I’m on a bit of a tirade this morning. So new and fellow real estate investors please bear with me, but a couple of recent events have set me off. I have titled this piece “ARE YOU KIDDING ME?!” and you’ll soon see why.
I realize I’m in the commercial real estate business, and I love it, but when I’m in social settings I’m generally loath to talk about more real estate if I can help it. However, I’m attending a neighbourhood social gathering the other day and a couple come up to me, they’ve heard what I do, and they obviously want to chat about it. I could tell within 10 seconds where this conversation was going; they had decided to get into the real estate investment game, had made a small investment and it didn’t go well.
I heard the bar calling but social graces dictated that I stay and listen. Outwardly I’m saying “Oh really? That’s too bad, what happened?” Inwardly I’m thinking “Okay I’ll listen for 10 seconds then excuse myself to the bathroom and make my escape”. I was about to employ my plan when my lovely wife Joanne came alongside and started to listen. I knew immediately I had been foiled and within a minute I heard her say “Oh my husband’s in real estate. I’m sure he could help”.
Oh well, “best laid plans” as they say.
So I listened, trying not to shake my head the whole time. The entire story would go well beyond the scope of this blog post but here’s the gist of it;
- They had done some reading and went to some classes but overall, thought they had been a bit misled on the process of purchasing.
- They looked at a couple of properties before selecting one.
- Other than a lawyer, they worked on the project themselves without help.
- The cost had far exceeded their expectations.
Here’s the reality: one book on real estate, (and I’m not even sure it was completely read), one starter class on single-family home investments, lots of advice from friends, family, and the TV was the entire scope of their knowledge as they jumped into the real estate investment game.
As far as I can tell they looked at only three properties, all in the same area, and carried out an analysis that included nothing more than potential revenue minus the mortgage minus the taxes to arrive at their expected income.
They had no coach, mentor or anybody with experience helping them.
And “oh by the way” they were totally caught off guard by the costs. Can’t imagine how that happened I thought. I cringed slightly but couldn’t help but ask about their budget expectations and where things had gone awry. It was a common tale, not counting the items totally left out; virtually everything they did budgeted for had been well underestimated.
So, let me get this straight. You decided to get into real estate investing with an absolute minimum amount of real estate knowledge or training. In a market filled with opportunity you look at only three properties. Your analysis consisted of a few numbers and a few guesses. You sought no help and you underestimated everything. Now, you’re unhappy with the outcome.
Here’s my answer:
“ARE YOU KIDDING ME?!”
Of course I didn’t actually say that but I can assure you that’s what I was thinking, that and how I would get even with my wife at some later date.
This incident alone would probably not have set me on a course for this tirade but the very next day I was having lunch with a colleague and his friend. The friend purchased an apartment building several years ago and you guessed it, he’s not happy. Here we go again in the span of 12 hours!
In his particular story, he’s unhappy about the monthly returns, doesn’t like the amount of involvement he’s had to have, and wants to travel and doesn’t want the headaches of having to deal with problems from a distance.
So I asked him about the returns. Turns out the property is about cash flow neutral per month but he has made several hundred thousand dollars on equity appreciation and even more on principal pay down. In fact I did the quick math in my head and his overall returns would have to be well above 35% over 2 1/2 years on his initial investment. I asked him about his time invested, he told me he spends a couple of hours maybe…I’m pausing here for effect… a month!
So let me get this straight, you made a staggering return on your initial investment over three years and your time invested to deal with the property manager is two hours a month, and you’re unhappy with the returns and the work you have to do?
Here is my answer:
“ARE YOU KIDDING ME?!”
Fellow investors, whether newbie or not, here are 4 facts of life you cannot escape when entering the real estate investment game:
Real estate is not a lottery ticket. It’s not passive income. It requires significant time and effort to be successful at it. Real estate is like any equation; what you put in is equal to what you get out. If you do not have the time or are not willing to spend the time and effort in direct investing (not a fund) then avoid real estate like the plague.
2) Do Your Research
Finding the right investment is a big process. The number of opportunities can be overwhelming. Also the information you need to know can be equally overwhelming; pricing, cost base, vacancy rates, interest rates, cap rates; these and many more are all critical pieces of information you will need to be familiar with. You will likely look at hundreds of opportunities to find a few that may fit your investment criteria.
Once you’ve found the right property, the due diligence and analysis can also be a daunting but absolutely necessary task. Do not rush this process! Look at entire markets if required. Do not purchase without proper and complete analysis and due diligence.
3) Get Help
Real estate investors are generally entrepreneurs as well, and entrepreneurs often overestimate what they can do themselves. I have been in the business for 30 years and I have an extensive team to help me. Spend the time and build your own team. Find a mentor with extensive experience, a good lawyer, an accountant, managers etc… I suggest avoiding friends and family. Find those that will challenge your decisions but be a positive influence in always moving forward. Real estate is not the place to be a loner!
4) Don’t Underestimate
New and seasoned investors alike consistently make this mistake. They underestimate everything; from the time it takes to get a mortgage approval to the time it takes to have a roof inspection, or the money it takes to rehab a kitchen to the closing costs. They leave out unexpected maintenance items or items like snow removal, or perhaps an unforeseen or extended vacancy. The list goes on and on.
Avoid doing this at all costs; in fact be conservative, overestimate for a change, and get a welcome surprise if the projections actually come true. Do your analysis and then go back and add 10% contingency on almost every item. Do not get caught squeezing time and costs lower and lower in an effort to make a property work. Everyone’s anxious to make a good purchase, particularly new investors who want to get in the market ASAP. But please don’t cram a square peg into a round hole just so you can say you bought your first property. These scenarios never end well.
There you have it. Pay attention to these 4 rules and you will be a much happier investor or happy that you avoided becoming an investor.
My rant for the day: “I’M NOT KIDDING YOU.”