Real Estate Investing Is A Long Game - Avoid Being Greedy Early On
If you know me, then you probably have heard me say repeatedly how patience in the real estate investing world is truly the only way to succeed. In fact, I’d argue that making choices that benefit you in the long term work out for you not only in real estate investment, but also investments in equities, bonds, and actually just in overall life to be quite honest. I really hate the saying “live every day like it’s your last” because statistically speaking (according to the CDC), you will live to at least 70+ years. So making your life decisions solely focused around the now or very immediate future will practically ensure that you will be a miserable 60 to 70 year old reflecting on your poor life decisions in poor health by an ugly motel pool while on your unenviable vacation. Let’s talk about ways to avoid this horrible outcome.
Overleveraging Your Investment
Whenever Eric and I consider an investment, one of us usually plays the aggressive, overzealous investor and the other plays the ultraconservative naysayer. We take on these roles to balance each other out and ensure that we’ve considered risks but not assign so much value to those risks that we kill every deal that comes across our desk. One discipline that we’ve stuck to during the period of low interest rates was to limit our exposure from a lending perspective. To that end, we’d bring in more equity either from our cash or involve investors. This hurt our profitability a bit in the short term, but when rates skyrocketed we slept like babies at night (and continue to sleep like babies) because our interest rate exposure is minimal in our portfolio. I’ve watched over the past several years veteran real estate investors lose their discipline and get addicted to borrowing too much, forgetting that the only constant in our lives is change. Now they’re sweating and thinking about selling off assets at cost or even at a loss to de-lever.
If the only way to make a deal work is with extremely high leverage and short term rates, I’d urge you to stop and take a pause while considering whether or not you have the ability to weather a downturn. If your answer is a very weak yes or a maybe, consider bringing in more equity from outside sources. It’s ok if you don’t squeeze every dollar off that deal and share some of the profits, you’ll find another property later on (and many more after that). This isn’t the only investment you’ll ever make in your lifetime, so don’t get too greedy.
However, if you are the only person on earth that knows that the property you’re looking to buy just so happens to be on top of a platinum mine, then by all means, go to every possible source of lending and borrow 100% of the purchase price at a 35% interest rate. Short of that, stick to the long term view.
Losing Sight of the Objective
Would you rather make $25,000 or $1,000,000? Seems like a simple question, right? I’ve seen too many people take the $25,000 over the $1,000,000. There is a certain type of “investor” out there who focuses solely on nickel and diming the deal instead of focusing on the big picture, which is to make large, long-term driven returns. They do silly things like try to cut into agents’ commissions or represent themselves in a seller’s market to try to save $20-25K on their $2MM purchase. The same deal, once executed, would net them $1,000,000 after they execute their business plan but they can’t get past the $25K they didn’t save and ultimately fail at getting the deal. Silly choice, but it happens all the time.
Conversely, I recall a story about a surgeon here in LA who bought a property to build a spec mansion. The original goal was to build something that would sell at an amount more than what it cost to produce. Simple concept! Yet somewhere along the way, he forgot about this goal and focused more on building something that would be featured on a reality TV show, which caused his budget to balloon to astronomical levels by adding in rare or exotic materials, amenities that only he and a few tasteless people would find cool, and just an overall lack of focus on cost control. I think he’s filing for bankruptcy since the property sold for way under cost.
You can pivot midway through a deal if you see an opportunity to do so and it makes financial sense, but rarely does this pivot result in more than a minor change to the overall plan. Don’t forget why you got into the deal in the first place, keep your eye on the prize and don’t get sucked into a battle of stoking your ego or chasing small dollars on a large transaction to get some sort of instant gratification. Real estate investing is about as far from that concept as one can engage in.
Deferred Maintenance Mindset
It still surprises me that in this day and age, we still have owners of property who think that putting off maintenance or doing cheap fixes is the correct path to success. In the short term, they are correct. If you throw some duct tape over a repair problem at your building, your cash flow will improve substantially in the month that it occurs. However, over the long term, all that you’ve done is temporarily pushed back your problem and increased the cost by 50%. All structures on this planet are subject to external forces that cause it to deteriorate over time. Rain, heat, cold, people using it, and wind are great examples of how a building will eventually need some element of it to be repaired over its overall useful life. If you don’t like this outcome, then when you build your own property or perform upgrades, consider buying materials or components that have longer lasting durability. For example, we use soft close hardware on our cabinets so that when tenants close the cabinet doors, they don’t slam and take extra damage. That costs extra, but we feel like it’s a great long term investment.
Closing Thoughts
Whenever you choose to optimize short term outcomes at the expense of long term outcomes, you are signaling to yourself and the world that you want to sign up for that horrible vacation by a bad motel pool in poor health while reflecting on your questionable life decisions. I urge you to make your investments in real estate with a very long term point of view. Over time you will succeed if you stick to a long term discipline of saving and avoiding unnecessary risk. If you want to hear more, I’m always a click away!
