Many begin investing in real estate to create financial independence for themselves and their family. Financial independence is generically defined as having the assets and income that provides you the freedom to do what you want, when you want, and how you want. The belief is that it provides peace of mind that when retirement comes around you have the ability to take care of yourself and the people around you without worry.
A worthy goal that isn’t achieved overnight. No matter what route you choose to financial independence, the journey takes time, it takes effort but in the end it is all worth it. And although it does take time, there is one proven trick you can use to accelerate the process – putting yourself in the leadership position.
Taking Full Responsibility is Critical
If you run your life like a profitable business, your road to financial independence can be remarkably short, but YOU must be the one who is the driver. This is not to say that you must do everything, but it does say you must be responsible for all of the wins and loses along the way. Delegate but do not abdicate.
Your real estate portfolio is a business, a very profitable and sustainable business if the leader stays in control and sets the tone. Your ability to succeed with real estate investing is dependent upon a few key factors that you must employ in your business. Your business, as the real estate entrepreneur includes revenues, expenses, customers, suppliers, inventory, financing and business management. Each segment requires oversight and planning in order to maximize the net bottom line.
The Net Bottom Line Is 100% A Result of Your Leadership – No Excuses
The net bottom line is your responsibility. fall on the owner of property and while maximizing revenues while decreasing expenses is the ultimate goal, providing a great product to a hungry market at a fair price will get you to the finish line. Even if you don’t manage your own rental properties, managing the business process and ‘managing your managers’ as the CEO of the business is of the utmost importance. While investment real estate is a lucrative strategy to build wealth, it is certainly not a ‘passive’ investment.
When it comes to using investment real estate as a driver of financial independence or as a portion of your investment portfolio, there are two principles that are critical for the healthy and profitable operation of your business: sustainability and duplicability. With both of these in place, your business is geared to thrive. If there is an imbalance between these two keys, long term struggle will become a common theme.
•Sustainability will be the ability for your property to create a positive income continuously year after year. Laser focus on buying and managing only those properties that fit into your detailed plan will create this income. By focusing on sustainability your business can grow, thrive and ride the inevitable waves of a marketplace. In fact, by building with only economically sustainable properties your portfolio’s financial results will accelerate and just as importantly with a positive cash flow sustainable portfolio of properties the financing institutions will be much more inclined to say ‘yes’ to your requests for financing. This positive cash-flow income has more than one benefit: it will be your safety net when an emergency comes up, but it will also allow you to maintain the property over its life. Properly funded maintenance programs retain the value of your property with the added benefit of keeping tenants for longer terms which in turn reduces your overall operating expenses. Which drives cash to your net-bottom-line, which is your responsibility as the CEO of your financial future.
On the flip side, if the property isn’t generating this income, your portfolio becomes a figurative ‘black hole’, eating away at your capital as well as income from your daily 9 to 5 and becomes unsustainable in a hurry. This situation can quickly turn you into an unsophisticated motivated vendor, and that is not a strong position to be in. Think sustainability in all cases.
•Duplicability means running your business based on a ‘franchise’ or repeatable business model. You’ll target the same type of properties in a consistent geographic area while also targeting the same customer (renter demographic) that will be drawn to your quality living space. This provides you the ultimate leverage situation. Sure many investors leverage their money, but the majority don’t leverage their knowledge, systems or strategies.
By focusing on duplicability you save time, energy and money. Soon enough, it will become easy to say yes to great deals that hit your desk without wasting precious time; furthermore, saying NO to deals that add more chaos to your portfolio (and life) will be just as important of a benefit. You, the CEO, must set the strategy and have the discipline not to be dragged away from it by the latest and greatest “Big Deal.”
By becoming a geographic specialist you’ll be maximize your time by focusing only on the area that you know best. You’ll already know what a property will rent for as you walk up the driveway, and your team of professionals (plumbers, handyman, etc.) are just a phone call away. This seems like a very cookie-cutter approach, boring almost – this is exactly what you want as a real estate investor. The less emotion you bring to your portfolio, the more likely you are to make smart strategic business decisions as opposed to emotional decisions; emotional decisions lead to chaos, catastrophe and loss.
Price Frankly Doesn’t Matter
You probably wouldn’t ever purchase a floundering business, in a dying strip mall in a town that is shrinking no matter what the price. Yet that is the exactly what I witness the non-strategic real estate investor do over and over again. They lose their focus on being the CEO of a sustainable business and they chase after price. In real estate, cheap does not necessarily mean a good investment. Which is the equivalent of buying that dying business in the dying strip mall. What matters to the strategic CEO is income to purchase price ratio. You will pay a premium, for a business or a property, if it is located in an area with strong growth with plenty of traffic and potential future demand for that property. But you will also be much more sustainable as a business. Sadly, purchase price gets far too much attention as the determining factor when investors are deciding to buy properties. The key to successful real estate investing is understanding the phases of the cycle, how to read them 18-24 months in advance of their arrival and then managing your property/business in alignment with your findings.
Down payments – The CEO’s Approach
As you start down the journey as a real estate investor, there is a threshold you must cross with every property you intend to purchase – the down payment. Many novice investors believe that putting down the lowest amount possible is ideal. In some instances that theory may be true, however in others it is false. Let’s circle back to sustainability: the less money you put down, the smaller chance the property has of creating positive income each year as your expenses (mortgage payments) are increased right from the starting gun. Lower money down will sustain working capital, however putting too little down, your working capital decreases substantially along with your ability to be approved for future mortgages. What does this hurt? Your ability to duplicate.
Finding balance between cash flow and down payment is an important trait of a strategic investor. In certain cases, the financial institution will direct you as to the percent to put down, but as the CEO of your business, you will want to call the shots. Being educated on what formulas the bank will be using to analyze your deal and portfolio is imperative.
Senior Level Thinking
Here’s an example of a senior strategy that investors with access to capital will employ:
A savvy investor will buy the property for cash (or line-of-credit if necessary), renovate the property to improve the value, find great tenants, set the rents to the maximum the market will bare and fill the suites. Then, after 6 months of normalization of new rents and lower operating costs, it finally becomes time to use strategic leverage.
That is the moment that the strategic investors takes their ‘borrowing package’ which now includes the new “Net Revenue” numbers you’ve created and arrange conventional bank financing with these higher numbers. You have leveraged your knowledge and expertise as the CEO, and now you will use the bank to leverage your capital. The great news is, in most cases, the banks will grant financing based on the new/improved value rather than the purchase price as a result of operating and managing the property for this period of time. This strategy helps decrease the inevitable amount required for down payment in relation to the purchase price. This refreshes your capital, provides freedom of choice and makes your portfolio look incredibly strong from a cash-flow perspective when the bank gets down to analyzing your portfolio.
Then off you go and duplicate it over and over leveraging both your knowledge and your capital.
Like a roller coaster…
In all businesses, there are ebbs and flows. This is very true in real estate investing. In business, if you set up shop in the wrong location, maybe chosen because it was cheaper than other options, you will struggle. This is the same for your real estate business, a poorly chosen location for your rental property will lead to struggle and very few strategic options and is definitely not sustainable.
In business, many people end up handing over operations to a professional, such as a General Manager. However when they do that, the owners still sets the tone, sets the rules, makes the major decisions and hopefully keeps a very close eye on the overall Net-Bottom-Line. This MUST be the same for your real estate investment portfolio. If you hand your property over to a professional property management company, you cannot wipe your hands of responsibility. They may be running the business on the day-to-day operations, but just like any other business, you must manage the managers as it is ultimately your responsibility to increase that net-bottom-line number. You must be a pro-active leader, even if you aren’t running the day-to-day operations.
Always invest, never speculate: this is the motto of the sophisticated real estate investor. And in all cases remain fully engaged and responsible for not only the sins in your business, but also your losses.
Delegate responsibility, do not abdicate responsibility.
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