They approach their investments backwards. So what is backwards, or the wrong way?
- Search the Internet or newspapers for a cheap property.
- Search for property with numbers that will generate great cash flow.
- Some may not even physically look at the property and buy strictly off the pro-forma.
- Buys the property because the numbers worked well.
These investments turn out to be more of a case of luck versus purposefully insuring a property will give a long term sustainable return. Many have learned a great deal on how to do diligence from this backward approach.Remember that returns generated on paper are only as good as the accuracy and the sustainability of the numbers that were used for the pro-forma.
So how does the seasoned investor who has personally failed, or learned from those who have failed, approach an investment?
- Location: Finding the correct market that will provide for long term sustainable growth with job and population growth, baby boomer appeal, undervalued markets and the path of progress, with decent schools districts, etc, etc.
- Invest within locations or subdivisions that have a high concentration of owner occupied properties. Sustainability is increased when your exit strategy is to sell to the end user. To maximize these returns you want to buy properties that the end user will want to live in. These are nice communities of owner occupied residences.
- Low crime rates: People pay top rents and top purchase prices in best and safest areas. Also property managers prefer to work in these areas
The set up to position your property for long term sustainable returns is far more important that just finding a well-priced property. It is paramount to understand why a property is priced cheaply.
This is a great example of how you can learn from the failures of people who simply bought a cheap property in hopes of becoming the next real estate tycoon. Remember hope is not a strategy, you have to be diligent.
The author John Maxwell in his book “Failing Forward: Turning Mistakes Into Stepping Stone for Success” illustrates this wonderfully. The idea is everyone and everything that is successful could have very well been made successful by first having failed at the attempt, after doing it wrong enough times you finally learn to do it right. Such as Thomas Edison and the thousands of attempts he made to finally invent a working light bulb. There is much we can learn from pioneers who plowed the path. When investing in real estate you can learn from the mistakes of those successful investors. My favorite statement for the real estate mogul Donald Trump is : “I would rather hear of people’s failures than their successes” everybody wants to share their successes but it is their failures that teaches us the lesson.