Investing in real estate long term has a nice ring to it, doesn’t it? It makes your efforts feel prudent, measured and planned. You can stick your chest out and proudly proclaim you’re a long term investor as opposed to a short term speculator of sorts. The problem is when you dig a little below the surface of many investors’ strategies they’re the same short term methods hiding behind long term jargon. So today I plan on laying out exactly what it means to be a long term real estate investor.
Metrics
Long term real estate investors make decisions on the assets they purchase today based upon their long term performance and their adherence to their long term goals. They ask questions like:
- What will this neighborhood be like in 10 years when this investment property is free and clear?
- What will this home be worth in 10 years when I plan to trade to a newer one with less hassle?
- What trajectory will rents in this area follow in my investment time frame?
- What will the net operating income be when I will need it the most – at retirement?
- What tax shelter(s) will my assets have left when I plan on living off the income they produce?
They are not the least bit concerned with short term metrics like current equity or current cashflow – their focus is strictly on the impact those metrics could have on their portfolio’s performance long term. Here’s what that means: Current cashflow is part of the fuel that a long term investor uses to get to a free and clear portfolio that meets their income goals at retirement. But a long term investor will pick a quality asset in a premium location with lower current cashflow over a “cash cow” located in a dilapidated area.
Think about it this way: A junk house that produces tremendous cashflow currently, will still be a junk house when it’s paid for at retirement. Question is: How do you feel about a retirement dependent on a portfolio of junky homes? You don’t exactly get that warm and fuzzy feeling, now do you? Same thing with current equity – Unless you’re planning on flipping the home in the next year or so, this metric is pretty useless to a long term investor. And if you’re planning on flipping it short term, you aren’t really a long term investor. As an exception, if you’re able to obtain quality assets in quality neighborhoods at a price below market, that can help the performance of your portfolio long term. But be careful to not miss the forest for the trees. In your quest to get current equity at any cost, you might miss out on acquiring as many assets at favorable terms as you could have, leading you to a poorer retirement. A well executed real estate investment strategy builds more equity each year you own your properties than you could ever capture at purchase. Again: Focus on long term.
Quality
The ingredient that makes a long term real estate investment plan work is quality. Take away asset, location and tenant quality and all you have left is a high maintenance mess. A true long term investor never loses sight of and never compromises on the quality of his holdings. In fact, this is where the obsession with short term metrics like current equity and cashflow rear their ugly head. In an effort to get $20-30k in captured equity or $1000 more in cashflow per year, the investor has to sacrifice the quality of his properties, tenants and usually both. So when it’s all said and done, two things will happen:
- The real life numbers those properties will do will be very different from those initial projections making the sacrifice of quality an exercise in futility
- The long term investors who focused on quality to begin with will be so far ahead that the “current equity” investor will need professional binoculars to see her
This isn’t rocket science – Good tenants rent good properties. Nightmare tenants rent nightmare properties. And everything in between. The next investor who thinks they will bend this rule and fit a square peg in a round hole will be the first.
Returns vs. Results
Long term real estate investors are primarily concerned about one thing: The final results. Everything else is transitory and largely unimportant. Make believe long term investors on the other hand are mostly concerned about returns on investment – Percentages they can rattle off to their coworkers on their water break.
The only question that matters to a long term real estate investor is the following: Did the investment strategy I executed produce the results I sought when I first got started? If the goal was a six figure income when she retires in 10 years, is the portfolio producing that kind of income? If the goal was to build wealth and increase the capital based to $1.5M, did the plan succeed? If not, all the returns on investment, cash on cash, cap rates and the like were pretty useless.
That’s the reason a long term investor utilizes all tools at their disposal: positive cashflow from the property, additional investment from their job income and tax benefits to achieve the retirement they seek. That’s the reason that same investor pays off a portfolio of properties leveraged with low cost 4.25% debt and a poser asks a boneheaded question like: Why would you stop making 15% on your money and pay off debt at 4.25%? Because it’s about the final result. This isn’t some quixotic quest to “beat the market” or outpace the returns of S&P 500. Ultimately it’s about results for a long term real estate investor: Did your real estate investments do the job you bought them to do? All else is just talk.
Bonus: What it doesn’t mean to be a long term investor
Employing short term real estate strategies for a really long time, isn’t long term real estate investing. Flipping properties for decades is very admirable – whoever is able to achieve it has my respect. I know how hard it can be to make it work in that arena for extended periods of time. But the fact remains that the investor is still speculating – much like a mechanic that buys a beater, fixes it up and sells it for a profit or a furniture restorer. Same thing with wholesaling. When you stop flipping or wholesaling, these methods stop working. They don’t produce income – they produce capital gains when they work. I often hear investors who are just getting started that “they don’t want to restrict their investing to just one thing” – that they would rather keep their options open and look at all alternatives. As nice as open mindedness sounds, it can be disastrous in real estate investing. There’s nothing wrong with picking a path or another – but know yourself, pick the best method that suits your goals then stick with it.
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