Beach view through Spanish-style entrywayA version of this article first appeared on September 11, 2021 in the Stansberry Digest (Master Series), published by Stansberry & Associates Investment Research, an independent investment research firm.  You can visit them at www.stansberryresearch.com.

Editor’s Note: Emotions can trick you into making bad investing decisions. Regular Digest readers know how dangerous it is to become fond of a particular investment and how your feelings can cloud your judgment in the process. But according to our colleague Steve Sjuggerud, emotions can run even higher with real estate investing. After all, unlike with stocks or bonds, you can see and touch a house – and it’s easy to get attached.

That’s why Steve says emotion is one of the biggest challenges to successful real estate investing. It can make it hard to spot a good deal – and even harder to walk away from a bad one.

In today’s Masters Series, originally from the June 22, 2020 Digest, Steve details how he first got started in the real estate business in the 1990s and shares the first of three simple rules you can apply to any investment in the sector. 

 

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Why I Bought a House with a Hole in the Ceiling

Most folks get introduced to real estate when they buy their first home.  They’re called “starter homes” for a reason, after all. But for me, it started with surfing trips in the early 1990s. You could say I did things a bit differently. I couldn’t help myself.

I didn’t set out looking for deals on property. But against all odds, I realized something that planted the seed. And by 1999, I was having an awkward conversation with my wife – “I need to buy a beachfront lot in Nicaragua,” I told her.

We hadn’t even bought our first home yet. She wasn’t amused, but I’d thought this through.

You see, I had been taking surfing trips to Nicaragua since 1993. And I found a wave that I believed would someday be one of the hottest destinations in the world. It was that good.

That’s why at 28 years old, I thought I’d unlocked the code. I was going to buy a lot right by that wave and build a house on it. I was sure that location would be a big deal in the coming years.

Amazingly enough, my wife agreed.

The Purchase

We closed on a strip of dirt in a foreign country for $15,000. That was more money back then than it is today and for us, at the time, it was a LOT of money.

To the best of my knowledge, I was the first person to build a home at Rancho Santana, Nicaragua. I was right about the wave, too. The hot spot, Playa Popoyo, has since hosted the International Surfing Association world championships multiple times.

My plan for the Nicaraguan property was simple.  I’d rent the house out (just like an Airbnb). The property would pay for itself and I would have access to one of the best surfing locations in the world.

Over the years that I held the property, lots of friends and acquaintances stayed there. They were having a blast. And the once-secret surfing spots were becoming popular destinations. My road map was playing out just as I thought it would.  But there was one major problem… Not a single penny of the rent money ever made it back to me.

I had someone taking care of the property locally. And by the time they got paid, plus cleanings, upkeep, and fees.  I made no money at all. My house was the surf destination. But somehow, I wasn’t making money on it.

To this day, I don’t know exactly where the hole in the bucket was. Folks paid to be there. But between fees, maintenance, cleaning, and who knows what else, none of it ended up in my pocket.

I wish I was able to stop the hole in the bucket. I couldn’t seem to, though. So, after a few years, I sold the house for about three times what it had cost me. It was a major win, even after the rent issues.

A Learning Experience

More than that, it was a big learning experience. I learned that managing property thousands of miles away comes with unique challenges. And fortunately, I also learned a lot more than just that.  In the years since, I’ve continued to seek out real estate opportunities. And most of them ended up being darn successful.

More importantly, each venture came with its own learning experiences. And each opportunity presented itself in different ways. The thrill and chase of a real estate deal, aside from being profitable, can also be a lot of fun.

Today, the majority of my investable wealth is in real estate. I own plenty of stocks, too. But I tend to gravitate toward property first.

To say I’ve learned a lot would be an understatement. So today, I’ll start with the biggest takeaway I’ve learned from my personal investments.

Three Investment Rules

When it comes to real estate, no matter what you’re looking at, there are only three things you need to understand. And no, they aren’t “Location, Location, Location!”

Once you understand these three simple principles, you can apply them to any real estate investment – from homes to raw land to apartments. It always works.

My First Rule Is Simple – Don’t Pay Too Much

This may seem obvious… so obvious that you’re wondering why I bother bringing it up at all. But believe me, overpaying is a trap that’s easy – and I mean EASY – to fall into.

The problem is emotion. Folks get emotional about their stock investments, after all. And real estate is much more tangible. You see it with your eyes and touch it with your hands.

Emotions can run wild… and trick you into making bad decisions.

Without realizing it, you can fall in love with a particular property. That leads to a willingness to pay any price. And overpaying is the easiest way to get into trouble.

If you’re not buying for investment purposes, it’s a different story… Your home, in my opinion, is more about living than it is about making an investment. Buy the home you actually want to spend time in. That’s fine.

But investment real estate is different.

You’ve got to seek out deals. Getting at least a 10% discount to true market value is key. And that’s AFTER estimated closing and renovation costs.

To get a grip on true market value, you must look at similar sales in the area. For any home, figure out the typical sale price based on price per square foot.

Not every home is identical, of course… Remodels and amenities can alter numbers. But if you look at 20 or 30 recent sales, a trend will emerge. Make sure you’re buying at a discount to that price.

I’ve had a lot of success buying homes this way. Over the years, I’ve been fortunate enough to buy at discounts of about 20% to the market.

That sounds good on the surface – buy stuff cheap and the rest works out. But I know what you’re wondering. How did I actually do itHow do you get from cheap prices on paper to successful deals in reality?

I believe these were the three keys for me.

  1. I was willing to walk away from the deal (it didn’t HAVE to be THAT house).
  2. The houses I bought showed terribly, but were fine structurally.
  3. The sellers lived out of state and didn’t have a strong emotional attachment.

Ultimately, the point is… don’t ever overpay. There are plenty of other properties to choose from. So be willing to consider properties that look ugly… but that you can easily shine up.

If the ‘Tide’ Is Rising, Don’t Fight It

No matter what kind of investing you’re doing, it involves a universal truth…

Interest rates always matter.

That’s true in the stock market, of course. High rates act as competition for stocks. Who wants to buy shares of tech giant Apple (AAPL) if you can earn 12% in a risk-free bond?

The same is true for real estate… What’s going on with interest rates really matters.

Seeking out a good price is the first key to my personal real estate success. But I’ve only sought out deals when the environment was right. And the first piece of the environment is my second rule.    Continued next month …

Read more November 2021 articles from the AOA Magazine