Sometimes a search through your bookshelf is like a treasure hunt. As I plucked Stephen Covey’s 1989 Seven Habits of Highly Effective People from my shelf, I believe I found some long lost gold. Flipping through the yellowed pages, I soaked in some of the long forgotten golden nuggets the book contains, and I pondered what the seven habits of a highly effective real estate investor would be.
I believe that none of the habits of a successful real estate investor are particularly extraordinary. In other words – anyone could be a highly effective real estate investor if they wanted to be. Of course, this is only my opinion, and without scientific study. But here’s what I believe makes up the seven habits:
Habit One: Know Your Goals
“If you do not change direction, you may end up where you are heading.” – Lao Tzu
Most of the real estate investors I know set out with a goal. Someone I know started off simply by selling his home to buy two lots side by side and built an 8 unit townhouse complex. He has turned that project into a company that sells and builds hundreds of homes in Toronto every year. Some goals are simple, but lead to big things. Other goals are big and have to be broken down into simpler shorter term goals.
Your goal does not have to be big (although I like to start with my five year goal and make smaller goals for each year to help me get to my five year goal). But I think that if you do not have any idea of what you want to achieve then your first step is going to be difficult to determine. And, you can’t just say I want to be rich. A goal by my definition has to be as specific as possible, measurable and with a time frame.
Habit Two: Make Your Money when you Buy
“Price is what you pay. Value is what you get.” – Warren Buffett
It’s very risky to pay over market value for a property in the hopes that the rent will go up, the area will improve, and/or the property’s value will increase. This is an entire article unto itself, but essentially you want to buy a desirable property below market value, in an area with a lot of potential for future growth. Really, it’s not unlike beginning with the end in mind. Envision yourself trying to sell that property and what, if any, problems you may encounter when you try to sell (e.g., is it such a unique property you’ll have a limited buyer pool or is it in a “challenged” location that may never improve, which will severely impact your ability to sell). If there is something that concerns you when you’re buying it, then unless you can easily fix that problem, it’s something that will likely concern the next purchaser.
Habit Three: Hire Help
Unless you want to buy yourself a job when you buy a property, hire a property manager. Unless you are an accountant, hire one to help you with taxes and bookkeeping for your properties. And, in most cases, we also recommend you hire a real estate agent. Just take some time to find one that will work with you to achieve your goals. I always tell Dave that we should only be doing the things that are the highest and best use of our time or the things we really enjoy. We should hire someone else to do everything else. Of course, when I say this I am also advocating we hire someone to paint or clean our own house. These are both things that I loathe doing and feel someone else can do better and for less cost than my time is worth. Dave takes a different stance on things – why pay someone else to do what we can do for free. But, as we find ourselves with less and less time he is starting to realize he can’t do everything and there are professionals out there that can do the job better and faster than he can. So, even “do-it-myself” Dave is finally paying the experts to do what they do best so he can focus on what he does best!
Habit Four: Use Just the Right Amount of Leverage
“A bank is a place that will lend you money if you can prove that you don’t need it.” – Bob Hope
Every single money-making real estate investor that I have met has made money in real estate, in a big part, due to the ability to use leverage. Even the richest people will eventually run out of cash if they keep buying property. Leverage allows you to use a small portion of your own money to buy a property. The less money you put in the higher your potential return on investment. In really simple terms, if you put in $10,000 on a $100,000 property and earn $5,000 in a year your return on investment is 50%. If you had paid cash for that $100,000 property your return would only be 5%. Too much leverage equates to too much risk though, so find a balance. If you buy a $100,000 property and only put in $2,000 of your own money and the market value of that property drops to $90,000 you now owe more on that property than it’s worth.
Habit Five: Find Good Partners
“Keep away from people who try to belittle your ambitions. Small people always do that, but the really great make you feel that you, too, can become great.” – Mark Twain
I love the success stories where someone with nothing but big dreams and a lot of initiative ties up one or more properties with contracts. They had little to no money, so while they had the properties under contract, they went out and found people who did. If you aren’t starting out with a big bucket of cash, it’s tough to make millions in real estate if you aren’t willing to partner with others. Your partner might be a family member, a friend, a colleague, a company or someone you haven’t met yet. We are millionaires from our real estate investing thanks to a couple of great partners that contributed equity to our investments along the way. We would likely only half of what we own now without them. Amber Sea