Top 5 Investing Myth-Understandings
I know that the title of this post is a little "punny" but I do find that there are a lot of myths surrounding real estate investing. Today I am going to look at 5 that pop up frequently!
The key difference between new and seasoned investors
Seasoned investors tend to think, act and ask questions which are logical and numbers based. They may ask questions such as what cap rates can I expect from this property, or perhaps what is my rate of return.
On the other hand, when I am talking with new investors, they tend to talk with more emotions. They will ask things like how much money can I make on this property or make statements like I want a cheap property (emotions at work here). All good seasoned investors will tell you there is no place for emotions in real estate investing. The best and often hardest thing to do is to keep emotions out and focus on the logic.
I routinely see 5 items of myth-understanding (mis-understanding) that suggest emotions are taking over
1. Following every investment and project:
This is a myth that is detrimental for most new investors. It is a sad truth, but an investor will talk to me about a project and the next conversation is about a better project and then the next conversation will be about an even bigger, better project. (We have all heard of this, it is the chasing of the next best thing, the shiny new object!)
These investors rarely ever end up buying any investments. They are so convinced there is something better out there that they miss the growth of all the investments. This is why I always suggest having a written investment objective planned out and strategized. You will then know exactly what you want and as a result it will be easier to identify when you find it. The only projects you will find then is the projects you are looking for. As times change, rules of investing may change as well, but the game does not change. Pick the game you wish to play, whether it be buy and hold or fix and flip or wholesaling. Whatever your game is, learn it, master it and make lots of money playing the game.
2. Get rich quick investing in real estate:
Another myth, we all know there is no real get rich quick scheme that is legitimate and sustainable. If you want to create wealth in real estate investments you most certainly can. The pace of this wealth may even be at a rapid pace, but please do not invest with intention of getting rich quick.
It may take some time to get the momentum going. Once the momentum builds, the wealth will grow with relative ease, but no question about it, there is time and work involved to create big riches. The good news is the riches can be as plentiful as you desire It may not happen overnight, but it will be solid and can be an investment that has long lasting sustainable and residual returns. Consistent action is the key to growing a sustainable investment portfolio.
3. Do it yourself to save money:
A myth that has tricked many new investors, they think of spending time as an investment. Instead it is sometimes better to spend money as an investment. When you think this way you will make wiser spending decisions. At the beginning when I first started to invest, I too subscribed to this philosophy. Later I discovered the lessons seasoned investors have learned.
It takes many continued hours of practice to master skills. Hiring professionals whether it may be plumbers to fix the plumbing or perhaps an attorney to draft leases, or property managers to manage the properties, having mastered skill sets on the job should not be considered a cost it should be looked at as an investment into your business. An investment where you may invest money in order to provide better overall value by getting it correct with optimum efficiency. Meanwhile this will keep your time free to optimize your income from your career or by investing in more property.
4. Buy cheap property to get better cash flow:
Perhaps the biggest myth of all. Most seasoned investors will happily share the horror stories and those pesky unexpected expenses with cheaper property. Recently I was talking with an investor who bought a property that was built in 1952. After having owned this property for just 4 months, she was very frustrated as she stated that each of those 4 months she has put 2 times the monthly rent (basically 8 times the monthly cash flow) into unexpected repairs. Needless to say this is not a cash flow investment that is sustainable.
She discovered what I am always stating “a pro-forma report may look great on paper for a cheap house, but they typically lack sustainability”. Assuming she has no further repairs, it will be 32 months before she starts to cash flow positive. Cheap properties may produce cash flow that looks enormous from a percentage standpoint. Large percentage of smaller dollars translates into (well, smaller dollars). What you often have is an older tired out property that typically requires many more repairs. These repairs tend to be costly and a quick drain on the once anticipated large cash flow. Both in my personal investments, as well as those investors I work with repeatedly have learned less is not more.
5. Buy close to home:
This is one that has morphed into a myth. As we are now in a global economy and have use of the internet. We now get information at lightning speed. We are able to identify best markets for investing that we simply did not have the tools at our disposal for in the past. The thought was, you should invest in your own backyard so you can keep a good eye on your investment property.
As years progressed I could not help but notice all the great investments in other markets. Investments, which produced much better returns than I could get in my own backyard. Then it dawned on me, If real estate is all about location, not everyone can live in an area that is the best place to buy investment property. It then occurred to me that people investing in stock markets do not live in the backyards of their investments. So why would anyone think that to get the best real estate investments they should invest in their own back yard? Perhaps a fix and flip type of investment may require this, but a buy and hold (true investment) requires the best location that will yield the longest term ROI.
Indeed we live in different times. The Investing Game never changes, only the rules in how we play the game changes. As time advances forward it is paramount we utilize the tools at our disposal to invest in the best locations for sustainable investments.