ROCKET: Hard-Won Lessons

There are plenty of these in the blog annals, but here are some of my favorites:

Buy properties that you, yourself, would like to live in.
I've seen it time and again. I've even done it myself. But no matter how good the numbers look, don't buy a property in a rough neighborhood. The numbers look good because the price is low. The price is low for very good reasons. One, because it will be hard to keep the vacancies low, so the numbers actually won't be that good after all. Two, because the renters in rough neighborhoods tend to damage property. Three, because the rents probably aren't as high as the listing says they are. Four, because the property probably has years' worth of deferred maintenance. Five, because the tenants will only pay in cash if they pay at all, and they will be a pain in the butt and take up all your time and energy. Six, because bullet holes are no fun to repair. Seven...

Overestimate the time and money needed to complete a remodeling project.
Again, a mistake I've made in a big way, and have seen others make as well, is to be under-capitalized for a project. I'm not exaggerating when I tell investors to carefully calculate how much a project will cost and how long it will take, and then double both estimates. There is a chance--a slim, outside chance--that the doubled estimate will, in fact, be too conservative, and everything will go exactly as planned. But wouldn't you rather know you have the resources to move ahead regardless of circumstance and possibly end up with a happy surpise at the end, rather than be sunk by a disasterous, unforeseen problem? Take my word for it as someone who has nearly been bankrupt and foreclosed by being undercapitalized on more than one occasion: always overestimate time and capital needs of a remodeling project.

Get rich slow.
It's easy to get the greed. To see the dollar signs. To want to make it happen now. I understand. I've had it myself on occasion. But don't give in. Here's how to be successful in real estate: Make a plan to get rich slow. Stick to it. Buy a bunch of solid cashflow properties, at market price if you have to. Rent them out. Wait ten years. Retire forever. It's that simple. The moment you start trying to cut corners or bend the rules, you end your path toward personal and financial growth forever, and you'll probably get caught too.

I know, I know, your brother-in-law's uncle's neighbor made a fortune in less than a year doing XYZ (at least that's what he says, anyway), and he wants to get you in on it too. But let's say you do take the big risk and try out some crazy scheme and it actually works. Let's say you make $25,000 in six months after working really hard to make it happen. Congratulations.

Compare that to the investor who buys a fourplex for the long term, gets a $500 cashflow per month after professional management fees, vacancies, and repairs are accounted for, and her property goes up $40,000 per year for each of the next five years. Then, that same smart investor, because she's got the time, money, and systems in place, goes out and buys two more every year just like it. She may not see the big $25,000 check in six months, but I guarantee that she'll be a millionaire many times over within just ten years (I can go over the numbers with you to prove it, if you like). All with very little risk and a tenth of the hard work.

Basically the lesson here is that real estate snowballs in a big way, but you just have to be patient. Over time, you get leveraged, compound appreciation, increased rents, the ability to refi to pull out gobs of equity to reinvest, huge tax breaks, all kinds of advantages. These benefits blow any short term gains out of the water. I don't care if you are buying properties for $100,000 under market value all day long and turning around to resell them for a profit--that would still be a drop in the bucket to the long term benefits that come from the boring old practice of buying good properties, renting them out, and waiting ten years. If you still don't believe me, then download some of our spreadsheets, or email us for others we have, and play with them. Very quickly you should be able to understand. The numbers never lie. Stick with the plan to get rich slow.

Be very, very careful about taking on an investing partner.
In fact, don't do it at all. I've nearly destroyed relationships with people who are very important to me because of business partnerships. You can invest in real estate all by yourself. It's not that scary. If your credit is bad, fix it, wait a year, and then invest by yourself. Remember, we're on a ten-year plan here. Losing a year is not a big deal. If you absolutely must take on a (non-spouse) partner, for whatever reason, then, please, take my advice, and talk to your attorneys, accountants, mortgage brokers, and other team members before you even look at the first property to buy.

Even go to the extent of writing a formal business plan, creating a partnership agreement, be very specific in defining roles, contributions, ownership, exit strategy, what happens if you lose money, et cetera. Get it all written up by an attorney and sign it before you even pretend to begin investing together. It seems excessive and expensive, but I guarantee every single one of those issues will come up at some point. If you don't address them in the beginning when the emotions aren't involved and the tension isn't high, then when the problems do arise, and boy do problems like to arise in real estate investing, disagreements will turn into heated arguments that will destroy not only the partnership, but probably the relationship. And the relationship is way too valuable to waste over some stupid problem that could have been easily and relatively cheaply solved long ago.

"But that could never happen to us. We're family members. We'll just shake on it." Wrong. Ever seen families tear themselves apart fighting over a deceased member's estate? It can happen to anyone. People's ideas about money--including yours and mine--are way too sensitive and warped to let something this important fall to chance. I would argue that relationships with family members are so important that it's even more necessary to do this up-front homework. I made the mistake of partnering with a close family member without doing all that homework, and when things went a little south in our investing at one point, it took us two or three years of hard work just to recover our personal relationship. And our business partnership is long gone. Trust me, if you can avoid a partnership, do. If you feel you must take on a partner, then be very careful about how you proceed.

Don't get anxious.
If a seller won't give you the price or terms you want, that's OK. Move on to the next deal, even if that was the most beautiful property in the world. If a realtor gets you all excited and tries to push you into a property you don't feel great about, fire him. I like to quote Dolf DeRoos, the great real estate investor and author, "The deal of the century comes around about once a week." Let the numbers dictate what a good deal is, and don't get emotionally involved. There will always be another good deal. If you can't find any today, there will be one by next week. Iff not, then definitely by next month. If not by next month, then look harder or find a new realtor. (Call Rocket!) But don't just buy because you want to get in the game. I'll say it again, we're getting rich slow here, so losing a couple months is not the end of the world. Buying the wrong property, however, could be the end of your savings, time, energy, and good credit. Moral of the story: be a diligent, but patient, investor.

-Like I said above, there are plenty of other good lessons learned written up in our blog. So check it out already. If you have any that you think should be included, drop us a line. If we include it, we'll give you credit.