5 Discoveries that changed the way I invest in Real Estate

BSby Larry Arth Real Estate Investor: Every investor has some successes, and boy do they like to share them.

You can learn a lot from these successes. And, if they are tried and true, by all means you want to duplicate them.

However, I believe far more valuable lessons come from mistakes that are made. If I remember correctly, it was Donald Trump who said, “I would rather learn about your failures so I know what to avoid, than learn about your successes.” We get information and advice every day about how to do this and how to do that.

The truth is, challenges come to us every day and learning the “do not’s” often proves to be more valuable than learning the dos. Here are the 5 discoveries I found that have forever changed the way I invest:

No. 1 – I no longer look for good investment property on the MLS

I no longer look on the MLS or multiple listing service Yes, I was young, and the family’s best friend was a real estate broker. I bought my first property, a city lot of land, from him.

So when it was time to look for investment property I of course turned to him and the Multiple Listing Service (MLS) to find it for me.
Years later, after becoming a broker myself, I discovered the purpose of the MLS by definition was for home sellers to attract the retail buyer. Hearing this definition out loud at a real estate brokerage conference forever changed the way I do real estate investing.

When I gave it concentrated though, it became loud and clear. Sellers of these properties are looking for a buyer who wants to move into the property and pay top dollar. As an investor, I wanted to buy either distressed property for a reduced price or a turnkey property with a track record of income. These properties are not going to be found on the MLS system. I now find wholesalers and/or turnkey property companies for good investment property.

No. 2 – I no longer buy a property based on a seller’s pro forma

I no longer buy based on the pro forma from a seller . Yes, early on, I liked it when I found a property that was rented and had a payment history.

But that history and the seller’s pro forma often are much different than reality. A pro forma is only good if it truly delivers the numbers stated on paper. Sellers are motivated to make a pro forma look impressive.

Their pro formas conveniently neglect expenses like repairs and vacancy loss. These two items alone can alter the numbers significantly. Eventually the unit will become vacant and while you are re-cleaning and prepping the unit for re-rental, you will have a loss of rent.

Additionally, over time you will have to do some repairs. These line items must be considered and a certain amount of money needs to be allocated for such. It is imperative to take the pro forma and validate every expense for accuracy and make sure you add in line items for future repairs and vacancy loss each month. Once you feel you have a great pro forma, you want to ensure the rental and the income are sustainable for the long term.

No. 3 – I no longer over-leverage my investments

Perhaps one of the best attributes of real estate investing may be leverage. Seasoned investors are always warning new investors not to over-extend themselves.

I too fell prey to the simplicity of a growing portfolio that looked great and over- leveraged myself. I broke the rule of having six months reserve in the form of cash or liquidity for each property I owned.

During tough times this liquidity is paramount and the lack of it forced me to sell some properties I truly did not want to have to sell.
When the economic times hit suddenly, renting a unit for top dollar is no longer easy and rents have to be reduced. Also, when times are tough, tenants tend to move out in favor of lower- priced living. A few weeks of vacancies on a multiplier of units that have to be re-rented at lower rates will hit a portfolio harder than ever. I am now one of those seasoned investors who experienced this first-hand and now warn against over-leveraging.

No. 4 – I no longer hire property management by price

I will always use a professional property manager.Anyone who knows me knows that I am an advocate for shopping value over price.

Well, that piece of knowledge comes from the school of hard knocks.

Early on in my investing career I managed all my own properties. When we decided to pack up and move from Minnesota to Florida, we had to turn over our portfolio to a property manager. Not wanting to give up my positive cash flow, I opted for the cheaper property manager. It was a big mistake. Through poor management, extended vacancies, and yes even embezzlement, I learned that when a property manager does not get properly compensated he does terrible work and even resorts to charging you for things he did not really do.

I found that when you hire a great property management company and it is properly compensated for its work, it will work diligently to help build your portfolio and increase your total ROI. Here are the questions I now ask property managers to insure I hire great talent.

No. 5 – I no longer do my own property management

After finding and hiring a great property manager I ran across this book “Outliers,” where the author illustrates that it takes 10,000 hours of work and learning and practice to be a success at anything. Wow.

Understanding this point (which made perfect sense), it made me question why I ever thought I would be better served doing my own property management. My later experiences have definitely validated this point. Great property managers have systems in place and techniques for getting quality results that I, or any one individual, cannot possibly duplicate.

I focus now on the full-time job, and the art, of finding great investment property. So I let the person, or company, focus on the art and property management of my investment property. My overall ROI is stronger having full-time professionals managing them.

I hope having exposed some of my trials and tribulations, from which I learned a great deal, has provided you some considerations for your investing future. Some were downright mistakes while others were simply self-discovery. Either way, they have transformed the way I look at all investments.

Information is deemed reliable but not guaranteed.