Crazy as it may sound, most investors drive blind. They don’t have investment goals; they don’t have a monthly or annual review of their investments and they don’t have an investment strategy. When you are looking to get off your investment plan, you’ll need an exit strategy. Unless you can predict the future, you’ll need to know where you’re going to get off on the right exit.
How Do Life’s Obstacles Change Our Investment Strategies?
Many of us invest in real estate because our friends or family invested or we read a book making it sound simple. Often, we think of it as a way to diversify our investment portfolios, hoping that if stocks go down, real estate will go up. In any case, we are looking for a profitable way to invest, but don’t have solid goals and along-term plan.
If we are fortunate, we make money on our first deal and we are off to the races, but more often than not, investment success comes after years of smart decisions and maneuvering around life’s obstacles.
Typically, when we start contemplating investing in real estate, we think of paying for college for the kids or retirement (which is so far off). Maybe we have a chance to read Richard Kiyosake’s book, Rich Dad Poor Dad and want to retire on the income generated by our real estate investments. We are thinking of “getting into the game” not about a path to success or an exit strategy.
The strength of real estate investing revolves around knowing where you are going and that can easily change throughout life. When you are in your twenties, you typically don’t have as much money to invest. Maybe you are getting married and focused on buying a home and having kids. The last thing on your mind is putting money aside to purchase a real estate investment.
Suddenly, you are turning thirty-five. Your kids are in elementary school and you realize you need to save for college for your kids; can you do that and save for retirement as well? A real estate investment might do the trick for you and, as luck would have it, your grandparents pass away and left you their home. Instead of moving in, you renovate the house and make it into a rental. You are one of the fortunate ones, because you are starting out with zero debt.
The house is in good condition and you have long term tenants and not too many worries. You start figuring and you find out that college for each one of your kids will be forty thousand dollars a year for a total of about three hundred and twenty thousand dollars. The house is only worth $120,000 today and if you are lucky will be worth $240,000 in ten years. It’s a limited amount and you aren’t sure if you want to sell the house to pay for the kids’ college education. Don’t forget that once you sell all the money you had planned on helping you through retirement is now for your kids’ future education.
You are doing OK and banking about $800 a month or $9,600 a year so that could help with tuition. But should you use that money to buy another investment?
You are forty-five. The kids are about to graduate high school and your wife is going back to work to help out with the bills. At the same time, your parents are getting older and need more help, so they decide to move in. In order to do that, you might have to sell the house because your home is not handicapped accessible.
You turn fifty-five – the parents are in assisted living and the kids are done with school. You managed to keep the rental and buy one more house, but you never really planned for your retirement. You’re not as energetic as you once were. You are making good money but barely keeping up with the new car payments and the wedding your daughter wants to have. (She wants you to spend $40,000 and she is the apple of your eye.)
As sixty-five beckons, you are tired of those tenants and the constant property repairs. Although the properties have been a good source of income, they take time and the bills are increasing. You sell both your rental houses and buy a single tenant NNN investment property. A regular check is what you want – no hassles please.
You Must Plan to Build Your Real Estate Empire
As you plan to build your empire, you need to decide how much risk and leverage you are comfortable with. If you leverage your investments at 25% or 30% down, you have more risk than if you put 50% down. I have found that younger investors are more willing to use leverage. As investors grow older, have more assets and have survived the economic down turns and high vacancy issues, they tend to move closer to a 50% leverage position. In any case, the options are clear:
- Set a goal of real estate and equity you want to reach
- Set a goal of income you want to have and plan to reach it
- Sell and trade up using a 1031 exchange
- Refinance and buy more real estate
- Get other cash to buy more real estate
- Invest with others (family, friends, professionals
There is no “one size fits all” exit plan. You need to customize your plan to your life; your income and you need your spouse or significant other on board. Life will try to derail your investment strategies. Do you best to plan around this while keeping your goal directly in front of you.
You need to be organized and understand all of the costs of the real estate decisions you make. I would recommend preparing a net sheet – what it is really costing you when you sell a property and buy another. Understanding your monthly reports and your annual income and expenses is critical to planning a successful exit strategy. Accounting is important – the back of a napkin does not cut it. Review your thoughts and with your advisors on an annual basis – your real estate agent, property manager, CPA, significant other.
Flexibility and nimbleness are the keys to successful investing. You need to be willing to change direction while keeping your goal in mind if things are not going according to plan. If you don’t have a plan, don’t feel bad – you can always make one today.
Part II next month.
Clifford A. Hockley is President of Bluestone & Hockley Real Estate Services, greater Portland’s full service real estate brokerage and property management company. He is a Certified Property Manager and has achieved his Certified Commercial Investment Member designation (CCIM). Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM).