Investing in Real Estate Secrets – How to Avoid Financial Disasters
“I am a newbie. I have no investments and no mentors. All I have is a desire to learn and a willingness to be coachable. How can someone like myself get started?”
“I’ve been wanting to do real estate investing for a while now. There is so much information to learn. It can be overwhelming. Where should my first initial focus be to start investing?”
“I’m trying to get started and I’m feeling a bit overwhelmed. I’ve heard people talking about “chasing the shiny objects “, and that’s exactly how I feel.”
“I have read a lot of books over the past two years and read countless articles/stories on the internet about investing. I am looking for advice on investing in real estate as I do not want to be working my whole life.”
“How do people start? Do you wake up one morning and say that’s it, I’m doing this or that? I know I would be a good business person as I am thorough and particular and a hard worker. I just feel like it goes to waste working for other people who don’t appreciate you.”
“I don’t really have an investment strategy as yet other than to hopefully have enough passive income through investments to one day not have to work myself. “
“I was misled and told that buying positive cash flow and receiving equity increases every year would put me in my own home much sooner. In a nutshell, I paid a commission of 30 odd k to buy somewhere I really didn’t want to because of the advice of a so-called expert.”
This manifesto may transform your financial destiny
First off, let’s look at the number of real estate investors.
In June 2016, one in eight American adults considers themselves to be residential real estate investors or own residential investment property.[1] The Australian Tax Office taxation statistics show that in 2013-14, 15.7% of all taxpayers (12.9 million) indicated that they owned a rental property.[2]
If you are thinking about investing in real estate, this manifesto is perfect for you. This manifesto can help you build a stronger foundation if you already have investment properties.
My personal desire is for you to be armed with the appropriate information BEFORE you invest your hard-earned money in real estate, to choose the right investment vehicle to enable you to achieve your financial freedom, to invest at the right time using the right knowledge, and to make the right investment decision to suit your personality, strengths and risk profile.
Assuming you have saved up some money for a deposit or can release equity from an existing real estate, you may be thinking about buying a real estate investment property to capture future capital growth, to get tax advantages, to create future wealth, to be financially free, and so on.
But wait!
This may seem remarkable but if you can sit down to read this manifesto; your entire financial destiny could be shifted because of it.
Let’s face it, a lot of us do not think through the possible consequences of our decisions until it is too late. Better still, if we have not invested, but are still thinking about investing in real estate.
The first and most important thing about considering a vehicle for income generation is to look for something that’s going to be long-lasting. If it’s going to be long-lasting, it’s going to have to work. The only way it can work is if it works with you; if it fits who you are.
Don’t look for additional income opportunities. Look for something that suits who you are.
If the vehicle that you’re trying to create an income from doesn’t fit who you are, you will fail miserably. You will either do fairly well for a short time financially, and then you probably won’t anymore because you won’t like it and you’ll look for something else, or you won’t do well from the get-go.
Look for a vehicle that suits who you are.
Here is where my story begins.
Real estate spruikers or marketers managed to convince me that real estate investment is easy and I could live forever off the passive income generated by a portfolio of real estate investments, without reliance on government handouts or pension. In theory, this sounds good.
At that time, I was a 45-year-old, sole income earner feeding a family of seven. Yes, I have five beautiful children. I own the house I currently live in but had no investment properties to support my lifestyle after retirement, which was only 15 years’ time, assuming I retire from full-time employment at age 60. This was my working assumption.
Unfortunately, the temptation was too great and I fell into the trap and bought an interstate investment property without any clue about real estate investing. The marketing ploy was slick, predatory and emotional.
Luckily for me, I came to my senses and terminated the sale within the 7-day cooling off period. Yes, I lost a couple of dollars to pay for the legal fees – it was worth it in hindsight. It was a lesson I learned and this insight was invaluable.
What is your horror story? The Internet is littered with war stories of people being taken for a ride by these slick real estate marketers or operators.
After this unpleasant event, I vowed to equip myself with more information and knowledge in real estate investing. I searched the Internet for FREE information sources and forums. I invested in a lot of real estate investing books and attended all the FREE seminars on real estate investing.
One thing I learned was that FREE information always has a catch. There is either a sell at the end or a promotion to buy their reports, services or real estate properties. I could see a range of sales and marketing techniques being employed to snare the unsuspecting or the ignorant (which was me, at that time).
It occurred to me that half-truths are often communicated where I am left to ‘connect the dots’ and to make sense of the information provided based on my acquired knowledge and readings.
The good outcome from the unpleasant experience was that I got many perspectives and I synthesised them logically to separate assertions and assumptions from the facts.
I took detailed notes and the information I gathered has been documented in my 160-page eBook titled, “The Ultimate Read Me First Guide to Real Estate Investing: How to Strategically Get Started and Not Make Costly Financial Mistakes.”
More importantly to you, this manifesto is written to prevent you from making the same mistakes as I did. I really do want you to think carefully about real estate investing, as it is not as easy as it is made out to be.
This manifesto is about knowing your WHY in real estate investing and having the right mindset and financial thermostat for doing so. It is about strengthening your thoughts so that you can take the appropriate action that will enable you to become financially free.
This can be a challenge if your wife, partner or spouse does not have the same mindset or does not want to be financially free. When it comes to money, relationships can be strained. That’s why it is so important for both of you to be on the same page when it comes to real estate investing (or even starting a business).
There are four must-answer questions before you invest in real estate:
(1) What is your investment timeframe? That is, for how long do you plan to hold your investment property or properties?
(2) Are you investing primarily for capital growth or cash flow? (It can’t be both)
(3) What is your appetite for risk? Are you looking for safer, set-and-forget type investments that will make you money over the long term? Are you looking to speculate and make money quickly? Are you planning to create or manufacture equity by renovating or developing properties?
(4) What can you reasonably afford without compromising your current lifestyle?
The good news is that to be financially free, there are other options available (like starting an online business) apart from owning an investment in real estate, which I will touch on later in this manifesto.
So print this manifesto (if you haven’t already), sit back and relax in your favourite chair. Read this document carefully as it may change your destiny and direction.
How I got into real estate investing
In my early 40s, I realised that I could not trade time for money. I don’t want to use physical leverage or hard work to try and get ahead financially.
Let’s face it, we get older by the day.
The busyness of life and family has kept my focus on other things.
Now, I want to take control over my reality and be smart about my future including my retirement.
All my life, I have been an employee to a number of employers like KPMG.
Being an employee has become riskier as the corporate ladder has become more of a dream than a reality; when older employees are being discriminated against or replaced with cheaper alternatives when there is a limit as to how much an employee can earn, and when employees are taxed substantially when compared with business owners.
My situation is no different.
Education is important to me. I wanted to know as much about the topic of real estate investing as possible.
I bought many real estate investing books that I could get my hands on, attended free real estate seminars, signed up for free ‘strategy’ sessions (which feels more like a sales call), signed up for free newsletters offered by organisations selling real estate services and properties, and searched forums for free advice and information.
All these materials and information only provided part of the large information jigsaw puzzle. I quickly realised that people have different motives for communicating what they want me to know and that they are all tactical and sales-like in nature.
Marketing messages like “claim a loss to get a tax refund” and “invest in the next hotspot” are all enticing and emotional to first-timers like me where studies have shown that emotions can have a significant effect on the way we think, decide and solve problems.[3]
Months later, the redeeming feature for me was that I had developed a long-term financial goal and real estate investment strategy that helped me to avoid being an opportunity seeker who went from one tactic to another and got sucked into the tactical hell of real estate investing, which I will cover later.
My strategy is to first build my asset base through capital growth and only then, once I’d built a substantial asset base, to move to the cash flow stage of investing.
The next stage in growing my net worth was to slowly lower the loan-to-value ratio of my property portfolio and then to start living off my ‘cash machine’ of properties.
While cash flow management is important to keep me in the real estate investment game, it will really be capital growth (increase in net worth) that will get me out of the Rat Race of life and into financial freedom. Net worth is the amount by which my assets exceed my liabilities.
My personal real estate investment strategy should provide me with the right strategic guidance to achieve my long-term goals where I want to retire financially free.
My retirement contingency plan
As an accountant and a risk management professional, I was thinking in terms of risk and reward. If the rewards are great enough, I can come up with a strategy or plan that will increase my chances of success.
Most people, including employees who work for job security, do not have a retirement contingency plan especially if they can no longer work for whatever reason. This plan is my insurance policy if things or circumstances do change.
I wanted security by diversification through investing in real estate and starting an online business.
After the global financial crisis in 2009, the possibility of a severe stock market crash just before or after retirement age is so real that it can potentially wipe out my entire retirement savings.
During this time, there were significant value reductions in retirement funds around the world. People close to retirement had to continue working unexpectedly. They were left without a choice. I am assuming that their employers can still employ them or if they can still find employers who want to hire them.
If you think that job security is smart and building a business or investing in real estate is risky, please reconsider. I did not want to be in a position where I have no control over my job. My job can be taken from me.
The bottom line is that I wanted to take control of my own reality by changing or reframing my reality through the shifting of my mindset and point of view and to reset my subconscious financial thermostat.
I reframed by adopting a different point of view that says that building a business and investing in real estate is smart and job security is risky.
You too can reframe and learn the same things as I did in my 40s.
I found out that clinging to job security all my life is a lot riskier in today’s environment than taking a well-considered risk to learn to invest in real estate and build an online business. One risk is short-term and the other risk lasts my lifetime.
Play to win or don’t play at all
I enjoy swimming and my brother-in-law enjoys cycling.
Which game should I choose to win if I were to play a game for money? Which game will give me a better chance of winning?
Isn’t it obvious that the decision will simply come down to the game I am good at, right?
What about business? Isn’t business a game that you play to win too? Who starts a business with the aim of losing money? Certainly not me.
If you were wondering why I am using a business analogy in this manifesto, real estate investing is a business, whether you are doing it full time as a job or part-time as a regular wage earner. No one goes into real estate investing as a hobby or interest, not least the majority of us.
There is a key distinction between what I am ‘interested in’ and what I am ‘excellent in’.
Let me explain.
I may be interested in the game of tennis. But certainly, I am not excellent in it to win the game, especially if it is a game for money.
No matter how interested I am in tennis, it does not make any financial sense for me to attempt to become a professional tennis player deriving my income primarily from any earnings I get from winning tournaments. Simply put, I will not enjoy the game. I do not have the passion for that game.
Here is something you must remember: Interest equals hobbies; strengths equal business profits.
You may be interested in hobbies, but it will be your strengths that will give you the money.
I took advantage of my strengths and worked on my weaknesses.
Focus on strengths in order to succeed
The first and biggest obstacle we will face when building our real estate investment portfolio around our strengths is figuring out what our strengths are in the first place.
To succeed in real estate investing, I must have strengths in various areas of real estate investing. Likewise, if you want to succeed in business, you require or acquire strengths in business.
In reality, if I started a business based on my interest rather than my strengths, I may be forcing myself to work harder and longer. There is no passion in the work I do. Worst still, I may not get the outcome I originally wanted.
In business, I know that I don’t get an “A” for effort. Effort does not pay the bills, unlike strengths that convert actions into profits.
Unfortunately, most real estate investors focus on their weaknesses because they have been brainwashed or bought into the faulty assumption that anyone can successfully build a real estate portfolio. Media and to a large extent, real estate marketers, have a greater part to play in creating a false emotional response in wannabe real estate investors; that is, to own a million-dollar real estate portfolio.
The message is clear: only start businesses (including real estate investing) when the core skill needed to win is a strength of yours.
What are your strengths? Do you have strengths that will give you a win in the game of real estate investing?
Our strengths are the direct result of the natural talents we were born with. These talents have been honed and sharpened through life experiences, education and the skills we’ve developed.
I’m sure as we went through school, we noticed that some people excelled at math, others excelled at English, and for some, they performed best at a gym.
The reason why people excel where they do is that they have inborn talents for these areas. So what they derived from their education has been determined by their natural talents.
Read the list below and think about your answers to uncover your strengths.
(1) Think about or try to identify any time in your past that you were able to pick things up very fast. If you were with others, you ‘got-it’ much faster than all of the other people around you.
(2) Are there any areas of your life where several different people (who do not know each other) come to you for the same type of advice?
(3) Is there something that many people ask you to help them with?
(4) What are you most productive doing?
(5) Which activities come easily and naturally for you?
(6) What have people praised you for throughout your life?
(7) As a child, were there any activities that you loved doing and that you did better than all your friends?
There are many routes I can take (or real estate investment strategies I can adopt): rental properties, flipping (i.e., flip to hold or flip to sell), residential, commercial, real estate investment trusts (REITs), land development, renovations, and the list goes on. Each of these avenues involves different types of skills and strengths to succeed.
For example, if I am thinking about flipping a real estate property as my real estate investment strategy, I will need knowledge and experience in financing, repairing, building, or developing properties. Even if I am not the primary person doing the work, I still need to have an understanding of those components. If a contractor tells me something, I should know if he is on par or off in the left field.
What happens if I tried to flip a property? Can I do it? Absolutely. I have to take time off from my current employment and learn things quickly.
Am I interested in flipping? Am I going to accept the higher risk of flipping? Not sure about it.
When I am naturally skilled at something, I am bound to succeed if I try. I can’t imagine 99% of people pulling off a profitable flip without the required skills and knowledge.
Why? Because I’d be fighting against my natural weaknesses and even more devastating than that, my strengths.
With my buy and hold real estate investment strategy, on the other hand, I have a better chance of succeeding because I am working in the same direction as my strengths (and my interests), my available time, my other commitments and circumstances, and my risk profile.
Some ‘experts’ may have different opinions about my strategy, but who cares. At least I have a strategy and I am sticking to it. It works for me, at least for now.
Don’t swim upstream.
I love how much money I could have made as a real estate flipper if I was an opportunity seeker. I can think of various projects that would be a blast. It could be so much easier for me as an investor because it would give me additional capital to invest in a shorter time. However, flipping doesn’t align with my strengths, interest and risk profile.
Therefore, if I were to flip properties, I would be constantly battling the currents. I could do it but I would be so much slower at it and more stressed than someone who has more of a natural inclination towards that sort of work.
Because of that, I know my talents and strengths will get me further faster if I focus on the things I’m good at; and therefore the things I enjoy. Even if at first glance it seems to be the slower route to financial freedom.
You can choose any real estate investment strategy you want. You can study all day long, you can find mentors, you can learn by jumping in and you can eventually succeed.
Why force something unnatural? If you have no skills, knowledge, and interest, don’t flip properties. Similarly, do not renovate a house if you do not have the skills, knowledge, and interest.
Figure out your strengths and then find a real estate investment strategy that compliments your personal strengths. You will have fewer headaches and you will only gain self-confidence rather than have it challenged every day.
Even if you wish you were good at a different real estate investment strategy, stick with your strong one first. Then once you are successful there, you can go play with other strategies and see what happens. Build your confidence first, put some money in the bank, then go play with what you may not be as good at.
If you’re in business for yourself, you’ve got to play to win. If you are going to win, then you are going to have to focus on your strengths. This is the foundation of a great business strategy and great wealth.
High failure rates for real estate investing
Wannabe real estate investors can muck up a real estate deal beyond all recognition while at the same time, wreaking financial havoc upon themselves. When this happens, it can take a very long time for them to recover from the effects of this type of financial whammy.
House prices don’t always go up. In fact, if you invest in the wrong location (especially single industry towns), your investment can significantly reduce in value when the economy turns.
I remember attending an annual property investing conference and the speaker asked the audience, “How many of you are making losses on your real estate investments due to poor or insufficient due diligence?” A quarter of the room of about 1,200 people raised their hands.
That was a revelation for me.
Here are some real estate topics I recommend you focus on during your early education:
(1) General principles and strategies
(2) Financing
(3) Deal analysis
(4) Finding and negotiating deals
(5) Property management
(6) Legal and contracts
After talking to many wannabes in real estate investing, I found that their knowledge about investing in real estate is superficial, at best. They lack the in-depth nuts-and-bolts knowledge required to put a real estate deal together from start to finish.
Worse still, the majority did not have a personalised real estate investment strategy.
I attribute the high failure rate to the fact that real estate investing doesn’t have any of the so-called barriers to entry that many other businesses have. It seems easy and anyone can invest in real estate. My friend did it, why can’t I? Perhaps it is about trying to keep up with the Joneses.
Anyone can invest in real estate at any time, without the slightest clue as to how to find, analyse and manage a profitable real estate investment deal. I was once that person.
As such, most people usually fail to make it as real estate investors and the reasons for failure include:
(1) Inability to stay focused on a single objective and real estate investment strategy
(2) Failure to perform adequate due diligence
(3) Incompatibility with their personal financial thermostat (covered later)
(4) Lack of capital and creditworthiness
(5) Pay above market value for the property
(6) Lack of basic real estate investment knowledge
(7) Lack of persistence and patience
(8) Failure to act in a timely manner
(9) No defined exit strategy
(10) Unrealistic expectations
(11) Bad advice from unreliable sources or so-called ‘experts’
(12) Lack of planning and project management
(13) Lack of mental toughness for the long haul
(14) Inability to manage time
Then there are those who say that real estate investing is bad and you can make more money on the stock exchange buying equities or shares. The entry barriers are much lower for buying equities and anyone can do it.
Shares, commodities, and futures tend to be ‘when-to’ investments.
Share prices are volatile, fluctuating up and down, and then down and up again. Sure, you can get your money out quickly, but you also run a bigger risk of making a loss. As a ‘when-to’ investment, you have to know when to buy and when to sell.
The problem is that timing is crucial with these investments. If you buy low and sell high, you do well. However, if you get your timing wrong, your money can be wiped out!
Most ‘when-to’ investment vehicles produce only a handful of large winners but there are many losers.
I am thinking about the number of people who lost money in a company I purchased shares in. I bought some initial public offering shares at $3.80. In two years, it went up to $5.40. Family circumstances forced me to sell my shares. Without much warning, the share price nose-dives to $3.60 over a period of two years. That company went private again and all shares were bought back at $3.40 per share. Whilst I made some ‘unintended’ profits, others weren’t that lucky to get out in time.
I recall how my uncle had to liquidate his house to pay for the margin calls on his share portfolio.
I’d rather put my money into a ‘how-to’ investment such as established major capital city real estate, which generally increases steadily in value and doesn’t have the wild variations in price. That’s me. Yet it is still powerful enough to generate wealth-producing rates of return through the benefits of leverage.
While timing is still important for ‘how-to’ investments, it’s nowhere near as important as how and where you buy them and how you add value.
Unfortunately, ‘how-to’ investments are rarely liquid.
Investing in well-located real estate properties produces many wealthy people (both homeowners and investors) and only a handful of losers.
Ultimately, it comes down to the return of your capital and your risk profile, which I will cover later.
Either way, the principles contained in this manifesto can be used for any investment activity. If nothing else, just educate yourself.
Start in the wrong place and time; get stuck in tactical hell
If you are wanting to start out in real estate investing, there will be a stream of never-ending advice from family, friends and ‘experts’; “Buy an investment property in this next hotspot location”, “Buy a positive cash flow investment property” or “Buy and renovate an old investment property”.
No wonder wannabe real estate investors are truly confused and do not know where to start.
I call this situation being stuck in ‘tactical hell’ and not strategically focusing on the end goal. Some refer to this as opportunistic behaviours or being an opportunistic seeker, getting distracted and constantly changing real estate investment strategies to chase the next shiny thing that promises money to be earned in the shortest possible time.
Distraction will be one of your enemies. Today, you might feel enthusiastic about saving and investing for your future. Along the way, other matters may occupy your mind. When you watch the news, someone will say something important. There’s this, there’s that. You will shift your attention to something other than what you have started. You need to stay focused on your goals and tune out distractions by having a personalised real estate investment strategy developed for you and your unique situation.
Given that we live in a society that demands instant gratification, people will tend to try the latest things or go after the latest, shiniest thing in the hope that they can strike it rich in the shortest possible time, with the least effort. They don’t like the idea of thinking and working for the long-term.
The latest nationwide gambling figures show Australians lost almost $23 billion between 2014 and 2015, up nearly eight percent on the year before.[4]
Ever wondered why the number of gamblers is rising?
People are desperately seeking short-term gains to overcome problems caused by consumer debt and the lack of investments due to uncontrolled desires for immediate gratification. These opportunistic behaviours, unfortunately, often lead to long-term debt instead of long-term wealth and financial freedom.
People want a quick answer. Too many people are fixated upon the get-rich-quick philosophy of life, which real estate investing is not. Real estate investors must stick through the highs and lows of property investing.
Real estate investment is not for the faint-hearted!
Let’s be clear about it.
Many people get into real estate investing hoping to become multi-millionaires overnight. Then when they don’t make it, they all freak out and want to get out, especially within the first couple of years of investing. They lose heart, saying that real estate investing is just not for them. They liquidate their investments at the wrong time, crystallising the loss in property value.
Real estate investing is not a get-rich-quick scheme. Real estate is a proven commodity that we all need. It has the tried-and-tested ability to provide steady, long-term gains through the power of compounding. For the best results, add debt and tax minimisation to the strategy.
The Australian Taxation Statistics 2010-11 shows that of those who stay in the game: 73% of investors only own one investment property, 18% of investors own two investment properties, 5% of investors owned three investment properties, 2% of investors own four investment properties and 2% of investors own five or more investment properties.[5]
Here’s the rub. The overwhelming majority of real estate investors are nothing more than opportunity seekers, speculators or gamblers. They have no long-term real estate investment strategy. They hop from one idea to another. While they may have some arbitrary income goal, they have no vision about what they would need to create in order to achieve their goals.
Since they don’t have a clear vision of the end game, they cannot follow any sort of real estate investment strategy. They end up buying anything and everything that comes with a big promise of easy money with the hope that this property deal is going to be it. It is their big chance to make it big, to be financially free. They pray and hope for the best.
Here’s the way I see it. People aren’t doing their homework. People aren’t acquiring the right knowledge and skills. People aren’t putting in the required time and effort to do the proper, detailed due diligence on the real estate investment deal and understanding the fundamentals of real estate investing and management.