A. To Reach Their
Goals.
B. To Produce Adequate Returns for the Amount of Time and Money
Invested
1. Concentration on Technique
(Lease Option, Subject To, Foreclosure, etc.) Rather Than on Property
Most investors new to real estate get mesmerized by a technique for
acquiring control of real property and or a technique for turning a
quick profit. These "techniques", often taught by "gurus" at $5,000 -
$10,000 for training, workshops and tapes, emphasize no need for
extended time and financial commitment (lease option, subject to) or
emphasize quick turn profitability (foreclosures, flips, over
financing). These are analogous to the technical or chart reading aspect
of stock market investing; it doesn’t matter what property you find,
just apply the technique.
The truth is that any of these techniques can be successfully utilized
given the right set of circumstances. However, they are applicable in
only a very small percentage of cases, and usually after an extended
negotiation or as an afterthought to the property acquisition process.
Successful real estate investors concentrate on the property itself
rather than on a specific technique. This not only allows the investor
to concentrate directly on where most profitability resides, but also
opens a much wider array of potential "deals" for the investor to
consider. Further, the investor can concentrate on the much more
reliable profitability formula of "adding value", rather than on the
more suspect and ethically questionable formula of finding a naïve
individual to work the other side of the real property transaction.
2. Plan on Doing Many Deals Each
With a Small Amount of Profit Rather Than a Few Deals Each with
Substantial Profit
Many investors both experienced as well as new are thrilled with a small
(under $10,000) profit on each deal. Since unexpected expenses always
seem to creep up when least expected in real estate investing, the
actual profitability of these transactions range from half the expected
profit to no profit. In order for the investor to earn enough income to
warrant the time commitment, monetary commitment and risk involved, he
would have to participate in a large number of deals annually. And since
it always takes many negotiations to produce a single deal, and many
property inspections to find a single property worth negotiating on,
real estate investment will become a full time real estate business. To
be sure, there are people who successfully play the low profit high
numbers game; most Homevestor franchisees come to mind. But if working
70 plus hour weeks and buying, rehabbing and selling 50 plus properties
per year sounds like a worse life than the corporate world you’re trying
to leave, you probably want to find a different approach.
In my many years investing in real estate, financing real estate
ventures, and observing successful real estate investors, I have come to
the conclusion that participating in a small number of highly profitable
transactions no only produces more monetary success but also leads to a
much more leisurely, less stressful and more satisfying experience. I
personally don’t believe any serious investor need look at any
transaction with less than a $50,000 profit, with the goal of eventually
only considering deals with a $100,000 plus profitability. If you don’t
think these kind of deals are available, then read 3. Below.
3. Working in a Crowded Arena
(Single Family Homes) Rather Than an Area with Less Competition and More
Opportunity (Commercial)
From real estate investment seminars to real estate investment clubs to
the proliferation of how to real estate books for sale, one would think
that the single family home is the only property type available. And
with the tens of thousands of new real estate investors as well as the
invent and expansion of the franchised rehab businesses, the single
family home as a real estate investment has become a very competitive
and crowded field. Whereas just five years ago a homeowner needing to
sell his home had very few and limited options if the home needed major
repair, he now has a much larger market demand to sell into. The
homeowner can sell to a much larger choice of investors interested in
purchasing his home, he can obtain refinancing money to repair his home
even with credit scores so low they would not have even been considered
five years ago, or he can auction his property and probably receive a
cash offer at fair market value. All this has made finding a below
market priced single family home investment like finding the proverbial
needle in a haystack.
Rather than competing in the crowded and overly competitive single
family home residential market, with its limited profit potential and
heavy time commitment, real estate investors would have geometrically
increased chances for success if they spent the same time and energy
learning about the various areas of commercial real estate. Not only is
this field significantly less crowded and significantly less
competitive, but the real estate investor is able to earn significant
returns on far fewer transactions. To be sure, there are tens if not
hundreds of types of commercial properties and transactions; the
successful real estate investor will educate himself with a good
overview and then decide on a area of concentration. Rather than waste
time fighting for the left over scraps in the single family residential
market, the investor can be breathing the rarefied of the commercial
real estate market.
4. Having No Sustainable Plan
"I want to make a lot of money" is not a sustainable business plan. "I
want to specialize in foreclosures, lease options, and subject to" is
not a sustainable business plan. "I buy property for cash or terms" is
not a sustainable business plan. Enough said. If you don’t know how to
develop a workable plan for real estate investing buy a book on business
plans, take a small business administration course, or better yet attend
my seminars and workshops.
5. Trying to Do Deals with No
Equity Contribution
Yes it’s possible to purchase real estate with no money. Yes it’s
possible to flip properties for large profit with no investment. Yes
it’s possible to option property for $100. That being said, it’s
infinitely easier to successfully participate in real estate
transactions when you as a real estate investor have an equity
contribution in the deal. When you put some money in a deal three great
things begin to happen. Conventional lenders become interested in
financing your transaction and 20 % hard money or 30 % equity share
becomes 6 % conventional financing. Sellers. Especially institutional
sellers, take you seriously and are willing to sell their property at
large discounts. And outside investors become attracted to your deal
syndication and limited partnerships. Life becomes easier and much more
profitable.
