1302: Life Changing Real Estate Lessons
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Welcome to Episode 2 of Season 13 of the Growing Empire Show. Today I am going to share with you the compilation of life changing real estate lessons that I have gathered from investors just like you. So make sure you stay tuned.
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Welcome to Growing Empires. Hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
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Today, we're going to talk all about those life changing real estate lessons that I wish I knew before I started investing, as well as many other investors wish that they knew. And since we have a lot to talk about today, we're gonna jump right in. One of the easiest things I think to miss is investing in landlord friendly markets. While we always look for the good deal, we're looking for areas that are generally appetizing for investors, as far as investment properties, we also need to consider whether or not the state that you're investing in or the area that you're investing in is a landlord friendly market. While a state may have a great opportunity for return, if you're in a state that is not landlord friendly, there's going to be quite a few things that could derail your investment strategy. One of those could be the way that the court system works. Landlord tenant complaints are held in district court. And those district court judges are elected. And they have very few, at least in my experience, very few rules that they need to follow. Generally, we can see them from courthouse to courthouse making up their own set of rules. I certainly can tell you in our area, which areas have judges that are landlord friendly versus judges that are tenant friendly. And there's very little that anyone can do, yourself or your property manager can do, to protect you in a court case where your tenant happens to be in a court where that judge is going to be more heavily favoring the tenant, and many times their sob stories. So you want to make sure that you invest only in landlord friendly markets. And you want to get enough education under your belt to understand how the district judges feel regarding landlord tenant law, how they decide on cases, you may even want to visit those public courtrooms, and see for, yourself firsthand experience, what you might come across.
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Definitely talk to local management companies and ask them what their challenges are. And it's not just about your rent collection, and about your tenant abiding by the laws, or the lease that you put in place. It's also about the state as a whole. Is there any chance that the state is going to enact rent control? Or are you in an area that is rent controlled? Those are things that are very critical to consider. Because if you put together a cash flow analysis, and you expect that you are going to increase the revenue by 20% next year, but rent control only allows you to increase by 2%, you have a very serious problem. So make sure that you're investing in landlord friendly markets and make sure that you're doing your due diligence before stepping your toe into an area that you are not familiar with. If you do not have money or experience you need to partner up. Never go at this alone, you must have at a minimum advisors that are well versed in the topic. Not people that pretend and not people that tell you a great story. You need to have actual advisors, you need to have your CPA, your attorney, your insurance provider, your real estate broker who must have experience your property manager who has extensive experience and can produce referrals that share their experience and expertise. But make sure that you partner up. That doesn't necessarily mean that you need to invest together. But you need to have partners in your decision making, partners in the deals that you're requiring. The right type of people to have on your team are people that are going to stick it out with you through the long haul. They're going to be there and they're going to help advise you they're going to want to see you successful and they're going to do everything in their power to make sure that they're working with you to make sure that you are successful. So if you don't have the money, enough money, or you don't have the experience, partner up. Get your advisors, get your team ready, and don't be afraid to invest with other people. Don't be afraid to have partners in your actual investment strategies as well. Some of the best partnerships are where everybody brings something a little bit unique to the table. And normally that trifecta is really really powerful. So the partnerships that I've seen that are super successful are ones where we have our financial guy that does all the analysis, right, which is a really critical component to your investment strategy. They have the deal getter, right, or the dealmaker. The guy that goes out and finds all the properties to acquire. And then they got the person that has the maintenance or the management skills. That's really your most powerful trifecta of partnerships, if you can find that. And there's nothing wrong with trying to share the expenses, or the risk on a property by having those additional partners. Keep in mind, though, that for every partner you have, you're diluting your potential profits or your potential cashflow.
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My next piece of advice is to always invest for profit first, and your tax perks. second. Sometimes the fear of your taxable event has prevented investors from making decisions that were otherwise going to be very lucrative in the future, because they were so afraid about what they were going to pay to the IRS. The reality is, is that you're gonna get taxed one way or another. Whether you do it now, or whether you do it later, you will be taxed. These are investments. So the tax strategy should not be the only factor. And it should not be the most primary factor regarding when you should invest and not invest, or when you shouldn't sell or not sell. So make sure that your investments are specific to your profit first, your cash flow specifically, and they meet your long term personal objectives, and then consider the tax consequences as a part of the whole investment strategy. The next lesson I'm going to share is one that I've watched far too many investors make the mistake of, and it's so painful to watch. And I hope that by listening to this, you will never make this mistake. And it's failing to have adequate cash reserves. The hardest thing to do is to get started as an investor, I as well know that story. You take so long to save up money to be able to get your first investment, that sometimes people take far too much of a risk and invest all of their money. And they forget that cash reserves are required for any investment property. No matter what you're buying, whether it's completely turnkey class A property or not. All properties need cash reserves. Even if, from a maintenance perspective, your property was in tip top shape. It could even be brand spankin new, as far as new construction. There are still things that could happen that will require cash reserves. So make sure that when you go to determine how much money you're going to invest, that you spend some time talking to your CPA and your advisors regarding how much reserves makes sense for you to have on hand. The general rule of thumb is you want to have about 20% in your first year. And I know that that sounds excessive. But the reality is, is that you need to ride out the J curve. You need to ride out the time where your property is maybe not going to cash flow because you've got to turn over units to get the rents up to market. You had some unexpected maintenance issues on your property. You could have tenants that are not paying. Nobody ever sells you their best investment. So you have to have cash reserves prepared for the what ifs. So for example, let's say you just saved up $50,000. And you want to leverage that and you want to buy a building. That's great. Use the leverage 100%. But don't spend $50,000. I would say at that point you maybe you have $30,000 to invest that you can leverage do not take every penny and invest it you are asking for trouble. And you're likely going to get into a situation where you cannot afford to maintain the property in a manner that is going to require you to keep happy tenants as well as be compliant with the municipality, as well as be able to put the money in to get that return on investment back in the end. Make sure you have those cash reserves. And definitely ask your advisors how much would make sense for the type of asset that you're trying to acquire.
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Another lesson that I have experienced, not only myself but have watched other investors have to learn the hard way, is that you don't need the perfect deal to invest. You don't need the perfect deal to get started. As a matter of fact, there really is never a perfect deal. So if you're constantly waiting for the perfect deal, you're going to forget to pull the trigger. And that's going to be the costly factor that keeps you from growing your portfolio and creating your life of financial freedom. Pull the trigger. Now you do have to make good decisions. You have to be well versed in doing property analysis or have somebody on your team that is well versed in property analysis. You want to make sure that you're not getting so excited to get into the deal, or that you're so desperate to get into a deal, that you fail to look at all of the potential pitfalls of that investment property or that investment strategy. But you also don't want to be so fearful of making the wrong deal that you never make a deal. This is probably the single most critical component for people, the difference between people that live a life of financial freedom and people that do not live a life of financial freedom and will forever be a slave to their employer. It's because they were so fearful of getting started and making the wrong move that they failed to ever make any move. Get yourself educated. learn how to do the proper analysis, get the right people on your team, and you don't have to worry about being that investor that makes the wrong move and creates a disaster for your family financially. Because you were well educated, you made good decisions, and you had advisors on your side that knew more than you did. That's a really critical component. But with that being said, make sure you make the move. Don't be the one that's so timid and so afraid that you never get the opportunity to live this life of financial freedom.
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The episode will continue in just a moment.
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As an investor, we know it's important to stay on top of market trends and real estate opportunities that add value to your portfolio. We also know that having a trusted source of reliable information to help you stay a step ahead of other investors is critical to your success. If you're interested in having these types of resources, as well as access to me and my team, I invite you to join the Empire Investment Club. A free service that gives you an easier way to make sense of today's and tomorrow's real estate opportunities. As a member of the Empire Investment Club, you'll get access to relevant resources and investment focused experiences such as live interactive webinars, market trend presentations, and investor socials designed to equip you with what you need to succeed. So whether you're an active investor, passive investor, a combination of both or just starting out, the club is where you'll get what you need to build a portfolio you love. To join, just head over to JenniferdeJesus.com, sign up, and we'll see you in the club, where everyone's on a journey to becoming a better investor.
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Once you own the property, the ROI, your return on investment, comes from excellent management. It doesn't come from the deal that you just purchased. Every deal can look good on paper and every deal can be creatively changed based on the storyline that you're given. But the reality is, is that all the hard work comes post acquisition. Finding the deal and leading up to all the things that have to do with the deal, although they're time consuming, and in some cases could be stressful, the reality is, is that whether you're building a successful or not, is all about what happens after you acquire the property. So when I'm saying your return on investment comes from excellent management, it does. If you are savvy enough and have enough experience and what property management means, by all means have at it. But if you are not, and that usually is the case for most investors, they don't have the proper expertise. You never under any circumstances want to go at this alone. So if you bought a property, and then you figured out after the fact that you couldn't afford a manager, you made the wrong move. Because you should have had that considered as a part of your analysis when you were buying the property. But if you don't have extensive experience in managing a property, don't believe anything you see on TV, it is all fake. And that is not real life. Managing a property is really hard. Making sure that you have all the right processes in place to protect your cash flow is really critical to the success. And only the people with the most experience are able to successfully do this in a manner that allows you to continually increase your revenue. So if you want to have the best return on investment, hire an excellent property manager.
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And last but not least, the last lesson I want to share. And again, probably one of the ones that top scale as the worst investment mistake to make is not being able to calculate and forecast your cash flow appropriately or accurately. In Episode One, we talked a little bit about due diligence. And I'm just gonna elaborate on that a little bit. There's many steps to forecasting and accurately depicting your cashflow. Part of that is the assumptions that you take from the listing or from the story that they tell you about the property. But you should consider all of that with a grain of salt. Because the reality is, is that you're never going to get the full story and you're never going to know the worst case scenario without proper due diligence. So, you're going to make an offer based on the assumptions that you are given. What the cash flow looks like, what the expenses are. And only in the proper due diligence period will you have the opportunity to. Verify that information. And that is something that you do not want to skimp on verifying that information is a critical component to accurately forecasting your cash flow. Some of the things that you're going to want to check for are, verification that the utilities that they state are accurate. You're not going to want to just take their word for it, you're going to want a cash flow statement, you're going to want utility bills, you're going to want an annual average expense from the utility companies. But you're going to want proof for every line item. For your income, the proof is your cash flow statements, your leases, and your rent rolls. For your expenses, your P&Ls, as well as the utility bills, or the actual invoices from those expenses would be the critical components to verify the cashflow. And only once you are able to know, with absolute certainty, that the income and the expenses that were initially assumed are correct, will you be able to accurately depict what your cash flow is going to look like. And then the second part of that factor is your forecasting. And you need to consider how long something takes. So you would not want to, for example, have your cashflow forecasting that in the next six months, you are going to be up to market rents for all of the units when in fact all of your leases are annual leases, and all expire at different times throughout the year. Because for example, you're at the mercy of that lease. In most states, you're not able to adjust the lease during the term of the lease. So you need to wait for the expiration of the renewal term to be able to do so. And what that means is, if you have a lease that expires, say in September and another lease that expires in December, well, right there is several months that you have to wait to be able to make the next increase so that you cash flow. So when you're trying to forecast what you can do, you need to make sure that number one, you have substantial facts based on what the market will bear. Not only for rent, but what is common and customary and as smart as expenses and what utilities, you can turn over to the tenant. You would want to make sure that it's customary because, let's say your assumption or your forecast is that I'm going to turn over all the utilities to my tenant, as well as increase rents. But you were in a marketplace where that is not normal and customary, you're going to have a really hard time selling that to a tenant. And if you're not able to do what you have forecasted, you essentially are not going to make the cash flow that you anticipated. So calculating your cash flow accurately and forecasting for the future is a really critical component to making sure that your investment is a profitable investment.
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Make sure that you take the time to do your due diligence upfront. During your contract terms do not take this lightly. You want proof for everything you want proof for the rent, proof of the security, proof for the payment history, and proof of all the expenses and you don't want just numbers on paper. You don't want that Word doc that was typed up by the seller. You want actual receipts, actual proof. And once you have that, and an understanding of what the market generally looks like, you'll be able to start with your advisors to put some forecasting together. Just make sure that your forecasting is really conservative as far as timeline so that you can make a general decision about the overall health of this building and how long it's going to take to capitalize on that forecast or that strategy that you were anticipating. My hope is that by sharing some of these life changing real estate lessons that everyone wishes they knew before investing, that you will take these and be able to make sure that all of your real estate endeavors are hugely successful. I hope you got a lot out of today's episode and until next time, take care.
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For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio visit growingempires.com