“God, give us grace to accept with serenity the things that cannot be changed, courage to change the things that should be changed, and the wisdom to distinguish the one from the other.”
There are three habits that most successful real estate investors practice – habits that just about anyone can develop:
They thoroughly research the areas they’re working and the properties they’re considering buying before they pull the trigger.
2. The willingness to act.
While they insist on doing their homework, they don’t suffer from “analysis paralysis.” Once they’ve got the answers to some fundamental questions about a property, they make the offer, get the property under contract, and (if no unhappy surprises arise during the due-diligence period) they close.
3. The practice of investing in themselves.
To improve their ability to find and fund deals and maximize the value of every property they buy, they read, talk with other investors, take home-study courses, and attend local clubs and seminars.
As you can see, what you need in order to succeed as a real estate investor has a lot more to do with your attitude than it does with your ability to do things like crunch numbers or swing a hammer.
Along these lines, I’d like to offer one more habit that I hope you’ll develop – a habit that most people don’t associate with investing: Humility.
Having humility means you recognize that some things are beyond your control … so you invest accordingly.
For example, you may be convinced that interest rates will fall soon. But should you hang your hat on that idea? After all, even Ben Bernanke, Chairman of the Federal Reserve Board, has limited influence over long-term interest rates.
So why take one of those short-term adjustable-rate loans and expose yourself to the risk of interest rate hikes when you don’t have to? Even if you intend to “flip” the property you’re buying (fix it up and quickly sell it for a profit), why not fix your rate … at least for a few years longer than you intend to hold the property?
That way, if your flip works, fine. You paid a slightly higher rate for a very short period of time. (Think of it as paying interest rate insurance.) However, if your flip doesn’t work as expected and you have to rent out the property and hold it for a while, you won’t find yourself hammered by rate hikes and higher payments.
Here’s another example of what I’m talking about. Let’s say you find a great value and growth market. The prices make sense compared to local incomes and rents. The population is growing, jobs are on the rise, and the economy is diversified. Everything about this market looks beautiful. So why try a flip on that luxury single-family home when it won’t even come close to cash flowing if the flip flops?
Have the humility to ask yourself, “What if I’m wrong? What is my downside?”
If the downside is that you’d have to rent it out with a negative cash flow of $1,500 a month … do you have the savings or a credit line that would allow you to do that? Even if you do, you’ll eventually have to pay the money back. Do you have the stomach for that kind of loss?
Another example: You’re buying raw land that produces no rental income at all. It’s in a hot area, and you expect to make a fast fortune when property values skyrocket and a big developer buys you out. But what if you’re wrong? What if the market stalls … even falls?
Can you afford to have your cash tied up in that land if you have to hold it? Can you make the payments if you’ve financed the purchase? Can you subdivide the land to make it more marketable and get your capital out? Can you get it rezoned to increase its value? Did you buy it at a discount to market value so that, if you sell, your chances of breaking even or making a little money even in a slow market are good?
By all means, have the courage of your convictions. But don’t be naive. Don’t think that just because you expect something to happen, it has to happen that way.
Be confident enough to pursue deals that have a high likelihood of success. But be humble enough to run a few negative scenarios through your head before laying down your money. If the upside is good and you can live with the downside, you may have found a very good investment – one that suits your financial situation and your temperament.
If you’re a beginning investor, an investor who hasn’t yet developed sufficient cash channels (debt, equity, or both), or an investor who simply doesn’t like to speculate … your best bet is to buy cash-flow properties at or below market value in markets that are themselves undervalued.
That way, if things don’t go exactly as you expect, you can at least expect to withstand any market downturn … because you’re buying with cash and equity cushions built into the deal.[Ed. Note: Justin Ford is the editor of Main Street Millionaire, ETR’s real estate success program.]