An interesting thing happens when people become successful real estate investors: like any true convert, they start to want to prosthelytize. And one of the primary characteristics of any good missionary is the desire to emphasize the good and de-emphasize the downsides of ones religion.
Have you ever noticed that most successful investors remember their early years in real estate as “not that hard”, or “scary, but doable”? Yet if you ask a new investor who’s in the midst of trying to find his first few deals, he’ll more than likely describe this time as “terrifying”, “overwhelming” or “nearly impossible”.
Remember, dear readers, that your mentors, gurus, and colleagues are not deceiving you intentionally. It’s just that they want you to succeed as they’ve succeeded, and that, now that doing deals is second nature, they’ve honestly forgotten a lot of what it was like to struggle in the early years. You may have been guilty of this yourself: I know I’ve been. But unlike most of you, I have a forum from which to atone for my sins of omission. So this one’s for every newbie who thought that he must be stupid for not being able to find a great deal his first week out, and for every old-timer who’s ever forgotten to mention to said newbie that, though a millionaire on paper, he’s too broke to fill his gas tank.
Secret #1: Not every strategy works for every investor. That’s right: the high-end houses that have made your colleague rich beyond his wildest dreams could end up being a money pit for you…or the big-time renovations that made a millionaire of your uncle might well make you a pauper.
When you first discover fact this for yourself—usually when you just barely get out of a deal without losing your shirt—you’ll probably think that success in that particular technique is just a matter of more knowledge, more education, more experience. But this is only partly true: people who are able to successfully “work” a certain strategy can do so largely because of their innate strengths and skills, as well as their resources and connections. Let me give you a personal example.
If you’ve ever heard me in person, you may have gotten the feeling that I’m not a big fan of renovating properties. It’s not that I’m against the strategy per se. in fact, I know many, many investors who’ve made MAJOR money doing exactly that. It’s far more profitable than wholesaling and far quicker than lease/options, two of my favorite strategies. No, the problem is that I don’t have the patience or organizational ability (or, some might say, self-discipline) to oversee the actual work—and neither does anyone in my employ.
See, I expect that when I make an agreement with a contractor to complete a job, he will do it correctly, on time, and for the price agreed WITHOUT having to be ridden all the time. It’s this disconnect from the reality of rehab has caused me endless trouble and cost me lots of profit over the years.
With very few exceptions, the successful retailers I know are resigned to the fact that they will have to make daily visits—and sometimes 2-3 a day—to the job site to make sure that their contractor is actually there, is doing the job correctly, and has what he needs. This necessity continually eludes me, although I know intellectually that it’s so. Somehow, I never manage to find the time in my day to get out of the office and baby-sit my contractors.
And yes, I’ve read Robyn Thompson’s excellent course, AND Elmer Diaz’s AND Greg Pitts’. And yes, I absolutely believe that they work. But 18 years of experience tells me that the next rehab I do, like the last, will take longer and cost more than it should due to my innate impatience and my over-scheduled life.
Don’t worry about the techniques that don’t seem to work for you—I’ve never met ANYONE who couldn’t find one that did. Just know yourself and know what the various strategies require of you, and choose the best fit.
Secret #2 Long-term investments will make you rich, but probably not as soon as you’d like. There is not doubt in my mind that well-chosen, well-managed rental properties are a no-fail way to become rich in the long term. Think about it: a $70,000 single family home that appreciates at a modest 5% per year will be worth $185,700 in 20 years and $302,535 when your tenants pay it off in 30 years. This means that to be a millionaire in 30 years, you’d have to buy just 4 of these houses now.
Unfortunately, most folks aren’t interested in being rich in 30 years—they’re interested in improving their standard of living NOW. And long-term strategies, for all of their benefits, don’t typically do this for you. Look at the math on the property above:
Purchase price $49,000 (70% of value)
Loan amount $39,200 (80% loan)
Loan pmt $340.18/mo
(20 yr fixed 8.5%)
Other expenses $240/mo
(vacancy, utils, taxes, insurance etc)
Market Rent $700/mo
Cash flow $119.81/mo
(These numbers are, of course, wildly inaccurate for a lot of the country; in high-priced markets, most properties won’t cash flow at all unless you manage to buy them for ½ price and make a 40% down payment on top of that. But let’s assume that those of you who live in markets like that will be investing your money in the Midwest and move on.)
At $119.00 a month, most folks would need to own a LOT of properties to significantly increase their standard of living—like 35 to replace a $50,000 a year income.
Medium term strategies like lease/options and selling on land contract are a little better, but since the REAL payoff typically happens about 2 years after the purchase, most investors need to keep their day jobs until enough of their buyers have actually purchased their properties to create a significant “nest-egg”. This happened to me: I bought 10 houses in the first 2 years of was in the real estate business and lease/optioned each of them out for 1 year terms. But it was 2 1/2 years (and the discovery of wholesaling!) before I was flush enough to consider leaving my job with my father’s company, and another year before I really felt secure doing so.
Of course, this was all before I discovered the real secret to early financial independence: short-term strategies like wholesaling (for me) and retailing (for other people). I have come to believe that these are an essential tool for any investor—no matter what level of experience—who wants to achieve early financial independence.
See, knowing that you can always generate quick cash when you need it is both a confidence– and bank account-builder. Steady cash flow is both good (passive income is the basis of long-term wealth) and bad (your tenants or tenant/buyers aren’t usually willing to give you more money one month because you’re in a cash flow crunch). And short term strategies aren’t JUST for when you need money to buy or fix a property, or to go to Bermuda—a consistent program of wholesaling or retailing properties can also help you pay off your long-term properties more quickly, thus speeding the day when you can move to Monaco and just wait for the checks to roll in.
Secret #3: It’s entirely possible to be a multi-millionaire on paper, but completely broke in real life. I should have figured this one out years ago, when my high school friends were wearing Guess Jeans and eating steak, and I was wearing ToughSkins and eating tongue. Yes, that’s right, tongue. We were so poor that, (at least until I figured out what it was and became a vegetarian on Tuesday nights), I spent a decent portion of my life eating out of a cow’s mouth—and all this despite the fact that my father was well into his first million dollars in equity.
This particular phenomenon is one that applies mostly to people who hold properties for the medium and long term (see? Another reason to learn wholesaling/retailing!), and especially to landlords. Here’s how it works.
You own 20 $100,000 rental houses that gross $995/month each, or $19,900 in monthly rents. On this $2 million in properties, you have $1 million in loans, so—on paper, at least,—you’re an official millionaire.
The debt service on your $1 million in mortgages is $6,650, (30 year loans at 7.5%) leaving you with $12,950 in monthly income. However, the taxes and insurance will cost another $6,000 a month or so, and the other expenses will generally run about 20% of the gross rents, or $3,980.
This leaves you with a little under $3,000 a month in income for your personal expenses, such as home mortgage, car, groceries, clothes, college tuition, and so on—not what most of us are striving for, but enough to squeeze by on, UNTIL.
UNTIL is the inevitability that one month, 5 of your 20 tenants will move all at one for no reason at all. Or that the boiler in one house will need to be replaced at a cost of $3,000. Or that the roof on your best tenant’s house will finally give up the ghost.
That’s the month when you suddenly wish you had a wholesale deal in the pipeline. Or a job. Or an empty credit card.
Most investors weather this by borrowing money from home equity lines or credit cards, or by robbing Peter to pay Paul. And most don’t talk about it, because it’s too totally embarrassing to admit that you’re a hyper-successful real estate investor who’s robbing the penny jar to pay for groceries.
But don’t worry—this only goes on until your mortgages are paid off. At that point, you add $6,650 a month to your income—making it nearly $10,000 a month, which is enough for most of us to live on very comfortably. But did I mention that, under normal circumstances, this point is THIRTY YEARS AWAY???
Yeah, Ok, I exaggerate a little. Rents will increase as the years go by, and while a lot of your expenses will increase with them, your mortgage payment won’t be one of them. Things will loosen up before the entire 3 decades has passed—by the time I was in high school, my family actually ate steaks once a week. Of course, my mother had to go to the butcher and buy a whole side of beef in order to get the big discount they still needed, but steak is steak, even when it comes out of the freezer every week.
And maybe you’ll be smart and plan ahead to pay off your mortgages early with your wholesaling/retailing profits, or maybe at year 10 you’ll sell ½ your houses and pay off the other half. But if you don’t, be prepared for a lot of conversations with your significant other that go, “How can we own a million dollars worth of property, and not be able to go to Mexico for a week?”
Secret #4: Some people have longer runways than others. Every time I teach a class full of beginners, there are 2 or 3 out of 100 that run out and start buying properties literally the next day.
This minority has the same education and experience as the other 97% of the people in the class, but they also have another indefinable characteristic that allows them to take what they’ve learned and put it into action immediately. It’s not fearlessness; in fact, most of them are smart enough to be pretty scared of committing tens of thousands of dollars to a new enterprise like this. It’s not genius, either; I’ve never noticed a correlation between native intelligence and the ability to do this. It’s just that we all have a runway that we have to pick up speed get off of, and their runway is really, really short.
On the other hand, I have a number of acquaintances that have been studying real estate as if it were the topic of their doctoral dissertation for 2 years or more who have yet to make a deal. In some cases, I think that they are really more interested in the social and motivational aspects of hanging out with real estate investors, but in other—rare—cases I’ve actually seen some of these folks eventually get off the ground.
In truth, most people seem to need between 3 months and a year to really get out and start making deals, if they’re ever gonna. Getting “off the runway” takes a combination of moxy, had work, knowledge, and being in the right place when the right deal comes along. And being in the right place at the right time means just one thing: making lots of offers.
Secret #5: There’s no amount of education you can buy that equals the education you get from making offers. Show me a guy who has $10,000 in real estate education under his belt, and I’ll show you a wannabe. Show me a guy who’s made 100 offers, and I’ll show you a budding real estate investor.
Until you’ve actually gone out into the world and looked at properties, talked to sellers, and presented offers, you haven’t even set foot on the path to being a successful investor. I don’t care how many $7,500 bootcamps you’ve taken or how many $499 courses you’ve read or how many group meetings you’ve attended, you don’t even know what you don’t know until you’ve heard a bunch of “no”s and felt red-faced stupid in front of enough sellers. Until you’ve done this, you aren’t even asking the right questions of your highly-paid guru or mentor—in fact, you’re wasting your time as well as theirs.
As someone who’d like to sell you thousands of dollars in books and tapes, it’s hard for me to say this, but the truth is, unless you have the intestinal fortitude to get out into the market and fail and fail and fail, there’s no amount of education that can make you into a financially independent real estate entrepreneur. If I were to write the most thorough, easy-to-understand encyclopedia of real estate investing in the history of the world, I’m STILL not precognitive enough to know what particular problems you’ll face, or which rejections will stick in your craw, or what odd seller objections you’ll run into. You have to find these things out for yourself before you can even call yourself a beginner!
When you took your current job, there was probably some sort of training before they let you go it alone. If you’re a professional, it was years of higher education followed by a sort of internship; if you’re a manager, you worked your way up through the company, understanding what each person or department did before being asked to oversee them; if you’re a plumber or carpenter, you undoubtedly spent years apprenticing to someone who knew what they were doing.
In real estate, you are much more on your own in terms of getting experience, and this, I think, makes the failures more difficult to take. After all, in your “real job”, you aren’t given enough responsibility to really, really screw up until you already know enough that you’re not going to, and you almost always have someone above you who’s job it is to help you out if you get into trouble. When you’re out trying to make deals, it’s like each individual seller you talk to is a separate job with its own requirements, and there’s no one there with you to save you if things start going badly. Furthermore, most people have the mindset that they don’t want to share their rejections, even with a mentor or guru who can help them understand what might have gone wrong.
If you’re one of those people who has to know for sure that everything will go smoothly before you’re willing to go out and start trying to make deals, get over it or hang up your spurs right now. I have never, ever, ever met anyone who “learned it all” through books and tapes, then went out and got it 100% right from the first offer.
Remember, most of your worst “failures” in real estate will come not from buying a bad deal or the wrong deal, but from missing opportunities or not having the experience to put deals together. So, if you have a competent mentor and a working knowledge of appraisal and estimating, your “failures” are less likely to cost you real money than they are to cost you potential profit. In a sense, you’ve only “failed” when you haven’t made an offer at all! To paraphrase the poet:
“’tis better to have made and offer and been rejected, than to have never made an offer at all.”
Everything you do out in the real world, from talking to agents and looking at houses to making offers and being rejected adds things to your bank of knowledge and experience that no guru can teach you. Even when things seem to be leading nowhere, you’re always learning, learning, learning. And this experience is far more important than any “book knowledge” you could ever get.
Reprinted from The Real Life Real Estate e-letter with permission of Vena Jones-Cox. Get a free subscription at www.TheRealEstateGoddess.com