Note: This is the next installment of my series the ABCs of buying, selling and investing in real estate. Each post, I select a letter (O this post) and write up a nice fictional advice column centered around the letter. The story is fake, but the advice is real(ty).
This post continues the story found in Three Operating Costs Most Newbie REI Forget When Investing in Rentals
Oscar was a retired sanitation city employee who had decided to follow his cousin into the life of a real estate investing. Oscar had decided this was the best track for him in his second act that would give him something to do and give him a secondary source of income beyond his pension. I was sitting in my favorite spot in the local coffee shop when I saw him wander in. He saw me immediately and quickly took a sit at the table, which I welcomed. He told me his last day with the city had been last month and he had followed my advice by writing a business plan outlining his expected expenses and income for the first five years of his business. He told me the only thing left to do was to implement it. I asked him what was holding him back. He sighed and said he read over the business plan at least three times daily since he wrote it. He kept changing it based on his latest reading of the web and books. He was hesitant to move on it because he had a fear of missing something big about starting the business that would cause him nothing but trouble in the future. He asked me what I see that investors miss when starting a REI business.
This is what I told Oscar…
I first congratulated him on his recent retirement and for writing up his plans for the future. Nothing beats a good solid plan when it comes to starting a new venture. I also told him that there was nothing wrong with rewriting the plan over and over to make sure it was contained his vision for his business. In fact, I told him that business plans should really be fluid documents that change over time as things happen and lessons are learned. On the other side of the coin, I told him that one can find himself in an “analysis paralysis” situation where the first step is never taken because plans keep getting analyzed over and over. “The trick is to find a happy medium where you can have a good solid plan that is prepared correctly to eliminate the greatest amount of risk without over analyzing,” I told him. “Eventually, you have to take action.” Risk is part of the process and he should never look at anything as a failure. You either win the situation or you walk away having learned something. He nodded his agreement, but still wanted to hear the most obvious things newbie investors miss when getting into the business.
- MLS Does Contain Deals – I wasn’t around as a real estate agent in 2008, but I remember being envious of all the investors who were getting great deals on real estate, both on the MLS and off market (not on the MLS). Agents tell me that investors had their selection of a property at some outstanding discounts as everyone who had gotten too big of a mortgage were now trying to get out of it. Banks were also very busy with foreclosures and Real Estate Owned (REO) properties. Whenever I discuss 2008 with long time investors, their eyes glaze over in remembrance. In this tight seller’s market, deals are much more difficult to find. It amazes me, however, how many newbie investors just rule out the MLS for deals completely, preferring to focus on off-market deals via wholesales and other means. Don’t get me wrong! There is nothing wrong, or illegal, in getting a good solid off market deal. You shouldn’t rule out the MLS, however. Deals still do exist there if you are patient enough to wait for them and ambitious enough to offer aggressive offers to get the properties. By aggressive, I don’t mean that you offer prices that don’t make sense number wise, but you offer a deal with other added bonuses like more earnest or option funds. You should work with your agent on figuring out the best offer to make depending on the circumstances.
- Old Adages Stay True – If you believe the old adage, “if it is too good to be true, it probably is”, or “you get what you pay for”, or “it takes money to make money”, then you are sitting good as an investor. There are a lot of shady characters in our business. I am surprised at times how trusting investors are with each other when it comes to deals being offered. You should always ask for any verification that the deal being offered is a real one, because there is a chance it won’t be if it seems like an incredible deal. When investing in real estate, you have the same statement hold true as with anything else in life, If you pay a contractor, or a vendor cheaply, most likely the work will be less than top quality. I was telling one investor that whenever I see good quality work done at an open house or during a showing, I always reach out to the listing agent to ask about their contractor. Contractors come in all quality levels. If you find one that is good and reasonable, you should make a point not to let them go. Finally, newbie investors should expect to spend some money to be successful in this business. For example, many investors I know employ direct marketing as a way to find deals. Direct marketing is not cheap and you can spend quite a bit on it before you realize any solid returns. If you don’t have some seed money in place starting out as an investor, you should reconsider your start date and build up some seed funds.
- It is not as easy as it looks – When investing in real estate, preparation is the key. Please do your homework and make sure you know what you are getting yourself into before jumping into the deep end of the pool. I know that HGTV makes it look easy and lucrative and it can be. However, you need to make sure to learn how it all works and not assume it will come to you when you need it. I show so many homes to investors where you can tell pretty quickly that the investor tried to save some money and do some repairs themselves. Nine out of ten times, it does not look good and really draws away from the overall presentation of the property. If you insist on doing things yourself, have someone show you how to do it first (youtube videos really don’t count here) and then tackle the project the next time. It will save you a lot of money and heartache to be prepared as a investor.
Oscar nodded his head during the whole presentation. He was very appreciative of my advice. He didn’t realize that you can still find deals on the MLS so he will make a point of reaching out to me to work with him on exploring that option. He knew that the old adages applied in real estate (like with everything else) but it was good to hear it from me. Finally, he didn’t plan to do any of the rehab work himself, but knew now to think twice about doing any without getting traine first.