The principal reason you won’t become wealthy investing in real estate

The majority of my writing here covers real estate investment strategies and mindsets you can use to become wealthy with long term real estate investing. In various case studies, I have shown you how to create a six figure income  and how to retire in seven years  etc. by making smart real estate investments tied by the common thread of a solid Blueprint strategy.

And that’s all well and good. We all can benefit from a little more “big picture” insight to help us design and take charge of our own financial future. But when you get down to the dirty details, the execution of such plans usually ends up being a lot messier than those projections. It’s one thing to look at  and intellectually understand the mathematical implications of a strategy that assumes flawless execution. It’s another to actually execute. Think about all the things you have to contend with when making an important financial decision. We all want to avoid risk where possible (risk aversion) which leads to uncertainty (indecision) about whether this is the right move (wanting the best deal possible) which leads to procrastination and paralysis by analysis (inaction).

Broke businessman with empty pockets

Sometimes knowledge of  the path that leads the opposite way can illuminate the path that leads to what we want to become.

In the context of building wealth through a disciplined approach over long periods of time this is not only true – it’s eyeopening.

You see there’s this massive myth in the realm of real estate investing  that has been propagated by multiple books and has been accepted as truth by most. It claims that in real estate investing you live and die by your rate of return. You might have heard it put a different way in “you make your money when you buy the property”  or “if your incoming rent is not at least X% of the purchase price, don’t buy the property”. They’re all different shades of the same idea:

Myth: Your ultimate success or failure in becoming wealthy investing in real estate is a direct result of your rate of return. Therefore, you should have a set return number in mind and use it as an acid test. Anything yielding a lower return is a nay, anything higher a yay.

Sounds sensible enough, right?

Let’s add on another layer of context to this discussion. In a free capitalist society the only constant you can count on is change. Case and point: The real estate market over the last 9-12 months has been experiencing rapid change from a sleepy sideways market to a “write your full price offer before you leave the property or you don’t stand a chance” Seller’s market. Obviously this has caused prices to rise and inventories to shrink substantially in most markets which leads to downward pressure on rates of return investors are able to obtain. Last week, I had a conference call with a client that had purchased several properties in 2007-09 and was mortified by the unrecognizable landscape.

With that in mind, you can see how “the number” you have in your mind for an acceptable return can change based upon your previous experiences (a new investor with no past frame of reference would view today’s market very differently than an investor that acquired property at the most distressed point of the 08 recession) and therefore influence your action (or inaction) going forward.

But none of that matters.

The idea that your wealth building efforts will succeed or fail based upon your ability to secure a certain rate of return is just untrue. Here’s an example that dispels that myth: Suppose you have two real estate investors A and B. Investor A puts together a portfolio of 9 high quality properties yielding 15% annual returns and Investor B purchases  similar quality properties (9) that only yield 10% returns. Both investors employ a Blueprint strategy to aggressively pay off their properties over the next decade and end up with the same income at retirement. All else being equal, Investor A will get to retirement much faster due to the higher return on his investments but in the end both investors end up with a similar net worth and income. In other words, both end up wealthy. So the 30% difference in returns impacted the speed of success but not the ultimate result.

Of course, all else is rarely equal in real life.

Take the same example above and add the layer of context of a changing market I described above. During the acquisition phase their plans, the market shifts and now 15% return properties dwindle in numbers and Investor A only acquires 5 out of the 9 properties he was planning to acquire. Meanwhile, Investor B completes all nine purchases since his 10% rate of return is more readily available. Who do you suppose fares better in the end? Investor B portfolio crushes Investor A’s and his coveted 15% because he acquired and paid off a larger asset value becoming significantly wealthier in the process.

It’s not the rate of return that determines your success or failure on the road to becoming wealthy. It’s action. If you’re disciplined and have a solid plan, you will pay off and own whatever you acquire. But it’s the acquisition that sets everything in motion. Without it, you lack the target to hit and with it the structure you need to be able to execute.

Remember this: Far more wealth is lost by inaction than ever was lost by accepting a lower return. Don’t let an arbitrary number in your head back you into the corner of inaction. That’s the principal reason one fails at becoming wealthy.

 

 

Comments

  1. Glenn F. says:

    Well said. Basically, many investors loose sight of the big picture.

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