Turning real estate investing failure into profits starts with knowing how to learn from past mistakes.
One of my favorite books of all time was written by the world famous John Maxwell. The book is Failing Forward and if you have not read it, it is a must read for everyone looking to get ahead in life. A short description of the book… it is imperative to learn from failure so that you can adjust and take those lessons and make sure you do not re-live the same mistakes. Well, what better way to learn, than to learn from the many mistakes that others have made. Those pioneers who plowed the path and made mistakes before us are great teachers to help accelerate us forward to being purposeful real estate investors without having to suffer the burdens of the mistakes first hand.
A backward approach to real estate investing:
If you learned one thing over the past several years, your most valuable take way should be that most investors who failed did so because they approached their investing business backwards.
Here is a common approach to investing (by the way this is all wrong)…
- Search the internet for a property that is selling really cheap
- Find a property that on paper shows good cash flow returns (after all it all starts with good cash flow right)
- May or may not look at the property to see its true condition
- Buys the property because the numbers worked well
As time progresses, typically starting within about 6 months, this investor starts to see problems. Repairs that are cutting into cash flow and or tenants that are not happy, trashing the place, not paying rent or a combination of these. This is usually because cheap properties are older in age, suffering from lack of maintenance, in lower social economic areas, or rented to people who are financially unable to sustain the payment of rent.
The common-ness of this would be funny if it were not true of most real estate investors. The truth is, most people invest this way. As the old saying goes, cheaper is not always better.
The purposeful real estate investor knows there is gold to be found when you look for it. Here is their approach…
Location, Location, Location: These investors know to sustain cash flow and or capital growth, they must first find the correct region, state, county, city and neighborhood that can provide long term sustained returns to make it a long term solid investment.
Zooming in they want to buy in areas with great school systems.
Buy in areas with median incomes that can support the payment of the median home price. To do this is simple. What is the median income in an area x 3 = what median home price should be. If the property is 3 times the median income (or less) you can purchase the median home and you have a winner. If the median home price is higher than 3 times the median income you must move on.
Crime rate: You want this to be lower than the national average.
Owner occupied versus tenant occupied: This one is for those primarily looking to maximize returns with capital growth (appreciation). Your exit strategy is to sell to the end user who wants to move a family in and pay retail price for a property. These retail buyers are looking for nice owner occupied areas.
Setting your investments up for long term success is far more important than buying a cheap property. It is impossible to get cheap and think that the cheap property will sustain maximum returns over time.
Here is a great way to learn from other people’s failures. So you can now become a purposeful investor and thrive forward.