know
enough when you step out and take action, acknowledging that you'll never
know it all. This leap of faith is the final ingredient of success.
