Author name: Erion Shehaj

On one hand, you want to invest in real estate to build a solid portfolio and achieve financial independence. On the other, you are currently located in a market where real estate is too expensive to make the numbers work.

What do you do? The obvious and easy solution is to consider investing opportunities in out-of-state markets where prices and rents are much more balanced. But the ease quickly ends when you have to get tactical and select a good market to invest in.

This is the point where I see real estate investors make the BIG Mistake: They rely on “Best Real Estate Markets to invest in 2020” articles to select their target market. I can certainly understand the allure. The research criteria for selecting these markets seems rigorous. They are looking at population and job growth plus real estate price and rents growth. What’s more, they offer a “silver bullet” that reduces the overwhelming task of picking from a multitude of options into a few neat bullet points.

“Why is that the wrong methodology to select a real estate market”, you ask?

One major reason: All the data they’re using to select the target market is backward-facing which means that it only tells you what has already happened. It is telling you that it was great to invest in that market 5 years ago. Investing in a real estate market because of its performance in the past is like deciding to invest in Apple stock because it is up huge over the last 5 years.…

I want to share with you a tale of two investors. Picture two childhood friends who went to and graduated from the same college with a degree in the same field. They possess the same natural talents and intelligence. Further still, they earn the same income and live the same lifestyle which results in the same savings rate and same amount of investment capital.

Fast forward a decade or two. One of these investors goes on to build an impressive real estate portfolio with multiple streams of income at different stages of her life. Meanwhile, the other does some sporadic investing and ends up with a couple rental properties that while they provide a good return on investment don’t change his life in a meaningful way.

Key Question: What made the difference?

If all the ingredients are the same, what was the cause of such vastly different results in the end? Why did one investor manage to succeed at a much higher level while the other fell short?

While the above is a hypothetical scenario meant to isolate the critical difference maker in success for long term real estate investors, I can tell you that in my experience I’ve seen similar scenarios often. Based on that experience, I can tell you that the critical factor that separates successful investors from those that fall short is the presence of a thoughtful strategy and the execution of a plan of action that flows from that strategy.

Why successful investors need a strategy to succeed?

…

https://youtu.be/nouSkGNRL5Y

When I posted a video on how to decide if you should pay off debt or invest earlier this week, a friend (and past client) commented with the following question:

What’s the best way to maximize the returns on investment for your stock market and 401(K) investments?

The answer may surprise you.

First let’s consider the following facts:

Over a 10 year investment timeframe 85% of mutual funds underperform the market. Extend the timeframe to 15 years and 92% of mutual funds underperform the market. In a nutshell, the overwhelming majority of funds underperform the market over the long run and charge you higher fees for that privilege.

But before you say: “You’re saying there’s still a chance …” you have the understand that the 8% that do outperform are not always the same funds. Meaning, a fund could outperform this year but underperform the next.

At this point I want to share one of my favorite quotes ever from Warren Buffett’s long time partner, Charlie Munger:

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.

That idea is as profound as it is clever. Most “wounds” in the financial realm are self-inflicted. How else can you explain the fact that while the market averages 10% returns over a period of time, investors average 4%.

So what should you do instead? Focus on what you can control: Costs and not doing anything stupid!…

Cash flow tunnel vision is a common and dangerous blind spot among real estate investors who “worship at the altar of the cashflow” (as my good friend Jeff Brown would say).

It’s a tendency to ONLY pay attention at the cash flow produced by the property on an annual basis. For instance, an investor will run the Year 1 numbers on a rental property to calculate the cashflow for the year. Rent minus expenses minus mortgage payment equals cashflow. Then they divide the cashflow into the amount invested in the deal and calculate the cash on cash return. This return is then compared to an arbitrary return benchmark and a decision made.

Cash flow is nice, don’t get me wrong. But cash flow is not where the MAGIC happens in real estate.

The MAGIC is in the long game: Where you invest $37,000 into a rental property and net 3.3x that amount 10 years later.

The cashflow is the dividend you get every year and it makes you some money. But the growth over time is what makes you a fortune.

…