I had a very difficult time learning to read. Today, they would categorize it as a learning disability. My disability was that I lacked a strategy for reading. It wasn’t until a teacher worked with me one-on-one that it began to make sense. And with that strategy came self-confidence.
Becoming a skilled real estate investor is like becoming a skilled reader. You first need a strategy. When you add to that the correct mindset and teamwork, you’ll end up with a winning combination.
This article is about the key to becoming a real estate investor; those three elements together. Anything that happens in the physical world first must start as an idea or set of ideas. This is particularly true with real estate investing. The way that you become a successful real estate investor is simple when you integrate these three elements into your real estate investing.
Do the numbers work, right now?
Every rental investment property operates as a family budget. There is income and expenses. Income must exceed expenses or there are consequences. Bounced checks. Bill collector. It’s no different for an income property.
As an investor, you need to be aware of what the income and expenses will be. For any investment property, you plan to submit an offer to purchase.
Refer to my article about calculating cash flow for investment property for more details on this subject.
The most important point is to keep in mind the concept of GIGO. It’s a phrase that came out of the computer science field, an acronym that stands for “garbage in, garbage out”. Your figures for income and expenses must be accurate in order for your math to make any sense.
And there are definitely people out there who will be pumping up the rents or minimizing the expense aspects because their interest is in selling you a property, not necessarily protecting your interest in the long-term viability of the investment.
Does Your Strategy Rely on Effort or Luck?
Suppose you buy a $400,000 dream home property because you love the look. It’s a home that you would definitely live in. The problem is that the property will have a $200 negative monthly cash flow. Your realtor says “with any luck, the rents will go up in the neighborhood – or maybe this will rent about the market because it’s such a nice property”. You purchased in a hot real estate market, so there were multiple bids. You had to bid above the asking price in order for the offer to be accepted.
Now suppose you do a careful analysis of the real estate market. You tell your realtor what you are willing to buy. After making offers on 5 properties, you end up getting a home under contract that will provide a modest monthly cash flow.
It’s obvious that situation 1 is an investment strategy that is based on luck. In that case, the property was purchased at the top of the market.
Nothing needs to change in order for the property purchased in Situation 2 to become a successful investment. The real estate market might heat up, and the property value could unexpectedly rise like the real estate market in 2021. But even if it doesn’t, the investment will still likely be successful because the cash flow is positive and the rental payment from the tenant is slowly paying off the mortgage. This causes the equity in the property to increase over time.
Does this Your Real Estate Investment Strategy with Your Long-Term Goals?
Years ago, I remodeled and flipped properties to make cash. The money was good, but it involved a lot of effort to find good enough deals that would be profitable. Not to mention all the work in managing the remodel.
On top of that, it did nothing to build long-term cash flow like buying and holding rental properties. I abandon this strategy in preference to buying and holding rental properties for all of the reasons mentioned.
More than anything, it helps to think long-term. To be more specific, here is what that looks like:
- Spurn any ideas about selling your properties unless there is something that is causing that property to not perform well. I’m talking about something that can’t easily be overcome, like a neighborhood that goes from bad to worse. You don’t usually run into problems like this unless you are buying older homes in mediocre neighborhoods. That’s why if you are an out-of state investor it’s best to stick with newer or new homes.
- Harden your properties or buy them already hardened for maintenance. That means updated or new systems (plumbing, electrical, and heat and air) so you don’t have ongoing problems with those items that lead to on-going maintenance costs.
- Affiliate yourself with professionals who never let you down. You’ll need to go back to these people over and over again as time goes by, and you add more properties to your portfolio. So find people you like working with.
At the writing of this article, the real estate market is overheated in Oklahoma City. It’s slowing down, but it is still a seller’s market. As such, prices are at a premium. I’ve just taken a break from buying.
One of the worst affiliations an investor can suffer from is fear of missing out (FOMO). FOMO looks like buying into investments at a higher price than should. I’m guilty of FOMO once in a while. For example, I also invest in cryptocurrency. I sometimes worry about missing out on a good buying opportunity – and buying on impulse. I have to remind myself there will always be other opportunities.
Right Team Engagement
I am a long-time member of Rotary International. The central pillar of Rotary is the four-way test:
- Is it the truth?
- Is it fair to all concerned?
- Is it beneficial to all concerned?
- Will it build goodwill and better freindships?
Rotary is a worldwide organization that is built around the idea of making the world a better place for the disadvantaged. It’s a great feeling to be part of that movement. I urge you to check out a local club near you if you are not a member.
What makes Rotary successful as an organization is teamwork among club members. There is no way to have lasting success as a real estate investor without excellent teamwork.
Obviously, you need to tell the truth in all situations to your team members. Integrity is never to be compromised.
But items 2 and 3 are equally important. In order words, every transaction should benefit all parties. For example, I always make it as easy as possible for contractors to do business with my company. If they are doing excellent work, why not? If you are generally hard to deal with a jerk, other professionals and service people will not want to work with you.
So the bottom line is this. To be a successful real estate investor for the long term, make sure you find yourself somewhere in the middle of the triangle, so you demonstrate the right strategy, the right mindset, and the right team engagement.