I recently spoke with an investor who told me that he has $500,000 in cash and is looking for the right investment property to acquire. As usual, I asked my standard set of questions: What are your goals, time horizon, risk tolerance and experience level? His responses were stable cash flow with some potential for appreciation, long-term time horizon of 5 to 10 years, not tolerant of high-risk investments and his real estate experience was limited to the purchase of his single-family residence. These are fairly common answers for new investors who are looking to steadily grow their wealth. So far, so good.
Then, I asked how long he had been looking for a property. What he said next shocked me: five years. This investor had been searching for the “right” property to deploy his money for five years. This means that he lost out on the last five years of cash flow and appreciation, and his money suffered from five years of creeping inflation — a poor outcome.
Although shocking, this type of story is not uncommon. In fact, I hear it frequently. Plenty of people desire to be in real estate, but consistently fail to invest successfully. Here are the typical reasons why:
1. No Clear Objectives
The primary reason investors I meet do not make any money in real estate is because they have not taken the time to establish specific, clear objectives. Most investors have answers for the questions I asked our representative investor above and believe that is sufficient for moving forward. But the objectives need to be “SMART”:
Specific: What type of property? Which neighborhood? What price range? What condition?
Measurable: What annual percent cash flow is your threshold? What percent appreciation do you expect to see in five years?
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Actionable: What specific steps are required to get to a successful outcome? What are you doing this week to progress?
Relevant: Why are you doing this — to retire, pay for your child’s college education, replace your current income? What will get you out of bed to make this investment successful?
Time-bound: What is the date you plan to have acquired the property?
Without taking time to establish these, like many things in life, failing to plan is planning to fail. No investment is made, or worse, the wrong investments are made and for the wrong…