IC E Lesson: 10 Things I Guarantee You’ll Regret 10 Years from Now
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 agressively 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 be 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.
#6: Not paying attention to your numbers
Unless you’re a CPA or other financial professional, I bet your books aren’t in order. In denial? Then tell me what your true net-net average wholesale fee was, after all gas, marketing, office supply and equipment, and other expenses were. I’ll wait—if your books are correct and easy to access, it should only take a minute.
Bookkeeping messes just become bigger and bigger messes as your business gets more complex. They’re costing you time, and they’re costing you money at tax time. Get them fixed.
#7: Not designing your business to serve your life, rather than the other way around.
If you’re “in real estate” as a part-time effort to add income to your life or plan for retirement, you can ignore this, because it will probably never become a problem for you.
But if you’re in it full time, or you want to be, please do yourself a favor and put your “why” first.
Too many real estate entrepreneurs become so obsessed with being the biggest, the best, the highest-volume business people they can be that they end up losing track of—and failing to benefit from—the whole reason they wanted to do it in the first place.
WHY did you get into this business? Was it to be rich? Probably not—it was probably to get something that you though “rich” had to offer. Like being able to spend tons of time with your kids. Or travel the world. Or support some cause in a meaningful way.
If all of your goals and efforts are around the “How” of the real estate business rather than the “why” of the end, it’s easy (and shockingly common) to find yourself with a huge business with an office to support and 10 employees to manage and keep busy, working 60 hours a week, and never seeing that family, or “being able” to take 2 weeks to travel, or getting to a single meeting of that charity or church you love.
I’m not against ambition or working hard. But often, if you really plan with the end in mind, less is often more. It’s better to have a business with you and a VA that grosses $150,000 a year but only takes 30 hours a week of your time and nets $100,000 than one with 10 employees that grosses a million, nets $200,000, and leaves you with zero time or energy to pursue the things you love.
#8: Not creating systems, procedures, and checklists for the operations of your business.
Without them, you can’t accomplish either #5 or #7. If no one except you knows what you do, how does anyone, ever, take over for you? How do you hire that VA to take 20 hours a week of scut work off your plate? And trust me, it’s a lot easier to do as you go along than it is to sit down after you’re already successful and write an entire operations manual. ‘Nuff said.
#9: Not connecting with other investors
I’ve written several articles lately about the importance of networking, live events, and joining (and attending) your local REIA meetings. It never ceases to amaze me, though, how often I talk to more “advanced” investors in my market who are so disconnected by virtue of thinking they’re too busy or too educated to attend these meetings, who have no idea that Ohio passed a law saying X or that bank Y has a great program for investors. They don’t know who’s partnering, who’s lending hard money, or who’s ripped off dozens of local investors.
Every little piece of information you pick up from colleagues, and every resource you don’t have to search to find, and every connection you make that could later turn into a buyer, seller, or partner, is worth a LOT of money. And the only way you get them is to take the time to get and stay connected.
#10 Not making a commitment to continuing education and cross-training
It’s so easy, once your business is chugging along, to decide that you don’t “need” to attend this workshop or that conference or your next association meeting.
And maybe it’s not—until something changes in the market. And it always does.
I can’t tell you how many successful real estate entrepreneurs I’ve seen who’ve lost it all because of a change in the market that made their business unworkable. And not just during the real estate crisis, either.
The problem is, when you get locked into a single way of doing things, you’re super-vulnerable to market conditions that you can’t control. Whether it be massively increasing competition, or new regulations, or changes in lending policies, or simply changes in demand, if you don’t know how to adjust quickly or even completely re-orient your business plan, you won’t have a business.
The workshop you take today on a strategy different than what you’re doing may not be something you’ll implement tomorrow (though I usually find that I take some idea from every class and add it to what I’m already doing), but it may turn out to be a lifesaver later, when the market calls for your business to change.
So what are you thinking? Is it “Yeah, yeah, those are all great ideas and as soon as I get my business going/get it on a better footing/grow it to where I want it to be, I’ll get starting on them for sure?”
Or are you going to do the smart thing, and schedule an hour a week during 2017 to start taking a bite out of these, so it doesn’t get put off until next year, and the year after, and the year after, and the year after?
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