An interesting thing happens when people become successful real estate investors: like any true convert, they start to want to proselytize. And one of the primary characteristics of any good missionary is the desire to emphasize the good and de-emphasize the downsides of one’s 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 and colleagues are (for the most part) not deceiving you intentionally unless they’re trying to sell you something. 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 a 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, and 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.
I, for instance, should never be allowed to renovate a property for resale. 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 lack some gene that good rehabbers seem to have—one that makes me want to visit the jobsite every day, and that gives me a sense of pleasure and pride when I see the work progressing.
See, I don’t like managing people, and I don’t get a thrill from turning an old, ragged-out house into a pretty one. Thus, I find rehabs a pain in the rear, and they never seem to work out for me the way they do for others.
And yes, I’ve read Robyn Thompson’s excellent course AND half a dozen others. And yes, I absolutely believe that they work. But 20+ 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: 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 meat that came 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 a 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 all move at one time for no reason at all. Or that the furnace 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 #3: 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 within the month.
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 to a year to really get out and start making deals, if they’re ever gonna. Getting “off the runway” takes a combination of moxy, hard 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 #4: There’s no amount of education you can buy that equals the education you get from doing what you’ve learned. 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 boot camps you’ve taken or how many $1,200 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 education and online courses, 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 whose 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 online classes, 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:
“This better to have made an 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.