Make Sure You Have What It Takes To Be The CEO of Your Real Estate
Financial independence – it’s one of the most sought-after goals in this day and age. Financial independence gives you the freedom to do what you want, when you want, and how you want. It gives you the peace of mind that when retirement comes around or an unfortunate event shows up out of the blue, you have the ability to take care of yourself and the people around you without worry. But how can you reach a goal that at times seems lofty? Many investment strategies exist, but one of the safest asset classes remains at top of mind – real estate.
Your ability to succeed with real estate investing is dependent upon a few key factors that you must employ in your business, and always remember – your real estate investing IS a business and should be handled as such. There are revenues, expenses, financing and business management, as with any other venture. These responsibilities fall on the owner of property and while maximizing revenues while decreasing expenses is the ultimate goal, providing a great product to a hungry market at a fair price will get you to the finish line. Even if you don’t manage your own rental properties, managing the business process and ‘managing your managers’ as the CEO of the business is of the utmost importance. While investment real estate is a lucrative strategy to build wealth, it is certainly not a ‘passive’ investment.
When it comes to using investment real estate as a driver of financial independence or as a portion of your investment portfolio, there are two principles that are critical for the healthy and profitable operation of your business: sustainability and duplicability. With both of these in place, your business is geared to thrive. If there is an imbalance between these two keys, long term struggle will become a common theme.
• Sustainability will be the ability for your property to create a positive income continuously year after year. Laser focus on buying and managing only those properties that fit into your detailed plan will create this income. From here, your business can thrive and you’ll see a collateral effect from your efforts – the banks will continue to say ‘yes’ to your requests for financing and this will help you to continue building your portfolio. This positive cash-flow income has more than one benefit: it will be your safety net when an emergency comes up, but it will also allow you to maintain the property over its life. Retaining the value and keeping your tenants long term reduces your costs even further – a win/win situation is born.
If the property isn’t garnering this income, your portfolio becomes a figurative ‘black hole’, eating away at your capital as well as income from your daily 9 to 5 and becomes unsustainable in a hurry. The next role you’ll play in this situation is the motivated vendor, and that is not a strong position to be in.
• Duplicability means running your business based on a ‘franchise’ or repeatable business model. You’ll target the same type of properties in a consistent geographic area while also targeting the same customer (renter demographic) that will be drawn to your quality living space. Soon enough, it will become easy to say yes to great deals that hit your desk without wasting precious time; furthermore, saying NO to deals that add more chaos to your portfolio (and life) will be a piece of cake.
By becoming a geographic specialist you will be maximizing your time by focusing only on the area that you know best. You’ll already know what a property will rent for as you walk up the driveway, and your team of professionals (plumbers, handyman, etc.) are just a phone call away. This seems like a very cookie-cutter approach, boring almost – this is exactly what you want as a real estate investor. The less emotion you bring to your portfolio, the more likely you are to make smart business decisions as opposed to emotional decisions; emotional decisions are not always in your best interests.
Down payments – what’s the deal?
As you start down the journey as a real estate investor, there is a threshold you must cross with every property you intend to purchase – the down payment. Many novice investors believe that putting down the lowest amount possible is ideal. In some instances that theory may be true, however in others it is false. Let’s circle back to sustainability: the less money you put down, the smaller chance the property has of creating positive income each year as your expenses (mortgage payments) are increased right from the starting gun. Lower money down will sustain working capital, however putting too little down, your working capital decreases substantially along with your ability to be approved for future mortgages. What does this hurt? Your ability to duplicate.
Finding balance between cash flow and down payment is an important trait of a strategic investor. In certain cases, the financial institution will direct you as to the percent to put down, but as the CEO of your business, you will want to call the shots. Being educated on what formulas the bank will be using to analyze your deal and portfolio is imperative.
Here’s an example of a senior strategy that investors with access to capital will employ: A savvy investor will buy the property for cash, renovate the property to improve the value, find great tenants who will pay above-market rent and operate for 6 months. From this point, they will go to the bank and get financing for the property based on the new value and the new income it is generating. In most cases, the banks will grant financing based on the new/improved value rather than the purchase price as a result of operating and managing the property for this period of time. This strategy helps decrease the amount required for down payment in relation to the purchase price. This preserves capital, provides freedom of choice and makes your portfolio look incredibly strong from a cash-flow perspective when the bank gets down to the nitty-gritty numbers.
Like a roller coaster…
As businesses roll up and back down in cyclical fashion, so too does real estate. If you set up shop in the wrong location (i.e. purchase a rental property in an area lacking demand) your business will stagnate. Handing over your business to a General Manager (i.e. property management company) and wiping your hands of all management responsibility is a formula for stagnation and under-performance. Learn how to market your business (i.e. how to effectively attract and filter only the most qualified tenants) so that the word “struggle” never finds its way into your business vocabulary.
A big mistake that comes up all too often is property being bought because it is perceived as being cheap – cheap does not necessarily mean a good investment! Great growth potential is a characteristic that should be found in every potential investment property you investigate. This is the equivalent of buying a floundering business in a dying strip mall versus paying more for a thriving business in a new mall with plenty of traffic and potential future demand for that property.
Sadly, purchase price gets far too much attention as the determining factor when investors are deciding to close the deal or walk away (i.e. Areas with excessive supply and waning demand has driven values down substantially). The key to successful real estate investing is understanding the phases of the cycle, how to read them 18-24 months in advance of their arrival and then managing your property/business in alignment with your findings.
Always invest, never speculate: this is the motto of the sophisticated real estate investor.
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