At What Kind of Real Estate Will You Be “Best”?

At What Kind of Real Estate Will You Be “Best”?

which direction imageOur business fascinates me.

Whether it’s creative deals, or watching how REIA groups develop and maintain individual cultures, or observing how different types of people react to the pressures and rewards of being real estate entrepreneurs, I find myself filing, categorizing, reorganizing, and contemplating where real estate investing fits in the bigger world, and how the people in it behave.

One of the things that I started to notice a few years back is that certain people seem to be drawn like a magnet to steel to certain strategies in  the real estate business. And from what I can tell from working one on one with FastTrack students, these tendencies appear to precede any actual exposure to real estate education and strategies.

Before I explain more (and potentially affect your answer to this question), let’s do a little thought experiment.

First, try to gain some neutrality about whatever money “things” are going on for you right now. If you have bills due that you can’t pay, or just saw your social security retirement statement and realized that you can’t possibly live on that, or just got a bonus at work and are feeling flush, try to chill about it for a moment. Close your eyes, take a deep breath, get centered, and read on.

You have a deal under contract. It’s a single family home that needs $10,000 in work to be a rental, or $25,000 to sell to a homeowner.

You have ALL the resources you need to do this deal: knowledge, access to money, a good rehab crew, a great manager, ample buyers or renters.

You are NOT under any financial pressure at the moment—not to get cash nor to invest cash.

All other things being equal, which of these would make you HAPPIEST—ie, most satisfied, least stressed about something going wrong, or about have lost out on something?

  1. Wholesaling this house for a $10,000 profit without doing anything to it, including closing it.
  2. Fixing up this house so it was beautiful, then selling it to a homeowner for a $20,000 profit.
  3. Buying, rehabbing, and renting this house for a $150 positive cash flow for the next 10 years, followed by a $650 positive cash flow when the mortgage is paid off (but never selling it)
  4. Buying the property then selling it “as is” to a handy homeowner for $3,000 down and a positive cash flow of $200/mo for 10 years—but no cash flow after 10 years, as the buyer will have paid off the property by that time.

If you answered #1, you’re probably a buy-and-sell person. Your driving motivation might appear to be “get cash”, but it might really be to avoid entanglements. In fact, you’d rather take LESS money (and pay more taxes on it) than deal with contractors, tenants, delays, hassle, and risk.

If this is you, you’ll carry this through no matter what your strategy or asset class—you’ll be more comfortable flipping than holding apartment buildings, mortgages, whatever comes across your desk

If you answered #2, you’re probably a beautifier. You still avoid entanglements by buying and selling, but you also get a sense of value from taking something that’s not working or attractive and making it working and attractive, whether that means fixing up a house, re-performing a delinquent mortgage, or whatever strategy you choose.

Because YOU find satisfaction in “adding value” through your own efforts, you probably have a hard time contemplating selling something for a profit when you haven’t “done” anything to it—you might even feel a little guilt about doing something like wholesaling. Since your innermost self thinks that the value is in what you’ve added to the asset, you probably have a belief that NOT improving something before you sell it is wrongish.

You’re not 100% anti-entanglement; you’re willing to work hard on the improvement of the asset, but you’re not crazy about the idea of staying involved with it once it’s at its best in terms of condition and performance—because from there, it only goes downhill, and that’s probably not something you want to stay around for.

If you answered #3, you’re a buy-and-hold person. I bet that if you’re honest with yourself, you can’t quite understand why someone who can afford to KEEP a property for long-term income would ever SELL it. Wholesalers probably make you a little suspicious (if it’s such a good deal, WHY would he sell it??) even if you’re trying to be one.

Your driving characteristic is the desire for predictability and financial security, and you’re willing to be “in it for the long haul”, with all the potential for short-term hassle that that implies. You’d much rather have 10 rentals cash flowing $1,000 a month than $15,000 in wholesaling income a month, because the surety of the passive income means more to you than the few extra thousand you’d make wholesaling after taxes.

Of all of the types of investor, you’re the one who’s most willing to put AND LEAVE money in a deal if the return is right.

In fact, you’re probably confused by this whole explanation, thinking, “Who WOULDN’T want that??”, but trust me, there are those who are just as confused by your willingness to risk tenant problems, lawsuits, and loss of capital as your are by their willingness to give up long-term income for short-term gain.

If you chose #4, there’s a good chance that you’re a rare breed—the true real estate entrepreneur.

You don’t mind long-term entanglements and, at the same time, don’t think every asset has to perform forever in order to be worth owning. You probably look at each deal on its own, not as part of a larger or longer-term strategy. You’re pretty agnostic about asset classes, exit strategies, and maybe even neighborhoods and property values.

You tend to operate by weighing risk and hassle—which you’re willing to take on for the right return—against reward. You don’t pay as much attention to your emotions regarding properties and opportunities as the other 3 do, and have a more pragmatic approach to the numbers.

And here’s what (at least should be) interesting to YOU: in my observation, these things are embedded deep in your psyche, and they affect which real estate strategies you’re best at and most comfortable with.

I’m no psychologist, but if I had to guess, I’d say that your “best” strategy probably has to do with things that you don’t completely control, like:

  1. Your internal risk tolerance, and where you perceive the risk to be (Losing money? Wasting time? Going back on your word? Lawsuits?)
  2. Your internal dialog about money, which comes from your own, but especially your parents’, experiences with and feeling about money and wealth
  3. Your values around predictability, beauty, freedom, and a bunch of other things

The problem is, if you try to go against those things, you may be trying to fit a square peg into a round hole and probably won’t succeed.

I see this over and over with students who are clearly “buy and hold” types who are “trying” to wholesale (ie they’ve taken the class and are making offers).

This is always interesting, because they ALWAYS have an intellectual argument for why they want to start out wholesaling (“I don’t have the money to buy rentals”, “I want to start with wholesaling because it’s less risky”, “I need to build a nest egg”).

But then, no matter how hard they try, they can’t ever seem to get a contract on a property THEY wouldn’t want to own long term (because they, on some level, don’t believe there’s a buyer for it) and, when they get one they would, find a way to buy and hold it even though they’re “broke”.

So, which type are you? Remember, it’s not about the strategy or even the asset class—a buy and hold person can invest in mortgages, while a buy and sell person can sell tax liens or mobile homes as easily as houses. It’s about which thing makes you feel best.

Are you focusing your education and efforts on the general strategy that’s going to make you happiest, or the one that your group leader or neighbor or guru told you you should pursue? Because there’s not a required, or even ideal, career path for real estate folk.

You should just do what’s a fit for you, even if you’ve never done a deal before. The education is out there, the resources are out there—if you’ll stop spinning your wheels trying to force yourself into someone else’s idea of what you should be doing, you’ll get where you want to go a LOT faster, and without a bunch of unnecessary detours.

What kind of investor are you? Did any of the 4 types ring true to you, or did I miss one? Leave your comments below, and share on social media!

 

 

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5 Comments on “At What Kind of Real Estate Will You Be “Best”?

  1. I’ll start: I’m DEFINITELY a type 1. If it were up to me, I’d NEVER hold anything longer than it took to get it bought and sold, and I’ve known for a while that my driving motivation is maximum freedom, not maximum profit.

    I’m guessing this is a reaction to growing up in my parent’s business, where no amount of hassle was too much to put up with for long term income and, probably even more importantly, tax breaks.

    HOWEVER, I also recognize that selling everything is NOT the path to real financial independence (as in, I don’t need to work to pay my bills), so I own rentals, notes, and other type 3 assets–but my goal with the rentals is to NOT deal with them and pay them off as fast as possible!

  2. Vena, this is so darned simple it’s brilliant! Actually, it’s something that I’ve always known about myself but I, too, have been “trying” to wholesale as my main investing strategy for several years. I just can’t get fired up about it or get myself to do it. As you said, I’m doing it because everyone says it’s the easiest way to make money in real estate — BUT NOT IF YOU WON’T DO IT!

    I’m a #2 – a beautifier. Always fluffing and rearranging my room as a kid, and then my own homes; always wanted to be an interior designer. But wholesaling first made sense – where else would I get the money to do a renovation?

    At the same time, I know it’s important to let the “deal” tell you what exit strategy will work best. But there are always wholesaler friends out there who I could pass those kinds of leads on to. And maybe if I wasn’t FOCUSED on wholesaling, but just happened upon one once in a while, it wouldn’t be so “against the grain” for me, because I would know it’s just a side gig and not my focus.

    You nailed it! Thanks for holding that mirror up to my face.

  3. I’m definitely a 3 and a 4 with a dash of 1. I do some of 2, but only to generate more capital for 3 and 4.

    I want that cashflow coming in every month, with the minimum of my time required to keep it flowing.

  4. Definitely no 3. I like owning things and enjoy buying value add apartments and I am a rare breed who likes dealing with tenants for the most part. I love the passive income and wholesaling is a very active process. Plus my day job is sales so it acts like wholesaling in a way from an income standpoint. I admire wholesalers because those who are good at it can make a lot more income on an annual basis but it involves so start heavy lifting. I prefer the tax strategies involved by owning apartments and multi family units. I have not gotten into notes yet but do anticipate I will in the near future.

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