How do you grow your real estate investments 10X? Through quality training, experience, and understanding the rules of real estate investing. Every new dieting system that comes on the market says three things; follow a quality diet and exercise program and take this pill or potion. Real estate investing, like dieting, has no pill or potion that works for everyone. Successful investors, however, do have their very own “secret sauce” – that thing they do that gives them an edge. It’s different for everyone, but the base is still quality training, or education, and gained experience.
That Special Thing – Finding Your Niche as a Real Estate Investor
What is your particular thing? What is your niche within the niche of being a real estate investor? It’s different for each investor. For example, why do people just LOVE The Rolling Stones? All I know is that it has something to do with Mick Jaeger. What is it that Mr. Jaeger does that makes people love his talent? I have no idea – but he knows – and he deploys it over and over again.
What successful investors do is stick to their knitting. Once they find a process, a property type, or market they understand and can access (accessing both property and capital), they will often purchase, repair, lease, and repeat. How many storage facility owners own just one? The people in that business, having taken the time to understand “the business of being in the storage business,” tend to buy more storage facilities. Makes sense, right?
This ability to rinse and repeat within the same asset class is played out all over the country at the local level. Every town, hamlet, city, and suburb has five to ten people (or families) that seem to own “everything.” Consider, even when positive market dynamics and demographics move away from an area, these folks are still well off based on their volume of holdings. For those families that find themselves “in the flow” of market dynamics, they become ultra-wealthy, life families that owned farmland in what is now Silicon Valley, or close-in farms to Washington DC.
Often enough, a property is not broken or in need of repair; what it needs is new ownership and an opportunity to thrive with professional property management that is engaged, that cares.
In today’s market, it is tough to become a real estate investor on a shoestring. Further, based on the recent recession, mortgage financing is harder to come by. One of the outcomes of the recession is that fewer people will be homeowners in the future, with more real estate assets concentrated in the hands of fewer people.
Real estate ownership is a very fragmented marketplace. There are many active mega owners, hedge funds, and real estate investment trust that own assets directly. As a real estate investor, one of your first decisions is to determine if you will be an active investor or passive investor. In brief, active presumes some role in day-to-day operations while inactive (or passive) means your primary task is in management selection and report review.
How do you get from $100,000 to $1 million in real estate assets?
As a passive real estate investor, spring-boarding your real estate investments to Ten-X is challenging as the primary decision-making responsibilities are in the hands of others. Becoming an “active” real estate investor increases the odds exponentially along with the risk. Becoming an active real estate investor requires having a quality team, understanding available financing (including the entire capital stack), and having local market knowledge.
If you have decided to become an active real estate investor, here are some points to ponder in the pursuit of growing your real estate portfolio Ten-X. Following is a brief discussion of real estate investment strategy alternatives. My best recommendation is to pick one strategy. Most real estate investors remain within one asset class, more so after gaining some experience therein. Select a single real estate investment strategy to strengthen your hand over time as the cadence, vocabulary, and capital stack that works best becomes part of your breathing. At some point, you no longer have to think about the minute’—focusing your attention on the next level of performance. By specializing in a style of real estate investing, you will out-perform the competition without rehashing the starting points repeatedly.
- Buy-and-hold. Buy and hold is the longest and best-known real estate investment strategy the world has ever known. Torto Wheaton has tracked single-family home values in Denmark from the 1600s to the present day (some still owned by the same family). How can we overlay this thinking within the American experience? As much as we are always in a hurry (going somewhere, doing something), there are lifelong benefits to slowing down long enough to think past next quarter or next year. Where will you be in 2040? What will your real estate investments accomplish for you and your family? Read Business Insider: Buy and hold strategy is Warren Buffet swears by for long-term financial growth.
A quote from- A Wealth of Common Sense.com: The Hardest Part of a Buy-and-Hold Strategy:
That tells you why somebody like Warren Buffet does so well. I mentioned to Warren a while back; I said, “Warren, it strikes me that if you did nothing else, you never sell.” If you can grit your teeth through and just disregard short-term declines in the market or even long-term declines in the market, you will come out well. – Alan Greenspan, former Fed Chair.
There is nothing wrong with a buy-and-hold strategy. Just recognize it for what it is; long-term strategy. It also requires you to be ultra-selective in your acquisitions. Many real estate investors in the 1940s and 1950s paid cash for a building and held it for a lifetime, passing it on to the next generation. To these investors, valuations on any given day or month were irrelevant. A multi-generational buy-and-hold strategy requires direct expertise or hired expertise for succession.
- Buy and sell. An opportunistic buy-and-sell strategy requires market timing and purchasing at a discount to current market value. This strategy is a very steely game requiring the investor to be right almost all the time, more right than wrong than in blackjack! You can make a living at blackjack being right 53% of the time. Your investment dollars will not survive those odds out here in the real world. Market timing and exceptional expertise are a requirement of deploying the buy-and-sell strategy. The deeper the discount to the current value, the less risk you (the real estate investor) are taking on.
- Trade up. The best method for trading up in real estate assets is to stay within the same asset class. Said another way; stay in your lane. Whether its farmland, apartments, or medical office, select your asset class and remain firmly therein. Trading up investing allows you (the real estate investor) to build on your asset class knowledge-making investment decisions based on your experience and market knowledge.
- Co-mingled funds. Adding partners or creating partnerships is challenging, but they can work. What makes for a good collaboration is when each individual brings a different skill set to benefit everyone within the partnership. The downfall of many partnerships is decision-making by the committee. Someone has to be in charge.
- Moon shot. Too often, a moon shot fails to measure risk-reward accurately as the risk often outweighs the potential rewards. Moon shot investing is like a game of craps; this is gambling. In this scenario, you should never invest more than you are willing to lose with the presumption that your investment’s total loss is probable. This type of real estate investment strategy represents a very high risk; therefore, it should serve the smallest portion of your real estate allocation.
Where the wheels fall off for so many real estate investors is in trying to deploy more than one of these strategies at the same time without a short-term plan for addressing operations and a long-term strategy for ownership. The full-time professional considers this, for the part-timer, being all-over-the-map is a typical recipe for disaster.
Granted, many of these strategies can combine very well, like buy-sell while trading up or buy-and-hold with co-mingled funds. The issue is deciding on an initial plan and staying on track after that.
Each of these alternatives has no guaranteed outcomes. However, what they do represent is a structured methodology and a targeted type of activity in a single-cylinder strategy to invest in real estate.
You may have noticed I sprinkled “real estate investor” throughout this piece. I didn’t do this as an article writing keyword strategy; it reminds you that regardless of your approach, each causes you to become an investor in real estate assets. The absolute best advice I provide to people regularly is that, once in, if you are not the “the one” to manage the asset, then hire professionals – professional property managers. Why? Because mother, brother, sister, or best friend, unless they are a pro, are trying to fake it until they make it. In real estate investing, there is just too much money as a stake for this method to be the game plan.
In this discussion, we have not addressed asset class, age of assets, financing, property condition, or competitive forces. Yet without touching any of these topics, I hope you can see a framework for making investment decisions within the real estate space to guide your strategy at a high level. These strategy decisions are the building blocks to your road map for becoming a successful real estate investor.
John Wilhoit is the author of the best-selling book on rent roll analysis: How to Read and Rent Roll. See also the companion guide to measuring the quality of rental income: Rent Roll Triangle. Find JW’s Podcast here.