Recently, a friend sent me an article about “why investors fail.” The article was specific to real estate, so of course I wanted to make sure I didn’t have any of the negative tendencies it mentioned. But, darn it, I didn’t want to admit it — but I do!
The article began with a story about a couple who bought rental properties over a long period of time, retired, and then lost their portfolio to foreclosure. That is not a typical story, although it was a bit more common during the Great Recession when many people overleveraged their investment properties. But for those who have invested in rental properties for many decades, the real story is quite the opposite. Most of the time investors actually have too much equity in their property, so they have a nice cash flow but poor net returns on their investment because their equity has built up so much over time. We see this often with investors who have so much built-up equity. When they eventually sell their investment properties and invest the proceeds into Guardian Fund, they see 2 to 5 times the net return.
But what really stuck with me from the article was the author’s final point. It wasn’t about having too much equity or not enough equity. It came down to this simple question: “Are you working on your business or in your business?” Are your real estate investments what you do or is it a side hobby? Essentially, investors struggle when they treat real estate like a hobby rather than what it is: a business. I fall into this trap, but not for the reason you may think. (I’ll share my confession with you shortly.)
My business partner, Steve Sixberry, always reminds me of this. He says, “Don’t forget to remind people that this is what we do every day when we get up!” This is not a job that we leave early so we can go deal with tasks at rental properties. Real estate investment — studying the market, making data-driven decisions, purchasing strategically, managing the properties, and communicating with tenants — is all we do with an entire team of people day in and day out.
When an investor doesn’t treat their investment like a business, they are at greater risk to fail — or at least, not be as successful. Why? Because they don’t take the time to develop systems, they treat their tenants like friends, they don’t create clear policies for finding good tenants, and they let menial landlording tasks get out of hand. Must I go on? I think you get the picture.
Just last week we met with a very successful real estate investor. She owns 16 condos in town that she bought at the right time during the down market. I wouldn’t categorize her into any of what I have talked about above, as she has done very well, but she admitted that she too struggles with these bad habits.
During the Great Recession, she had bought the condos at about $50,000 apiece. Today they are worth $200,000 each. Her first issue is that her net return is pathetically low now with all that equity built up in them. She could easily increase her return by multiples by doing a 1031 Exchange into Guardian Fund. Secondly, she doesn’t have the heart to raise her rent on her tenants. They are good families who work two to three jobs and she doesn’t want to make it any harder on them. She knows that what she is charging in rent is lower than the market rate.
This is a typical story because most of us can relate to struggling at points in our lives and having to make every dollar count. Her kindness makes for a nice charity story but doesn’t make for a good business story. And that is what she has: a business. She gets it, and that’s why she was checking with us on how it would work if she did a 1031 Exchange. She is also reaching an age where she is ready to move on and stop dealing with the landlord hassles.
I know you have been waiting for my confession — what do I do wrong as a real estate investor? I own two commercial buildings here in Reno that I manage myself. I should probably have my own company do all the property management for me because, like my investor friend, I too get emotionally attached to my tenants. One of my tenants who has been with me for more than 12 years just doesn’t run a very good business. He struggles all the time. I had not only lowered his rent dramatically during the recession, but I had also failed to raise it to the going rate for quite a few years after the recession ended. I finally got around to raising his rent at the beginning of this year and, once again, he gave me the sob story of how he can’t afford it. The good news is I still raised his rent. The bad news is that it’s still not where it should be because I am too nice and want to help him out. Maybe someday I will learn my lesson!