Hindsight is, as they say, 20/20.
IF ONLY I could go back to 2006, cash in all my properties, and use the money to short Fannie Mae stock. Sigh.
But daydreaming that you could have had foreknowledge of something as earth-shattering as the real estate crash is one thing; continuing to act in ways that you’ll very predictably GUARANTEE you’ll regret in a decade is another.
Each of these things have commonalities: they’re “quadrant 2” projects that can always be put off until tomorrow, because they’re not crises right now. They’re projects that can’t be completed in a day, or a week, or even a month: they have to be kept in consistent focus over longer periods of time—something we’re not usually great at when we’re entrepreneurs. And they’re all things that most NEW investors, and some intermediate investors, always think is something they’ll do when they’re more advanced. Only, for most of us, the day we feel “advanced” enough to start working on them is the day they DO start to become a crisis.
#1 Not opening a self-directed Roth IRA or 401k—and using it.
There’s general agreement in the IRA community that Roth plans—the ones that you get no deduction for contributing to, but that you pay no taxes on when you begin making withdrawals—are eventually going to go away. When Congress set these plans up, they didn’t apparently realize that real estate investors and other entrepreneurs could grow a very small initial contribution into millions of dollars in non-taxable assets in 10-15 years, and next time they’re looking for some easy tax money, they’ll undo that decision.
There’s also general agreement that if that happens, existing plans will be “grandfathered” so that if you already HAVE a Roth, you’ll get to keep it. You know, like your doctor.
These plans are incredibly powerful for building retirement assets and income—and as a rule of thumb, you’ll need to multiply the income you want to have in retirement (which is after age 59 ½, in the case of a Roth) by 25 to get the size of the IRA you’ll need to have to get that income. In other words, if you want $100,000 a year in tax-free income, you’ll need to build your Roth account to $2.5 million by the time you retire.
You’ll never do that with contributions, obviously—you’ll do it by making a contribution of as little as $500-$1000, then aggressively leveraging that contribution using wholesale deals, options, and owner-financed deals into enough to begin investing it more passively in things like hard money loans and partnerships.
You’ll never even SEE those deals, though, if you don’t set a goal for yourself to open an account (or convert all or part of your traditional account, if you have one) with a self-directed provider like Equity Trust (www.TrustETC.com), and to grow it by $x this year.
#2 Not buying rentals while prices are low
Yes, prices have recovered—but rentals in most parts of “flyover country” are still extremely cheap as compared to the rents they command. This won’t be the case in 5 years, with rising interest rates and interest in real estate. Can’t do this because you don’t have the money or credit to get a loan? See #3.
#3 Not buying rentals because “you can’t afford it”.
One of the constant refrains I hear from newer investors is that they plan to buy rentals “when I can afford it”.
Given that the last 4 rentals I’ve bought were purchased for a total of $720 down, and with no banks or qualifying involved, I’m not quite sure what that means.
There are plenty of ways to purchase rental properties with owner financing. We spend 3 or 4 weeks on that topic in the Inner Circle webinars, and I have a whole home study course on the topic (called Transactioneering Mastery, available at www.REGoddess.com ) Assuming you buy the RIGHT rentals, don’t commit to adjustable rate loans or loans with balloons, can get financing that pays off quickly (5-10 years), and know how to evaluate the property before you buy so you’re SURE you’ll be making money rather than feeding it, there’s no reason you can’t own rentals by leveraging your KNOWLEDGE rather than your cash and credit.
Oh, and there’s one more thing:
#4 Not keeping adequate reserve accounts
I consider it the hugest mistake of my early real estate career that I didn’t keep reserves for my rentals. Like many younger/newer investors, I spent whatever was in the account at the end of the month, figuring that if there were a problem later, I’d simply do a deal to get the money to fix it.
BIIIIIG no-no; rentals need to make enough money to support THEMSELVES, and that means that at least 20% of the gross monthly rent needs to be diverted into a reserve account for vacancies, maintenance, repairs, and LONG TERM CAPITAL RESERVES. ‘Cause that brand-new furnace you just put in will need to be replaced in 15 years, and that’s not a surprise that can’t be planned for.
And while you’re at it, how about a reserve account for taxes. Wholesalers? Wholesalers? I’m talking to you. Your income taxes are supposed to be filed and paid QUARTERLY, and you shouldn’t be devoting your first 5 wholesale deals of the year to catching up with the IRS. Just put the money aside as it comes in.
And…do you have a personal reserve account that includes 6 months’ worth of expenses? No, you don’t, because you’re an entrepreneur, which means you think you’ll always be able to work and always be able to generate another dollar—and that any extra money you DO have should be plowed into your business. Which brings us to #5:
#5: Have an estate and succession plan.
Over the past 10 years, I’ve been witness to exactly what can happen when business owners don’t have a detailed, written, updated plan for what happens to their businesses if they die, or become unable to work.
During this time, I’ve watched my father’s real estate empire—which in 2004 was provably worth $2.5 million—dwindle to the point where my parents are living (for free) in one of MY rentals, because they’re living off of the income from 2 rentals and 2 small social security checks.
This is a business he worked 50+ years to build, forgoing vacations, time with his family, hobbies, EVERYTHING for most of those years. In his case, the problem was that he was unwilling to give up control of the day to day operations even after he was diagnosed with Alzheimer’s a decade and a half ago; this left my mother, who has very little ability to deal with properties, largely in charge of a portfolio that, without my father’s direct involvement, needed serious hands-on management.
I see this all the time. Landlords assume that their spouses or kids want to, or can, manage their properties if they’re disabled or dead—or that the same family members who’ve always, often loudly, expressed their dislike/distain/disinterest will suddenly come around, or find a way to deal with it, in an emergency.
The kind thing for my father to have done—and for you to do—is to have a specific, written plan for people other than my mother to operate the properties in trust for her should she become disabled. What’s yours? Because you don’t have to be 85 to have something happen to you that makes it impossible for you to deal with the complex situation you’ve created.