Investor Mindset

Everyone is a genius in a rental bull market

July 27, 2012 By Erion Shehaj 5 Comments

The rental market in Houston Texas is hot. Rents have been rising steadily for the last 4-5 years with average time on market dropping to under 30 days. Landlords are in the driver’s seat and the high demand for their properties allows them to ask for longer term leases, higher credit tenants and rent escalations built into the deal. What’s most important is that this rush of demand is fueled by real economic and job growth, not some artificial inflation. Under the current conditions you could literally close on any property on Friday and have a long term tenant in place the following Friday. And he probably had to fight off four or five other applicants to get accepted.

In the current market, it is easy for an investor to feel invincible – feel like they can’t go wrong. All the talk about quality of neighborhood, school district, amenities, upgrades etc. seems irrelevant. After all why would you go and spend 40% more money on a “better property” when you can buy cheaper, lower grade assets for a fraction of the price. With rental demand as strong as it is now, they will both rent out quickly and your ROI will be much higher on the lower end stuff. Right?

Mark Cuban said: “Everyone’s a genius in a bull market. Recessions are the great equalizer”. These are good times for investors but they’re also dangerous times. The euforia produced by the rental bull market can fool shortsighted investors into dropping their guard and skimping on asset quality. Incoming rent will cover all the cracks in your asset selection for the time being. There’s a funny thing about cracks though. No matter how often you patch over them, sooner or later they always show through in times of great tension. So ask yourself this: What would happen to your portfolio if the rental market weren’t this hot? If there were fewer tenants looking for properties and competition among assets, would they pick yours? In other words, would your portfolio withstand the test of time and all the changes in market conditions it brings?

If you are a long term investor, the number one factor you have to seek when building your portfolio is Quality. Don’t listen to the siren calls of cheap properties in cheaper locations. Build a portfolio that will perform no matter the market.

Miguel Angel via Compfight

What training for a marathon taught me about real estate investing

July 5, 2012 By Erion Shehaj Leave a Comment

On February 18, 2012 I ran the Livestrong Half marathon in Austin Texas. The training for this event took almost a year of early morning runs in Houston’s hot and humid summer weather. It was a transformative experience for me as I went from over 200lbs and getting winded just walking to the mailbox, to being fit and healthy again. But most importantly, in pushing myself to accomplish this goal that seemed larger than life when I started, I learned some valuable lessons about real estate investing that I wanted to share with you today.

Lesson 1: Start with a plan then show up. No exceptions!

No one gets a free pass when it comes to training for a marathon. Unless you’re a proven runner, your level of fitness is largely irrelevant. A fit person might need a shorter training plan but they have to train! Lack of training is a guarantee of failure regardless of your fitness starting point. So you must lay out a long term plan – which days will you run and how long. And this plan is designed to get you closer to the ultimate goal of finishing the big race. But the plan doesn’t work if you don’t show up and execute. Especially on the days when you feel like turning on the other side and getting another couple of hours of sleep.

Real estate investing is much the same say. Some people start with more capital some with less. Some with six figure incomes and some with less. But neither of those in and of itself will get you ready for the big event – retirement, financial freedom. You have to lay out a solid plan – what assets will you acquire, when and where. And how will you use those assets to get you ready for retirement? Then you have to show up and execute. If you don’t take the steps the plan calls for, it remains just an idea on a piece of paper. And everyone that’s ever taken a shower has an idea…

Lesson 2: Your efforts follow your goals

When I first discovered this, it was an epiphany. One day the training schedule called for a long 8 mile run. So when I went out that morning, I was mentally prepared for the distance. I would be halfway there at 4 miles then about 75% done at 6.5 then one final push to the finish. During that last mile and a half, I was so exhausted I couldn’t feel my legs and my heart was in my throat. A few days later, it was a short 3 mile run which I thought would be a piece of cake. A funny thing happened during that last mile that day: I was just as exhausted and barely finished.

Most of the limits we think we have are not physical but mental. Your real estate investing efforts and your intensity in executing them will follow the goals you set for yourself. So don’t sell yourself short. If retirement and financial freedom is what you seek, don’t settle for “buying a couple of rentals”. If you want a couple of million in net worth and six figures in annual income don’t strive for “some extra income”. First your mind, then your plan, than your actions.

Lesson 3: There will be doubt and resistance

I’d love to tell you that during my marathon training, I was 100% unwavering, eyes on the prize but I’d be lying. Actually on a pretty regular basis my mind would try to sabotage my efforts through rationalization. In one instance, I was trying to run 10 miles – a 2 mile increase from my previous high. Needless to say, when the ninth mile started, I was spent. I thought I would just shut down all of a sudden like a PC but I kept trying to push forward as the goal was just in sight. And right at that moment, this thought would come one that said: Hey, if you stop now, you’re still increasing your highest mileage by 1 mile. That’s pretty good, right? Just stop, you’ve done enough for today etc etc

Same story with real estate investing. I get phone calls from clients all the time, questioning if the plan they’re implementing is actually going to get them to retirement. Doubts are a part of human nature – we’re hard wired to question ourselves and to present resistance to forward movement. We prefer what’s comfortable. But in real estate investing, “comfortable” means sitting on the same spot you were 5 years ago with no forward progress. When the doubts seep in, it’s not time to stop. It’s a signal to push forward harder and execute your plan.
Photo Credit: Raymond Larose via Compfight

Successful real estate investors begin with the end in mind

July 3, 2012 By Erion Shehaj Leave a Comment

Most real estate investors that do it wrong, do it backwards.

They acquire a portfolio of cheap inferior properties in inferior locations with inferior schools and amenities. Then they try to figure out a way to place top notch tenants in them that will sign long term leases, will pay on time and will treat the property like they own it. And when time comes to sell the properties they acquired, then they try to figure out a way to sell them for maximum dollar.

That’s trying to fit a square peg in a round hole.

Stephen R. Covey said it beautifully in 7 Habits: Effective and successful people begin with the end in mind. So what does that mean in the real estate investing context?

You begin by thinking about the type of portfolio you would like to own. Think about it as a legacy. What type of properties you would like to pass on to your children or your loved ones? Where would they be located and what characteristics would they have? Next, what kind of tenants would you love to have in your properties? Take it one further. These types of tenants you described, what are they looking for in a rental property? Think about the location, schools, upgrades and overall condition of the homes they seek.

Then acquire properties that fit that description by paying a fair price for them. Begin with the end in mind because the assets you acquire pick the tenants you will have and the price you will fetch when you sell. It’s both a simple and powerful concept.

Photo Credit: Mukumbura via Compfight

The River and the Fish

February 22, 2012 By Erion Shehaj 2 Comments

Today I want to tell you a story.

Once upon a time, there was a beautiful river nestled in the middle of a peaceful forest just a few miles away from the village. Only a select few weathered and experienced village fishermen knew that this river was chock full of fish: trout, bass, you name it. It was their secret – and they preferred to keep it that way. They could drive up there in the weekends knowing that they would come home with a great haul. One day, a news reporter from the city nearby did a story about the wonderful bounty in this river. “If you like fishing – she said – this is a “must try” place”. Soon after the story aired, the village fishermen that had been coming to the spot for years, were surprised to find hundreds of people fishing at the same spot. They soon came to the realization that their fishing trips would never be the same again. Eager folks started fighting over spots and arguing with each other. Instead of going home with the best fish this river had to offer, they started settling for what was left. Everyone went home unhappy. The End.

Almost every real estate investor out there, long term or not, starts their investment property search by looking at bank owned foreclosures. The reasons are obvious. You are taught that to make an investment work you have to find a good deal – one that is priced well below the current market value. And if you want a great deal like that, foreclosures are the place to be. I understand that line of thinking and those motivations. But let me fill you in on what the reality of the bank foreclosure submarket is:

EVERYONE is fishing in the foreclosure river. The “news story” on this has been out awhile and the demand has already skyrocketed. So what happens when demand is high and supply stays the same? Price goes up. Basic economics. If you don’t believe me, try to make an offer on 10 bank foreclosures in any city. I am willing to bet that 9 out of 10 properties will have multiple offers. This results in sales prices that are often higher than asking by as much as 10%. So that great deal you thought you were getting, is looking less and less shiny.
Over 90% of foreclosure inventory is not investment grade. This may come as a shock to many, but the overwhelming majority of foreclosure properties aren’t good deals. They might be selling at market value even if they still need work to be in market condition, or discounted just enough to account for the rehab. Why would you pay market value and get a rehab project to boot.
Investors’ selection is limited to leftovers. A large percentage (over 50%) of foreclosure properties in the market today are FannieMae/Freddie Mac or HUD owned. Because the government wants to promote home ownership, they usually have a “first look” or owner occupied exclusive period. That means, for the first 14-30 days these properties are on the market, only buyers that are planning on living in the homes are allowed to bid. Investors don’t even get a shot during this period. So really, the inventory you can go after is what the homeowners didn’t buy – or what’s left over.
Banks aren’t known for their flexibility. Most banks (the eight that are left anyway 🙂 ) strictly refuse to contribute in ways that would help an investors rate of return tremendously. For instance, they will agree to lower the price by $2,000 but won’t agree to pay $2,000 in closing costs at the asking price. Same thing with home warranty costs. Pointless I know. This matters in the context of a portfolio made of several properties. The money you save on closing costs on your portfolio may give you the capital to purchase an additional property that increases the return and the cashflow you will enjoy once the strategy has been executed.

So what’s my recommendation? Fish upstream. Remove the blinders that are arbitrarily making you pick a long term investment using a short term metric like built in equity. Open up your selection of properties to include new construction homes, retail sales as well as well taken care of foreclosures. Then make a selection based on which property you would rather hold in 10+ years.

How to be successful

October 19, 2011 By Erion Shehaj Leave a Comment

Success is simple. There are a handful of time tested principles that when followed consistently over long periods of time will inevitably cause you to succeed at anything. The funny thing is I’m not about to tell you anything you don’t already know. So then, why do successful people make up such a small percentage of our society? Because while these principles are painfully simple, they aren’t by any means easy.

Photo Credit: Alosh Bennett via Compfight

Success Principle #1: Figure out “why”

If you open a business because you just want to make lots of money, you usually don’t. People that just want their jeans to fit a little better don’t lose weight and keep it off in the long term. The Why is the driving force behind your actions that will push you through when you get stuck. When I meet with a real estate investor for the first time, the first question I ask is why they want to invest. Their first reply usually has to do with semantics: I want another stream of income or I want to build some wealth or I want to take advantage of this market. But when I ask them to dig deeper they find that they’re doing it because if this succeeds their daughter’s college will be taken care of or because they’ve always dreamed of traveling the world with their spouse someday or because they don’t want to end up relying on Social Insecurity (h/t Dave Ramsey) like their parents had to. There’s always a deeper purpose and if you want to be successful, stop here, figure out the why before you worry about how.

Success Principle #2: Have a Plan.

This sounds like a principle straight from the “Duh” Files but it’s amazing how many people are hopelessly pursuing something and they have no clue what. If you don’t know what your Point B looks like even Garmin can’t help you find the way! When it comes to success, vague is the enemy. Know your destination: Set goals and measure progress. Dave Ramsey says goal(s) should be specific, measurable, written, time limited and personal. You will be amazed at what you can achieve if only you sit and write down specific goals, set a deadline for achieving them and measure your progress on the way there. As a real estate investor, having a plan makes the difference between a six figure retirement and just buying a couple of houses for cashflow that couldn’t support your latte habit. That’s why The Blueprint is the cornerstone added value that we provide to our clients. Without it, you’re just making it up as you go.

Success Principle #3: Focus

The power of focus is immense. I am sure you’ve heard stories of people achieving amazing feats by focusing on their goal with intensity. The problem is we live in a society with the attention span of a chicken. We can’t do just one thing anymore. We have to be checking email, playing a silly game, updating our Facebook status and saving the world all at the same time. You don’t believe me? Go to a restaurant, any restaurant and observe how long people can go without checking their smart phones. We can’t even focus on feeding ourselves or just having a conversation, anymore. Don’t let circumstances dictate your actions and turn you reactive. Once your investing plan is in place, you focus on execution. Avoid analysis paralysis, pull the trigger and bring your plan to life. You’ll be happy you did.

Success Principle #4: Do 20% Work

Most people do work that doesn’t really matter. Pareto’s 80/20 principle says that “for many events, roughly 80% of the effects come from 20% of the causes”. Put a different way, 20% of what you do will cause 80% of your results. Do that work and avoid busywork like the plague. Kill or outsource everything else and you’ll never look back. For real estate investors, that means working with a real pro and entrusting them with providing you the data, information and analysis you need to make a decision. Your 20% work is executing your plan – the rest is just distraction.

Success Principle #5: No shortcuts

This principle is by far the most important. In the words of Beverly Sills: There are no shortcuts to anywhere worth going. Know the why, make a plan and execute it. Any attempts to short-circuit the process undermines the results every time. Human nature loves shortcuts: Diet pills to lose 100 lbs in twelve minutes, “proven” systems that will make you a zillionaire by Wednesday, you name it. The truth? You have got to work hard for results that matter and last. Want to change your life and get healthy – you have to eat less and exercise more. Want to be wealthy – you have to spend much less than you make and invest the surplus long term. Captain Obvious would roll his eyes listening to this. But remember, success is simple. You already know all you need to know to win. You just have to execute. It’s simple but not easy.

Decidere

July 1, 2011 By Erion Shehaj 1 Comment

For the past week, I’ve been reading a terrific book by Tim Sanders called Today we are rich and I can’t seem to put it down. The book is a goldmine of brilliant ideas that mostly came from his Grandma’s sage advice. But what I want to focus on in this post is when he explains what it means to make a true decision:

It’s important that once you’ve made a decision, you don’t give it another thought. The word decision stems from the Latin word decidere, which means “to cut off.” Making a real decision “cuts off” all other options or alternatives. Once you’ve made your decision, there’s nothing left to do but execute (emphasis mine)

Sanders, Tim (2011). Today We Are Rich (pp. 83-84). Tyndale House Publishers, Inc.. Kindle Edition.00

Sanders seems to be channeling his inner Tony Robbins that in Awaken the Giant Within said:

Part of the problem is that for so long most of us have used the term “decision” so loosely that it’s come to describe something like a wish list. Instead of making decisions, we keep stating preferences… Making a true decision means committing to achieving a result, and then cutting yourself off from any other possibility.

Robbins, Anthony (2007). Awaken the Giant Within (pp. 38-39). Free Press. Kindle Edition.

People often fail to make a decision and act on it because they’re afraid of making a bad decision. Know this: Even worse than making a bad decision is making no decision. So, do your homework, ask all the questions, check all references. But once that’s done, make a decision and cut off any other possibility. The results you will achieve and experience will change your life.

Good night.