Mistakes: A staple in the 10 Commandments when building a real estate portfolio
Make no mistake about it, when you do a lot of investing you will make mistakes, I know I have made my share of them. Do not let mistakes stall you however as they are often the best most remembered lessons you will ever encounter. The great thing about mistakes is that you are able to learn from other people’s mistakes, so you can often avoid the cost and pain learning that lesson yourself. In fact, when I am out networking people always like to share their successes. I am much more interested in learning about their mistakes. When you are out networking I always suggest you ask people about the biggest they have made.
The more interactions you have with real estate investors such as belonging to Investment clubs allows you to learn from others. While these lessons do not set as concretely in your mind as making them yourself they are less costly to you and you indeed can avoid many of these costly mistakes by learning what others have done that did not serve them so well
Over the years I have been involved in the transactions of hundreds of real estate purchases. I have seen many people make mistakes and have proudly helped many people avoid many costly and painful mistakes.
Seeing so many people aiming toward what you know leads into problems areas become easy to identify after you see them repeated by so many people. To that note I would like to share the 10 commandments that I now live by when investing to build a real estate portfolio.
1. Thou shalt begin with the end in mind
Perhaps the first and possibly largest mistake investors make is right out of the gate. They do not have a clearly defined investment strategy. They decide to invest and set out to buy a property. They know they want cash flow and that is about the extent of their plan. I have found the most successful investors have a 5, 10 and even a 20 strategy plan of what they want to accomplish and how they plan to do so. How they will continue to raise cash for down payment money. Determine how they will create the reserves for security of the properties and when they will leverage to buy more. Beginning with the end in mind will allow you to safely and strategically accomplish those goals.
2. Thou shalt build a power team
We all know that team is the acronym for T.E.A.M (together everyone accomplishes more). We are not suggesting you partner up with another investor (unless you feel that serves you best). Instead we are suggesting you build a network of real estate professionals who know your overall investment portfolio objectives and help you to not only buy the best investments, but to keep the maximum profits from those investments while reducing your liabilities. Realtors, accountants, attorneys, tradesmen, and property managers, Portfolio managers, etc. These professionals are all important people to have on your power team. They will all work diligently to help you build your portfolio.
3. Thou shall invest in sustainable i8nvestments and within sustainable markets
Just as not all properties are created, equal neither are the market conditions. You can find many properties to buy in any city U.S.A. You can also find many people who will teach you how. Perhaps the most important attribute that no one ever discusses is sustainable returns. Smart investors always invest in markets that are safe, with local economic stability and growth. They then buy properties within the sweet spot of the market to insure further sustainability.
4. Thou shall invest in low risk investments
Many investors found themselves in trouble by speculating, assuming prices would go up and they could sell for a profit. Investments that cannot create cash flow from renting the property (should you have to resort to this as a backup plan) are considered high risk investments and should be avoided. Always put your properties through the low risk test
5. Thou shalt invest in properties that have immediate cash flow
Savvy investors always make sure that the day a property is purchased there is income being generated. Buying a performing asset is often a safer investment. Buying a property and hoping to rent it out for X and hoping expenses will be X is more speculation and is subject to unforeseen challenges. From the day you take ownership of the property until the day you get it tenanted is negative cash flow with speculative outcome. (Side note) manufactured growth has its perks. There are often great deals to be found and can be very lucrative when you are purposeful and know exactly what you are doing and incorporate the upfront negative cash flow in your calculations. Until you are experienced in investing for manufactured growth I always suggest you start investments with immediate cash flow.
6. Thou shalt protect your investments and liability exposure
Often I hear people say they will buy a property in their own name and the insurance will protect their liability interest. Have you ever made an insurance claim? They try everything possible to avoid making payments. Yes, you want and need insurance, but to protect the assets you already own and to truly build an investment portfolio, it is imperative to have an LLC or a trust or some sort of other entity to shelter your assets. Talking with an attorney and an accountant as to what is best for you and your situation is important. As we have plenty of readers from outside the U.S. it is important to talk with a tax person that is efficient in foreign tax law as not all countries recognize the American LLC (which is a prominent entity utilized here in the U.S. )
7. Thou shall always have an exit strategy (or two) in place before making a purchase
Often the expression is, "you make your money going in". This is because as we know in real estate investing you want to know your exit strategy going into the deal. Perhaps a backup exit strategy as well. You then realize the financial gain when you exercise that strategy. Those who purchase for speculation only to hope for a higher sale price often are disappointed when things do not work out; unfortunately hope is not a strategy!
8. Thou shall diversify for safety
Buying multiple properties in one location may expose you more than you care to be exposed, should that particular market falter. (Example, I have a client who had all their investments in Florida, When hurricane Irma came was forecasted to come directly down the center of the state they rapidly understood what too much concentration in one area for investing could mean, fortunately they faired fine but it was a nail biting experience)You can safeguard your investment portfolio by investing in various emerging markets.
9. Thou shalt focus and stop chasing the shiny objects
I know this sounds juvenile, but every day I see great people miss opportunity after opportunity because they are so busy chasing the latest and greatest investment craze. Here is where I suggest you make sure you understand and take heed to number 1 (above) and begin with the end in mind, or begin as you plan to proceed. Know what you want to invest in, due your proper diligence and get informed and invest. I have worked with the shiny object chasers for years who watched our market cycles rotate and watched many people make great cash flow and equity growth while they did no investing at all because they were too busy trying to make sure they were chasing the best investments. Create your investment plan now!
10. Thou shalt duplicate the process
When you invest with purpose and diligence it is easy to make money in real estate investing. Once you make a few purchases you will get into your investing groove. You will see what works for you and what does not. Use your real estate power team to help find acquisitions. (T.E.A.M) You then simply repeat the process to build a strong and dynamic real estate investing portfolio worth owning.
Create systems for yourself and duplicate over and over until you get your desired portfolio built.
Happy investing!
The author’s opinion cannot be construed as tax or legal advice, and may not represent the views of HTBUSA or its stakeholders. HTBUSA is not a legal service or professional tax service. As with any investment, there is an inherent risk in investing in real estate.