The best deals I've ever made were not to be found in the classified ads, on the MLS, or via other investors. The real deals are often masquerading as "no deal", until you actually make an effort to look at the fundamentals...
Fundamentals Dictate Strategy
This is the basis for all of my teaching and writing on real estate investing. The fundamentals are those things about a "subject property" that cannot be changed, but must be dealt with. Strategies are the methods and procedures you use to either buy-sell-or hold a given property. In order to be successful throughout a long real estate career you must be able to recognize the existing fundamentals within each property, and choose the strategy that is supported by those fundamentals. For a detailed look at this topic, see my video here.
Money Without Skill Is A Recipe For Disaster
Oh the list of real-life horror stories I could tell, related to this particular circumstance. The "creative investing gurus" would have you believe that you don't need "any special knowledge or skills" to make money in real estate. Nothing could be further from the truth. In fact, the less you know, the easier it is to make big mistakes or become a target for frauds created by "professionals" like crooked attorneys, brokers or other investors.
The worst frauds I've ever seen were perpetrated by attorneys, brokers and investors who offered to "take care of everything for you". In reality they are targeting unskilled investors because you have cash or good credit that can be used to perpetrate a fraud.
Most Investment Property Deals Are Made, Not Found
The best deals I've ever made were not to be found in the classified ads, on the MLS, or via other investors. The real deals are often masquerading as "no deal", until you actually make an effort to look at the fundamentals. It's all about what is happening behind the scenes with things like seller motivation, location, condition, etc. It often takes time and effort to determine how to meet the sellers needs, and structure a deal strategy that works for buyer and seller. This is particularly true of creative real estate investing, where seller motivation can play a big part. You have to pry open the oyster shell to see if a pearl is inside.
Rehabs will always cost more and take longer than you think
No matter how small or large a rehab may be, it is always a challenge to keep it on budget and on schedule.
Future Property Appreciation Can No Longer Be Taken For Granted
Household formation is down since 2007, full-time job growth is tepid and real incomes are down, while the cost of living, especially food and fuel are going up steadily. Plus we have a glut of housing owned by big investment companies who may be forced to unload a lot of it in the coming months. I think the supply-demand fundamentals are very soft in most parts of the US. It is foolish to bank on appreciation as an investment with those fundamentals in play. Watch for the next down-turn in housing prices and wait for some evidence of a new bottom.
Never pay more than a total of 75 cents on the dollar, including your rehab budget. Be sure you can cash flow if you cannot sell so that you have a back up plan. But for the time being, even hot markets like California may see falling prices and very little appreciation in most areas. Only the best locations in the hottest areas are going to continue to hold appreciation. The areas where job growth is best will hold up better than most. But even in those cases, sustainable appreciation depends on strong positive fundamentals, which are subject to change.
Beware "Ground Floor" Opportunities -
At the height of the development boom in south Florida, "ground floor investment opportunities" were flourishing. By the early 2000's the real estate investment industry was feeding on a steady diet of out-of-state investors, who were hungry for the "ground floor" opportunities.
Developers, so-called gurus and entrepreneurs were able to raise millions from unskilled investors by holding week-end bus-tours of various development projects, some built already and some only available in the form of an "artist rendering". But what happened was not the happy ending that seemed inevitable in the beginning.
By 2004 investor-buyers were over-sold into high-rise condominium type properties, with the promise that the properties would continue to go up in value by double digits. The investors, with more money than skill, (see #2), jumped in with both feet, excited about the prospects of a quick cash profit that would be realized within mere months, with no work or skills on their part.
But what happens when you have a 200 unit building and 100 of the buyers are investors? The old supply-demand fundamental kicks in. When all investors put property up for sale at the same time in the same concentrated area, prices go down and they go down quickly as the investors begin having to pay those high mortgage payments. And in this case, since the investors were paying retail prices, virtually 100 cents on the dollar, they were totally dependent on fast appreciation and strong demand from real, end-user buyers to make any profit at all.
By the time 2004 ended, with 4 major hurricanes that had all caused significant damage along both coasts, the vacation and retirement crowd decided that maybe the mountains of Carolina and Georgia might be safer and less expensive. Once demand began to fall, it never recovered. The investors who had paid full price in hopes of fast appreciation and a quick resale were left holding over-financed units that not only would not sell, they would not cash flow either. This was the early stages of the Florida collapse. 2008 was merely the icing on the cake. Tens of thousands of investors got a first class lesson in the realities of "ground floor" investing.
Your Success Is Dependent On You, Not Someone Else
Everyone of us would say that we "know this" but we don't always act like we do. Once, when I had to inform a young investor that, not only had he been ripped off and his credit ruined, but he had inadvertently committed mortgage fraud because he had accepted a "cash kickback", after the closing from his "friend" who "wanted to help him make some money". His anguish over the realization that, not only had he been victimized by a friend, but also made a party to the crime through his "greed and ignorance" as he put it, was palpable. His comment was "my grandmother taught me better than this. If she were here she'd kick my ass".
You may not have to know everything about real estate in order to become a successful investor, but it does help to know enough to keep it honest and never assume that anyone else has your best interests in mind.
About the author: Donna S. Robinson is a 18 year veteran of the real estate industry and residential real estate market expert. She coaches real estate investors to improve cash flows while reducing risk. She is the author of "Real Estate Investing Fundamentals & Strategies". Follow her on twitter @donnaconsults Watch her videos here. read more articles and contact her about coaching or business consulting services on her website.