Did you know that 20 percent of investors succeed while 80 percent do not? So says the Pareto Principle, commonly known as the 80-20 rule, and it applies to everything we do in life.
For example, do you know that you wear 20 percent of the clothes in your closet 80 percent of the time? Do you know that 20 percent of the country’s population controls 80 percent of the country’s wealth?
Applying this principle, it would suggest 20 percent of investors will succeed while 80 percent fail. OK, there is nothing wrong with failing as to succeed—some of the time. In life, you have to go through a series of failures. Author John Maxwell calls this failing forward. I would suppose you may fail 80 percent of the time to get to the 20 percent wins.
How to be the 20 percent who succeed
In today’s information age, you can learn from the 20 percent wins as well as the 80 percent fails without having to do so with your own investment dollars. There are plenty of pioneers who plowed the road and made successes and failures, and you can learn through their experiences. Via the Internet, there is a massive amount of information available to us.
I have found that learning about those unsuccessful investments can often teach you the most valuable lessons. Everyone is eager to tell you how they succeeded; it is human nature. However, everyone wants to try to improve on those techniques or take shortcuts and try other things (navigating away from the success), which often results in something other than success. By learning how not to do things first, you may accelerate your ability to succeed.
The investor who wanted to take a shortcut
I received a call the other day from a gentleman who wanted to buy investment property. As I asked him questions about his investment objective, he shared with me that the house down the street from him had recently been sold. “Someone bought it and has spent the last six months remodeling it and now has it on the market for $80,000 higher than the purchase price. I would like to do fix-and-flips like this,” he said.
He drove by this house every day, watching progress as the property was being fixed up. He was thrilled to finally see this home come back on the market. When he saw that the asking price was $80,000 higher than its listing price six months earlier, he was sold on the idea of making these huge returns. He said he had been interested in investing for years and after seeing the success this flipper had, he was ready to invest.
He wanted to buy property like this, too. So I of course had to find out what this flip looked like so I could help him duplicate it. “OK,” I said. “So what type of condition was the property in and what type of work did the flipper have to do with it?” He shared, “Well, all I saw him do was cut down some small trees and bushes, repair some soffits, paint and add mulch.” I answered, “OK, that makes sense. What did he do to the interior?” His reply told me the bigger story. He stated that he had no idea. “They were in there doing something for six months, but I did not see what it was,” he told me.
Do you see where this investor went wrong?
This would-be investor could have learned so much by being a friendly neighbor, but he had never actually talked to the flipper. Without knowing what that flipper did inside and how much time and expense he had put into it, the investor could not possibly have known how profitable his project had been—if at all.
My guess is that if the flipper spent six months on this house, he either did a lot of work that cost a lot of money or he did not spend much time inside at all and wasted a lot of money on holding costs. Either way, this flipper who spent six months to increase the value by $80,000 may not have cashed in really big. The more interesting part is that the gentleman who called me wanted to duplicate this unknown process.
Copy and repeat
School kids always want to copy the work of the smart kids so they do not have to work so hard. While teachers always taught you not to copy, society and successful people tell you to do just the opposite. Why waste time and money failing when there are so many successful investments to duplicate? Just find what works and duplicate. This story above (a true one that happened just a few weeks ago) was a classic case of a new investor wanting to duplicate another investor but failing to even identify what he was duplicating. What worked and did not work? He was simply chasing a shiny object. He saw a house with a shiny new price tag $80,000 higher in six months and wanted a part of it. He failed to plan.
Identify and Invest
I have learned over the years that all successful investors do these nine items:
- Identify what you want from an investment. (What is most important—
largify what type of property interests you most. (Single-family? Multifamily?)
- Identify your investment niche. (Fix-and-flip; buy-and-hold; buy, fix and hold?)
- Identify your source of financing. (Cash, finance, hard money or partnerships? Secure your money source, as the best properties move quickly and you need to be positioned.)
- Identify your entity structure. (For liability protection, do you want to put these investments in an LLC or perhaps a trust?)
- Identify your exit strategy. (As the old saying goes, you make your money going in. Regardless of your investment style, you want to know how you will profitably exit the investment.)
- Identify your power team. (Attorneys, Realtors, accountants, property managers and trades people. Having them in place and all on the same page with you will help you accelerate your return on investment.)
- Identify the best location. (What area will offer sustainable returns for your investment objective? All markets are not created equal, and finding the best location for long-term ROI is paramount for a great investment.)
- Identify your property. (Fully armed with all your investment criteria met, find the best property to fulfill your objectives.)