7 ways to treat investing like a business—and reap more success
Often the difference between a successful real estate investor and a not-so-successful one is how they treat their investments. A successful investor sees investing as a business while a not-so-successful one thinks he’s being business-like but actually has more of a hobby mentality.
Here are seven ways successful investors treat their investments like a business.
1. Make a plan
A successful business begins with a plan. It’s not enough to decide you want to invest in real estate—you should know what type of real estate you want to invest in, where you want to invest, whether you want to flip or hold and how many properties you want to eventually own. The more details you can work out ahead of time, the better off you’ll be.
“I knew a guy who had a wide range of rentals, from storage units to student rentals to Section 8 to commercial,” says Deb Tomaro, a broker associate with RE/MAX Acclaimed Properties, in Bloomington, Indiana. “It was like having four or five different businesses in addition to his day job. He couldn’t do any of them very well and ended up losing all of them.”
Successful investors specialize in a particular area of real estate investing, and once they have a plan in place, they determine metrics for success, says Brian Davis, co-founder of SparkRental. This could be a minimum monthly cash flow, return on investment for flips or something else. But after establishing your metrics, it’s important to monitor them, evaluate them and adjust accordingly.
“The best businesses do this constantly,” Davis says.
2. Treat investing like a job
Investing is a job for successful investors, even if they own just one property that requires little oversight. Think of yourself as an employee of your real estate investing business. Set hours that you dedicate each week, or at the very least each month, to managing your properties, and give yourself job duties such as collecting rent, paying bills and reconciling the financial accounts. On a regular basis, evaluate your performance objectively. If you’re not effectively doing your job, you may want to hire a property management company to do the work for you.
You can get into trouble when you treat real estate investing like a hobby, according to Mark Ainley, a property manager with GC Realty in Bartlett, Illinois. Ainley manages more than 700 properties in addition to a significant portfolio of his own. If you don’t think of investing as a job with set hours, he says, it’s too easy to spend the evening on the couch instead of managing your properties or looking for new deals.
3. Create systems
Successful investors create systems, or written procedures, that put their business on autopilot. If you have systems in place and the tenant doesn’t pay the rent on time, for example, you can refer to your written procedure outlining what to do in that scenario. Systems also ensure that you treat every tenant equally (as long as you follow your systems), something that can save you from claims of Fair Housing violations. A tenant can’t claim you are treating him differently and, therefore, discriminating against him if you have systems in writing and apply them equally.
Using systems can also help you grow your investing business. Davis points out that McDonald’s didn’t become the hamburger chain it is today because it makes great burgers; it owes its success to creating systems that are so refined that it is “effectively run by teenagers.”
If you apply that concept to your investing, as successful investors do, you’ll be able to manage more properties and manage them more efficiently than you would otherwise.
4. Rely on a network
While it is a good idea to think of investing as a job and to create systems to do necessary tasks, avoid assigning yourself duties you aren’t qualified to complete, especially if your goal in doing so is to save money. Successful investors hire accountants to prepare their taxes, contractors to complete renovations, and attorneys to prepare legal documents. They will even hire a property management company to manage their properties.
“Time is money, and the more time you can save, the more money you can make,” says investor Mark Ferguson of Invest Four More, a real estate blog.
Ferguson believes the most costly—and least business-like—mistake investors make is trying to do repairs and renovations on their own instead of hiring contractors. It usually takes an investor longer to complete the work, leaving the house off the market or unavailable to rent for a longer period of time. That’s money lost. Plus, you end up spending your time on the renovations instead of finding more deals. More money potentially lost.
5. Analyze your deals
Hobby investors fail to analyze their deals. They guess at how much it will cost to renovate a property, what it will be worth after renovations, and the rent they can collect. That can lead to tremendous losses.
“It is important to view property acquisition with an analytical eye,” says Tom Hume, a real estate agent with Windermere Professional Partners in Tacoma, Washington. He suggests using the cap rate—net income divided by acquisition cost—to analyze each deal. (Don’t include the cost of borrowing money.)
But the cap rate is only the starting point. Successful investors also take into consideration the condition of the property, the location and its appeal. That doesn’t mean you have to install granite countertops, but if the property has three bedrooms and only one bath, it may be difficult to rent out or sell.
Ferguson adds that you also need to take the emotion out of the deal. If you’re at an auction, stick to your numbers and don’t get into a bidding war. If you’re looking at a pre-foreclosure, don’t go through with a deal that doesn’t make sense because you feel obligated to help the homeowner who’s fallen on tough times. Make smart investment decisions.
6. Deliver good customer service
Customer service is a big part of any successful business. Successful landlords realize their tenants are their customers and provide them with good service such as returning phone calls and promptly making repairs. Offering good customer service doesn’t mean accepting excuses for late payments or lease violations, though. There’s a balance, according to Tomaro.
“Owning rentals means walking a fine line between servicing your customer and protecting your asset,” she says. “I’ve seen too many landlords err on one side or the other.”
But good service doesn’t end there, in her opinion. She believes you should treat your vendors professionally, not attempt to get special treatment from them and pay them immediately. Treat them well, she argues, and when you need their services, they’ll be there for you. As a result, she’s able to offer even better customer service to her tenants because the vendors she works with are eager to service her properties and do excellent work.
7. Stay educated
If you want to treat your real estate investments like a business, you need to know what’s going on in the industry. Read news articles about real estate every day, get connected to a real estate investors association, attend conferences and network with other investors and industry experts. And then realize that you can’t know everything there is to know about the industry, and find people who can help you stay on top of what you need to know.
For example, most investors are not able to keep up on all of the tax laws concerning real estate investing. That’s something best left to a certified public accountant who specializes in real estate. Investors who try to do this on their own often miss out on deductions or make mistakes when it comes to depreciation.
Successful investors make every effort to stay on top of trends and what’s going on in the industry and then leave the rest to experts, including accountants, attorneys and property managers. Hobbyists might make an effort to educate themselves at first but never go beyond that. They’re the ones who are the last to recognize a market shift, and they usually pay for it.