“Meticulous planning will enable everything a man does to appear spontaneous.” – Mark Caine
Every year, Michael Masterson encourages ETR readers to use the first two weeks of January to lay out their goals for the next 12 months. This year, I’m hoping at least some of your goals will have something to do with investing in real estate. One may be to buy a certain number of properties. Another might be to add at least $1 million of cash-flow rentals to your portfolio. Yet another could be to do your first commercial deal and end the year with at least 10,000 square feet of fully leased commercial space.
Investment goals like these can be helpful. They can motivate you, nudge you to the next level of competence, and spur you to come up with a workable plan to achieve them. They can also act as a yardstick against which you measure your progress as the year goes on.
But whatever new benchmarks you’re setting, don’t make your new target numbers into a resolution.
Instead, always let the quality of your deals take precedence over the quantity.
I have my own target numbers for 2007. I consider them ambitious, and I’ve started to make progress on them. Yet I would rather not add a single dollar’s worth of new properties to my portfolio … or one square foot of commercial space … than buy rashly for the sake of hitting a target number.
Here are just a few examples of what can happen if you forget this lesson …
I met a former investor a few years ago who bought something like a dozen properties his first year as an investor. It turned out he had a “mentor” who sold him his own properties and financed them at inflated rates. The newbie was thrilled to own all this real estate, until he finally realized he couldn’t make the properties cash flow and that, even if he sold them, he wouldn’t get what he owed … much less what he had paid.
By that time, the “mentor” had sold the loans, pocketed his profits, and disappeared, leaving the overleveraged beginner to go bankrupt.
You see similar things happening in the stock market. Why did investors pay ridiculous prices for all those money-losing dot-coms back in the ’90s? Because they were focusing on short-term targets. A stock had gone from $10 to $20 … and some “analyst” was predicting it would go to $50 or $100 before the year was out.
Never mind that the quality wasn’t there. That there weren’t enough earnings to justify the price. That it wasn’t a business that comfortably covered its expenses, could profitably compete, or was prepared to withstand a downturn in its market.
Investors nonetheless poured into the stock, craving huge profits in a short time. And all the while, the guys who started the company kept it afloat long enough to legally sell their inflated shares and walk away with millions before the stock collapsed.
Now, don’t get me wrong. You can absolutely make a lot of money in real estate in a short time. I’ve done it, and so have quite a few other investors I know.
But the way to do it consistently and with the greatest margin of safety is NOT to focus on short-term targets. It’s to focus on value over the long term. In other words:
- Buy cash flow (properties that pay for themselves).
- Buy at or below market value on a dollar-per-square-foot basis.
- In bubble markets, only buy deeply discounted properties (special situations such as pre-foreclosures, bank-owned properties, etc.).
- In value markets, make sure you have growth (rising jobs and employment) working for you as well.
- Concentrate on areas that are improving and experiencing rising demand.
- Plan for rain. That is, have ample cash reserves or access to cash through a credit line or private lenders. (Hint: If you don’t have cash yourself, make sure your private lender or equity partner puts up enough cash in the beginning to adequately capitalize the deal, including reserves.)
I’ll go into detail on each one of these points in future ETR articles. But for now, go ahead and lay out your real estate investment goals for 2007. Then lay out a plan to meet those goals.
But resolve to always buy value … first and foremost.
That way, you’ll be a successful investor not only in 2007, but in 2017, in 2027, and for as long as you care to invest.[Ed. Note: Justin Ford is the creator of Main Street Millionaire, ETR’s real estate investment program.]