SERIOUS REAL ESTATE INVESTORS KNOW THAT PIGS GET FAT – HOGS GET SLAUGHTERED
February 17, 2016 By Larry Arth
This is perhaps a crude analogy, but one this really describes are the two different types of investors I encounter on a regular basis. I have noticed a distinct difference in investors who want to buy real estate as investments versus seasoned investors who want to invest with purpose and to win.
Be a Pig and Get Fat
Wanting a lot is a healthy investment style. Seasoned and purposeful investors want to invest in property that they can make decent returns on over time. They are about creating win win investments and want good returns that are feeding them month after month with consistency. This fattens their bank accounts and comforts them with the safety and sustainability of the investment.
Be a Hog and Get slaughtered
Wanting too much with little effort or little investment usually always ends up a disaster. Buying low priced properties and wanting high returns is never sustainable. These low priced properties tend to have high tenant turnover which is an investor’s largest expense. They also tend to have many more fix and repair orders as the cheaper properties tend to be older and more worn out. The low price property with high cash flow suddenly turned into a money pit and voila, the hog just got slaughtered.
Same Wants, Different Expectations
Strong cash flow:
what is a realistic cash flow for one investor may be considered too low for another investor. It is normal to want a cash flow rate that supersedes your cost of borrowing money so you have a positive leverage. 10 percent seems to be a nice round number to most real estate investors and one that has a realm of possibilities. Wanting, say 20 percent cash flow returns, is never sustainable and will result in long term disappointment.
The word bargain has different meanings to different people. Bargain to some means cheap or even dirt cheap. Like buying a house for 20k, 30k or 40k. Bargains to others mean a price that is below retail pricing, such as 150k property that may be a bargain if it has a retail price of 160K or 170K or higher. Buying a property that has some built in equity should be the consideration. A cheap property for $40k may be cheap, but if it is only worth 40k then it is definitely not a bargain.
Often considered the number one wealth building principal is the acceleration of value to your initial investment. Not all appreciation is created equal. The properties that tend to appreciate in value the most are the properties that tend to be the most highly sought after product. These are the properties that represent the median priced home within an area that the most number of people can afford. Median priced homes have the largest demand and therefore tend to be your safest appreciating asset. Buying a property for 40k will typically not appreciate or very little as the properties are old and tired within old and tired areas where fewer people want to live.
Perhaps there is no irony to the difference I see between the two different investing styles.
Those who want to buy property cheap want to make money fast. They want huge and quick cash flow and a quick appreciation.
Those who want to make a safe and sustainable return want to buy and hold for the long term. As the old saying goes there is no such thing as a safe way to get rich quick. It may be possible but the risks are high and often lead to disappointments.