What began as my savings for the purchase of my dream car back in the 1990s quickly turned into the hard-earned $20,000 that my mom refused to let me spend on anything less than an investment for a substantial return.
“You are not going to buy that stupid car,” she told me. And when I tried to venture off to the car dealership anyway, she forced me to spend my savings on a down payment for a condo. At 19, and against my wishes, my mom had turned me into an investor. She told me, “God can only manufacture one thing: Land. And I hear he’s not making any more of it, so buy now!”
Inadvertently, she taught me that to become a real estate investor is to become a business owner. Here’s what I’ve learned about investment and management since then:
1. Focus on monthly cash flow, not equity gains.
As a business owner, it is your task to create distance between the money flowing into your business every month and the expenses necessary to keep that business sustainable and growing. When you begin your investment research, you ought to be calculating how much renters will be able to put in your pocket each month, and then likewise ensuring that that number is greater than your expenditures. Maintain that formula and you’ll stay in the black.
2. Time can pay you money.
Time preference — also known as delay discounting — is a term economists and investors to use to describe the difference in something’s financial return over time. People who exercise a poor use of time preference trade a higher future income for the lower equivalent, because they lack the patience to wait for that greater dollar.
Investment requires patience, and the best real estate returns often come from a willingness to wait decades before cashing in on the big bucks that have accrued because of your home’s growing value. It’s also worth mentioning that you can be rewarded immediately and annually for your willingness to wait: Owning a home gives you tax write-offs and, if you run your business right, can mean that tenants cover all your monthly expenses.
3. Desperation is expensive.
Avoid problem tenants by doing your homework. A desperate tenant-seeker is bound to cost themselves more than a few dollars because of their impatience.
My early days in real estate investment came with many headaches: evictions, property damage, late payments, etc. It did not take many of these poor tenant experiences before my patience grew enough that I began conducting more thorough background and reference checks before saying “yes” to just anyone. First-come is not always first-served when it comes to renters.
4. Surround yourself with the right people.
From the outside, real estate investment can seem like a one-man show. But the best investors I know have made a habit of surrounding themselves with the right influencers and maintaining an openness to learn.
Establish a team. Join an investor networking group like REIN (Real Estate Investment Network), and then connect with real estate agents, accountants, bookkeepers, real estate lawyers and others who are connected to your goals. These friendships and professional networks improve your chances of success by putting you within ears reach of advice from diverse vantage points within the same industry.
The right idea from an accountant and lawyer could save you millions of dollars if you try to involve yourself in the right conversations.