Profitable Lessons from the “Real Estate Generation Gap”
I’ve been thinking lately about the massive difference between people who began investing in real estate a generation ago and people who have joined the business more recently.
This difference I’m talking about isn’t one of the age of the practitioners. Today, as 30 years ago, there are people from their 20s to their 80s just getting into the business. In fact, as I write this, I’m sitting in a class being taught by an investor who bought his first rental property 49 years ago, and he’s just 68; one of the students here is a beginner, and he’s 75.
It’s a difference in the investment/business philosophies of the people who invested during—or at least clearly remember—the hyper-inflationary period in the 70s and the high mortgage interest rates of the 80’s and the people who began their investment careers during or after the “housing bubble”.
For the sake of reference, let’s call the first group the old-timers and the second group the newcomers. And, before I begin, let me say that I do understand that not everyone in either category has the same attitudes as their contemporaries. But on the whole, I’ve found that, IN GENERAL, their thinking and philosophies are as follows:
- Overwhelmingly buy-and-hold people. Although they often TRADE properties for ones they like better, they rarely buy for the purpose of selling.
- Largely bank-averse—they wouldn’t borrow money from banks even if it were available. Very creative about financing, particularly financing from sellers, though they also use partners and private lenders
- Main goal is/was to own as few properties as possible, work as little as possible, and live very well but reasonably. You meet very few people in this group that want a private jet or a private island—but many who live in nice waterfront properties somewhere.
- Typically, these people worked (mainly white collar or sales) jobs until they were in their 40s or 50s. Their goal was to pay off as many properties as possible and slide into early retirement with enough income to live as above. As a result, many took 10 or 15 year loans on properties, which meant they had little or no cash flow while mortgaged—and in fact, the properties often had to be “fed” by the owner’s salaries until they were paid off.
- Most think of every property they own as a job, so they’d MUCH rather own 15 expensive paid-off properties with low rents and tenants who’ve been there for 12 years than 100 leveraged, aggressively managed, high-rent properties in low income areas, even though the latter might produce significantly more income and represent more overall equity.
- Often have an ultimate exit strategy of owning NO real estate—instead, they want to end up owning the FINANCING on the real estate. Many of these people end up selling their homes (and even apartment buildings) with owner-held mortgages, thus giving up the management altogether in favor of collecting interest income. When and if the buyers refinance and give the old-timer a big chunk of cash, he immediately buys another note, or lends the money out to other investors as hard money.
- Have operated as self-employed people throughout their careers. Many old-timers refer to themselves as control freaks—because they’ve never been able to stomach the idea of delegating anything that has to do with THEIR money or THEIR properties to anyone else. And even when they do hire an assistant, or property manager, they don’t so much delegate those roles as micro-manage them; they treat these people as if they were extensions of the investor himself rather than training the employee and letting him make decisions on his own.
- Much more oriented toward buy-and-sell strategies, like wholesaling and retailing. Although many will say that their ULTIMATE goal is to own some rentals, they often see their path as: make lots of cash, use some of that cash to buy rentals (or pay down payments to buy rentals), but keep making lots of cash at the same time. Very few start with rental, or buy them early in their careers
- Know very little about creative buying, especially seller financing. Are always looking for someone to “loan” them the money to buy properties. Prior to 2007, it was banks; now it’s private lenders.
- Often have the goal of building a very large real estate business that ultimately buys and sells dozens or hundreds of properties a year or owns hundreds or thousands of rental units. Feel competitive with other investors—want the pride of being “the most successful” among their peers, even if it means working their butts off for years. Are often very interested in the idea of “living large”—multiple homes, expensive cars, and, yes, the private jet.
- Much more open to “e-myth”-type concepts of systemizing, hiring, and being a business owner rather than a self-employed person.
So which group do you think is “more” right? I mean, in general, we tend to think of business philosophy as progressing and evolving over time, as generations of practitioners find out what works and what doesn’t—so in theory, the newcomers should be “more” right, right?
I would argue that the answer, in this case, is no. Each of these generations have SOME things right, but both also have things wrong, and it’s for these reasons:
- Each generation’s philosophies were deeply influenced by the market conditions at the time at which they started their investing careers. The old-timers never got used to dealing with banks, because getting financing was tough in the 70’s and 80’s (banks required 20% down, high credit scores—you know, the things they didn’t care about in the 90’s or ‘00s but care about again now) AND because rates were so high that it made no sense to use conventional financing to hold properties. Old-timers didn’t start out as buy/sell people because, well, the resale market wasn’t all that hot when interest rates were 18%. Newcomers, on the other hand, largely started investing during an easy-money buyer’s market, where good tenants were nearly impossible to find, because everyone with a decent credit score just bought a house.
- Each generation’s philosophies have been deeply influenced by the gurus of their generation. I have a copy of Al Lowry’s “Real Estate Investment Course” from the early 1970s. This course (commonly referred to as the Lowry/Nickerson course) was THE national seminar of this era; the other big one was Robert Allen’s “Nothing Down” seminar. Both focused heavily on creative buying and then holding. Beginning in the early 90s with the ascendancy of Ron Legrand’s “quick turn” courses and their ilk, the message from the front of the room switched from “buy and hold” to “fix and sell” (or just wholesale). By 2000, most of the true creative finance courses had disappeared from view—despite the fact that it was still a valid strategy for buying properties. No education, no hype, no excitement about a perfectly good strategy.
- Neither generation has been especially open-minded about what the other has to teach. It’s been my experience that people at either side of this continuum are fairly locked-in about their particular way of doing things. Newcomers often turn their noses up at the idea of rentals; old-timers think newcomers are idiots for selling houses that they could hold and, over time, get 10x as much profit with ½ the taxation. If anyone from either side would stop being so married to their strategies about being “best”, some of the problems of both sides would be solved:
- The old-timers would have cash strategies the would allow them to pay off their properties earlier, meeting their goal of high cash flow and little work
- The newcomers would have ways to buy rental properties earlier, thus hastening the time when they could stop working so hard to generate cash payday after cash payday.
I, of course, have my own opinions on the “best” way to invest—and it’s a philosophy that straddles the 2 generations. The fact that I grew up in a household run by a dyed-in-the-wool old-timer, but that most of the people I hung out with in the formative years of my own career were hard and fast newcomers gives me a different perspective that either generation.
So I think that in a perfect world, we’d all:
- Begin with the end in mind: decide what we’re ultimately trying to achieve, what we are and are not willing to do, and figure out what COMBINATION of strategies would get us there most quickly
- Understand and use MULTIPLE creative techniques for buying properties in a no-financing buyer’s market
- Acquire as many high-equity, high-cashflow rentals as we can reasonably find and manage
- Have at least 1 cash strategy (wholesaling, whether it’s junkers, lease/options, or notes, or retailing) that would allow us to have a comfortable lifestyle AND build wealth by reinvesting the money in more passive investment like rentals and notes
- Understand the BUSINESS of our business, and have systems and people in place to speed this process up by doing more than we can, better than we can
It’s time for a new generation of real estate investors to arise: ones that understand that knowledge is the main currency in today’s market. The more ways you know to do deals, the more deals you’ll make. So talk to those old-timers if you’re a newcomer, and vice versa. Think for yourself about what you can take from them—don’t listen to any “guru”, including me, who proposes to tell you what the best strategies are for YOU.
As part of this new generation—let’s call it the new-timers—we need to reinvent what it means to be a real estate investor. More openness to new ideas. Broader education. Less reliance on “experts” to hand us “turnkey strategies” that ignore whole segments of the market and might not even work in a turnkey fashion in our areas. Rejection of the idea that there’s a “best” way of doing things and more recognition that my best way might be different from your best way, and both might actually be best FOR US.
And in this way, I think that us new-timers might just be the most prosperous generation of real estate investors ever.
P.S. Are you registered for Mondays “What it takes to build a 6-figure wholesaling business” webinar? It’ll give you a big leg up in understanding how to create consistent cash, fast. Register HERE.