Building Confidence In Real Estate Investing (For Rookies)

[Sam Smith]

We all know that confidence is a good thing, right? Confidence in something is often what lets us pursue it. Take real estate, for instance, the reason people like investing in real estate is because they have confidence in the asset class’s performance. Why? Well, there are a number of reasons they’ll give you. Maybe they’ll say “real estate is the world’s oldest investment” or “more millionaires are made every year from real estate than any other investment”.

Maybe those facts they give are true, but it’s not the truth about what gave them their confidence in real estate. It’s not the truth about why they pulled the trigger to actually start investing. It’s too heady and intellectual. Reasons like this are what people give after they’ve already built up their confidence in real estate. They give these reasons like statistics because it’s succinct and clear and sounds like the smart thing to say.

So what are the real reasons for their confidence, and how can you gain enough confidence to start investing as well? Well, let’s take a step back, just for a moment and ask what confidence is so that we can understand how to build it up.

People throw the word around, and throw it on a poster too cavalierly. They say “just have some confidence” or “all you need is a little confidence” as if it’s as easy as taking a pill. Worse yet, they call something like sales a “confidence game” as a proxy for calling salespeople a bunch of liars and fakes. This muddies up the definition and detracts from the true value of confidence. Confidence is not “faking it until you make it” or something that you can talk yourself into having. Like it or not, confidence is something that must be built up -- and that’s why it’s so valuable.

To understand true confidence, think about all the things in your life that you can depend on and why. Do you have confidence that the sun will come up tomorrow? Even if you have some nagging dread about an asteroid knocking us off kilter, when it comes down to it, you plan your day around the fact that you have confidence about the sun rising tomorrow. Why is that? Well, you have two key things: experience and knowledge. You have years of experience living in a world where the sun rises every single day. You also have some intellectual understanding of how the Earth rotates and revolves around the sun. Can you build confidence with one of those? Sure. Do you build more confidence with a combination of experience and knowledge? Yes, you do.

“Great,” you’re probably saying, “we went down a boring rabbit hole about the origins of confidence. But what I really want to know is how I can feel comfortable enough in real estate to pull the trigger myself and start making some investments without having a heart attack.” Fair enough. Let’s get into it.

First off, new things are always going to be a little uncomfortable. The trick is to build up your experience and knowledge to make them less and less new. Sounds weird, right? Well, think about it like how astronauts learned to fly the space shuttle. They didn’t just jump into the pilot seat and start counting down. They didn’t even start with space shuttles or jets or airplanes. They started with classroom instruction. They sat at a computer, like you are now, but instead of learning about real estate they learned about gravity and the degradation effects of ultraviolet light.

Okay, so that one half of the confidence equation. We’ve got knowledge covered. There are plenty of resources you can draw on to get the intellectual understanding of taking apart a deal or researching the microeconomics of different markets to see where to buy. But what about that other half? What about experience? How do you get that without jumping right into the pilot seat and risking the money you worked so hard to save up? A lot of people would say you can’t, that you just have to do it and figure it out. I think that’s stupid, and actually pretty lazy. That’s basically like saying “you just need a little confidence,” which we already called out as idiotic.

I think there are several ways to gain experience in real estate investing before you sign a deed. They aren’t going to be direct building blocks, but they are still useful. They are going to be like how astronauts start with digital plane simulators, then ride in a plane, then fly a propeller plane, then review the charts, then move on to a digital jet simulator, review those charts, then a digital space shuttle simulator, then a space shuttle, with a thousands steps in between. Now, luckily, you don’t need to have as many steps as that, but you get the picture.

Getting down to it, my advice to start building that experience half of the confidence equation is to get experience with other businesses. After all, when you buy real estate, or make any other investment, you are buying into a business. You may not think of it like that, but that’s just what it is. Like any business, there are cash inflows (income), cash outflows (bills), appreciation of assets, management of people, etc.

Here are three actionable ways to get experience in business in order to build up your experience as you move toward investing in real estate:

1. 1. Track your personal finances.
2. 2. Work in a business.
3. 3. Invest (small amounts) in the stock market.
4. 4. Pay attention to your home.
5. 5. Talk to people who are real estate investors. Continually.

The first one is fairly easy. When I was in boy scouts we did this as part of a merit badge. If I could do it then, you can do it now. This is a healthy thing to do whether you are investing or not, but what you should do is keep a notebook for one month. I know all your transactions might be in your banking app, but trust me. You need to write it down to get a sense of it and to focus on the exercise. Keep it simple with four columns: date, purchase type, income, expenditure. For instance, if you went to Target, keep the receipt. You might write “11/22/21 , Groceries , and then in the expenditure column write “-$47.64”. If you also bought a lamp, I would include that on a separate line, but that’s just me. Whenever you get paid, write “12/1/2021” , “paycheck from X company” , “+$WhateverYouMake”, and leave the fourth column blank. Then, at the end of the month add up all the income, write that down, add up all the expenditures, write that down, then subtract one from the other to see how the month went. This is called “keeping your books” and is the cornerstone of any business. In real estate, this is what you or your property manager should be doing for each of your properties, and then as a whole. If your property manager does it, you need to review to double-check. Don’t think you are too good or too far along to do this. If you feel like you “got the gist” by reading this paragraph, you are only building knowledge. By actually doing the exercise you will be building experience, and thus confidence enough to move forward into real estate investing.

The second way to build confidence in business and thus real estate investing is to work in a business, which you have probably done before. For this exercise, think of yourself not as an employee, but as an investor. The reason it helps to have worked in the company is because you can see the inner workings of the business to get a sense of its core. Which is what? Income and expenditures. Simulate a year of your company’s operations. Start by taking a headcount of your coworkers along with all the job titles, then look up the average salary on Glassdoor. These are all company expenditures. Then research how much a company of your size pays for health insurance, taxes, office space, office supplies, etc. For income, find out how much clients pay for whatever it is your company sells or provides. Be sure to subtract what it costs your company to produce whatever they are selling or providing. If you are lucky, your company might make some of this public. If not, guesstimate. The exercise will still serve its purpose in giving you experience calculating profitability.

The third way you can gain confidence is to buy a small number of shares in different publicly traded companies. But don’t go crazy. Get a list of the S&P 500, and sort by the lowest priced stocks. With $100 you can buy one share of five different companies if the share price is below $20 each. Again, you should actually do this. You need some skin in the game. Then, once you buy those shares, start researching the companies to find out how they make their money, and read analysts' opinions about future prospects, vulnerabilities, and potential upsides. Likely, some of these stocks will offer a dividend. By comparing the dividend performance to the performance of the stock price you’ll get experience with cash flows, represented by the dividend, and appreciation/depreciation represented by the performance of the stock price. Cash flow and appreciation/depreciation is the cornerstone of real estate: how much money goes into your account each month after all expenses vs. how much the market value of your property went up or down. If one of your stocks pays a high dividend, but the value of the stock goes down more than the dividend amount you’ll feel what it’s like to buy real estate in a dying market, and you’ll know to avoid that when you buy.

The fourth way to gain experience is to pay attention to where you live. Do you rent or have a mortgage? How much do you pay each month? Include any repairs you have to pay for and any repairs or upgrades your landlords pays for. Figure out what property taxes are in your area. Determine the approximate cost from zillow and figure out if this would be a good deal for an investor to buy.

The last way I’ll mention, although there are a ton of others which I challenge you to find for yourself, is experience by proxy. Talk to real estate investors. If you can’t find any, talk to homeowners. Now, this one may feel like it crosses the line from experience to knowledge, but I promise you it’s not. I believe there is something hard-wired into humans about community and in-person learning through your community via second-hand experiences. To get the most out of this exercise, and to really gain experience you should find someone who will actually go into detail with you about the ups and downs of being a landlord. If you’re lucky you can get someone to share their monthly rental reports with you and talk them through. For instance, if on the rental report you see that there is a deduction, ask what the deduction was for. If it was for a plumber, ask what they fixed and see if you can find a bill to see how the plumber charges. Ask how they found that plumber or if the property manager always uses them. Ask how quickly the plumber showed up and how quickly the tenant reported the issue. Really try and dig in and put yourself in the investor’s shoes, because one day you will be in those shoes. And like we said, the only way to get there is through confidence. And the only way to gain the confidence is to gain the knowledge and experience.

One final note, as you go through these exercises, let your curiosity run. I have a tendency to get blinders on sometimes when given an assignment like these. I just want to get it done and move to the next thing. But, just as important as the experience is the knowledge. The way you gain the knowledge is by allowing yourself to be curious. You’ve got pretty much infinite information in your pocket in the form of a smartphone. Let yourself google anything you like right there in the moment. Nobody is going to judge you for doing that, even if it’s the smallest little thing you need a reminder of. Let it be fun!

PS. I’m going to make a post titled “My Monthly Real Estate Report Analysis” where I post several months of statements from my property manager with in-depth explanations. Feel free to find that post and take a look if you don’t have someone in your life that can share their monthly reports with you. Some people aren’t that open with their investments because they feel judged. But when you do go through these exercises and eventually build the confidence and invest in real estate I just would ask that you help share your knowledge (about real estate or anything else) with anyone who is curious enough to ask. And really, even better would be to volunteer the help to anyone without being asked. Just keep in mind that most people will politely brush off the offer of help in the moment, but it is SO REWARDING to help people when they are ready for the help.