But the Guru told me…

I’ve made up my mind: one day soon I’m going to commission a formal statistical poll in order to learn the following:

   1. the percentage of all real estate investing advice dispensed that is actually drawn from practical real world experience
   2. the percentage of real estate investors who continue to follow old dogma’s – even in spite of market conditions

On #1 above, I have no doubt that most advice dispensed has no basis in reality. My wager would be that my poll would come back with evidence that an overwhelming percentage of investment advice is not based on any practical experience, but perhaps a few isolated incidents and a lot of hocus pocus.

On #2 above, my wager would be that at least half of all real estate investors cling to old dogma’s – standard and accepted ways of doing things – in spite of changing market and business conditions.

Let’s explore this more…

Do As I Say (…not as I do?)

The old expression: “if I had nickel every time <fill in the blank>, I would be the richest man alive,” is never louder in my own mind than when I hear real estate investors, both new and experienced, begin a sentence with: “But so-and-so said…”

While I am glad that whomever I’m talking to has taken some steps to arm themselves with knowledge, there is always a point where you must check what you’re being told against common sense. For instance, there are no shortage of market forecasting wizards who were claiming a “rebound in the housing market” in 2008. 2008 came and went and then 2009 came and went and there has been no large rebound in national home prices. Quite the opposite has happened.

As an investor, this should be looked at as opportunity. It should also be looked at as a prime example of why you should not take every market prognostication from a media pundit or real estate guru as gospel. Plan your business around reality and plan your business around experience and listening to your mentors and advisors – while also listening to your “gut” instinct.

Out with the old and…in with the old?

There is a tremendous vested interest in clinging to old dogma’s. After all, it’s difficult to change. If you’ve made a lot of money over the years doing things one way, it’s very hard to shift gears. Much of this has to do with human nature. It’s OK to stick with a winning formula – if it ain’t broke don’t fix it – however, this can come back to bite you in many ways. Mostly because there are so many factors outside of your control. Allow me to give you an example…

For many years I had a “buy & sell on lease-option” model. It was simple: purchase a house, renovate it and then sell it on a rent-to-own program. Receive a large option fee/deposit up front, make some monthly cash flow and then a big payday when the tenant buyer cashed out the property 2-3 years later.

This worked well for many years. What fueled the large back-end profits, where most of the real money was made, was sub-prime mortgages and other home-buyer help programs (down payment assistance, etc.). As soon as sub-prime mortgage started to fade away, the percentage of my rent-to-own houses that actually sold to the tenant buyer began to fall – a lot. Soon, the cash out rate in my area went from 3 out of 4 to 1 out of 4 (if that much).

Because the buy and sell on lease option model had worked for so long, it was hard to change. A lot of real estate investors got caught with properties that could not cash out to lease option buyers. These houses became long term rental properties. Now, having a long term rental is not a bad thing. Have the tenant pay down the financing and put cash in your pocket every month. However, the problem came in balancing out my business. You see, if houses weren’t going to cash out at a reasonably predictable schedule, I needed to find alternative means of bringing home the bacon.

It was tough for me to transition. The paydays from lease-option cash outs were huge. 30 or 40 grand profits were common. However, it slowly hit me between the eyes each day that if I didn’t make any changes – and fast- that I was going to be looking at a smaller pot of gold at the end of each month.

I transitioned my business. Moved into wholesaling and flipping more and changed my target areas for long term holds. I turned to apartment buildings for opportunities to buy and hold as well. While it sounds like this happened in the blink of an eye – it definitely wasn’t easy. It required a wholesale restructuring of how I thought about the market and also required me to raise additional sums of private money (large sums in a short period of time). It took some work, that’s for sure. I’m glad I did it.

Profits are what matter

A great way to stay profitable and increase your wealth is to do a quick common sense check of the advice your getting. Is it practical? Does it make sense for your business? Does it make sense with where the market is right now?

Like it or not, real estate investing is joined at the hip with market conditions – as prices move up and down, as rents move up and down, as government programs change and evolve – you must adjust your strategies for buying, selling and renting accordingly. Sometimes you may want to do one thing, because you’re more familiar with a particular approach (for example, subject-to purchases), but come to find you really won’t make money with it.

2010 has the potential to be a huge year for you – we’re already 4 days in – so you better get moving. As soon as you remove out the old dogma’s and look ahead with a clear vision you’ll be leaving the other real estate investors in the dust.