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Chapter One
Why Invest in Real Estate?
Have you ever listened to the song, Times Like These, by the Foo Fighters? It comes to mind when people ask me why I think real estate investment is a good idea. I have no trouble answering that question, but I sometimes think the people asking are a bit disappointed by my response. They want me to tell this great story about the very moment I knew real estate investment was for meâI want to talk about moving!
A story like the one they want to hear would likely include some pivotal moment, for example, the instant the sun hit a âFor Saleâ sign as I was driving down a residential street and I realized (with an overwhelming rush of emotion) that I could be buying properties and renting them out to people who needed a place to live, or fixing them up and selling them to people who needed a place to live. A story like that would evoke an epiphany of real estate awareness and would likely include some instant understanding of all of the investment principles I've come to hold dearâprinciples such as the importance of focusing on long-term wealth creation and the deliberate forging of mutually beneficial investment relationships. It would also have to include some specific ideas about how one could set up actual real estate investment systems, systems others could follow on their own path to success. Now that would be a story!
The reality of how I came to see real estate investment as a good strategy is less dramatic. It's also a better story, but not because it has moments of high and low drama or because I'm so darned interesting. The real story is better precisely because I am just like most other Canadians. And that's really important. I invest in real estate because I can make money in real estate and generate future financial security for my family, myself and my charitiesâand that's it. I started investing in real estate because I could. I keep investing because I can. It has never been about what I knew or who I knew or having a giant pot of money to start with. I had none of those advantages.
It has always been about a commitment to a long-term outlook and working hard to minimize risk while making my money work harder than I doâand I work very hard. Opportunity, like beauty, is in the eye of the beholder. Keeping that in mind, I open this discussion of the fundamentals by encouraging you to be on the lookout for two very different kinds of real estate investment advice or comment: the kind you'll get from the Armchair Authority, and the kind you'll get from those who practise the Final 30-Feet Rule.
Beware the Armchair Authority
Before we study the fundamentals that sophisticated real estate investors use to determine whether a specific real estate investment makes sense, I want to acknowledge the three primary arguments real estate investment naysayers will use to convince you that real estate investment is a bad idea. They will tell you that:
1. Interest rates will rise rapidly and anyone in real estate will go broke in an instant.
2. The real estate market is in a bubble (or approaching same, or about to break same) or a depression.
3. Nothing good ever comes from having tenants.
I am living proof that even with all of that negativity around, you can do incredibly well if you know what you are doing. (Admittedly, if you do not know what you're doing, you can create major problems.) As we don't seem to be able to escape the naysayers, I'll tell you how you can use information to counter their negative outlook.
Prophets of doom exist in all market conditions and it's impossible to steer completely clear of them. They remind me of Goldilocks, who discovers that bears have sampled three bowls of porridge, and found that one is too hot, one is too cold and one is just right. The only problem with applying this analogy to real estate naysayers is that in real estate, even when these characters find a property that is just right, they'd still tell others that it was wrongâand they should go eat eggs instead! Their reputation for having a negative outlook is more important to them than reality! Some even wear a âbearâ moniker proudlyâand that is why you need to be aware of the danger posed by their misinformed opinions.
I think new investors (and anyone whose portfolio is weathering a market storm or is looking for market direction when all he can see is a horizon of dark clouds) should recognize the three negative arguments listed above as warning flags. They are flags signalling arguments that should be disregarded, and they are more common now than in past years thanks to the fact that the internet gives everyone with an opinion a chance to share it. My point is that while everyone is exposed to these arguments against real estate, the strategic investor arms himself with the tools to analyze what's right. When you need to make investment decisions, no one else's opinion really matters, not even mine. When confronted with negativity, my favourite response is to ask the naysayer, âWhat type of real estate experience do you have?â If the answer is none, or very little, you know you're listening to an Armchair Authority, not someone who knows what he or she is talking about.
Seek Out the Experienced Investor
Now consider the opposite of the Armchair Authorityâthe realist. I learned, very early on, to only take advice from someone who has been very successful in what I want to be successful at. You'll notice I didn't just say relatively successful, and I'm also not talking about someone who got lucky in a hot market. I want to learn from, discover insights from and hear the good and bad side of the investment world from someone who has seen it all and knows how to respond to all market conditions.
To look at how this works in the real world, consider how everyone you bump into seems to have an opinion on the real estate market. It's a bubble! There are too many condos! There are not enough condos! It's going to collapse! It's a great opportunity! It's better to rent than buy! And so on. As I wrote this section I was sitting on the patio of the local Starbucks and I overheard a real estate conversation at the next table. I chuckled at the mistaken myths they were sharingâand was chagrined to realize that the speakers seemed to be making important decisions based on what I knew to be myths.
With commendable candour, one 20-something enthusiastically shared her opinions on real estate. In just five minutes she noted:
- âYou won't believe the deal I can get on a time-share! For only $46,000 I get two weeks a year at no charge. That's like a free holiday every year! The rest of the year it is rented out. Too bad it isn't by a ski hill but the winter sun will be great, if I can get those weeks!â
- âDowntown Vancouver is not that expensive. My friend has a 380-square-foot condo and pays only $1,400 a month rent.â
- âMy friend really wants to get a place in the States because the dollar is so strong. I told him it was a great idea and that a bunch of us should pool our money and then share the profits because there is no tax as a Canadian down there.â
They say enthusiasm is a virtue, no matter how misinformed the enthusiast is. I disagree. From the gist of the conversation it was clear that no one at that table had any experience with even one real estate transaction. This young woman's declarations were so positive that her friends (even those who were significantly older than her) were accepting them as real estate gospel. She made it clear that she hadn't ever bought a property, but she had read a âtonâ about the topic so she knew how it works. I was astonished to hear them respond as if their comments were written on tablets of stone.
Although certainly not lacking in confidence, this greenhorn investor lacked first-hand knowledge. Missing this critical piece to the success puzzle made her confident declarations and opinions very dangerous.
You would be right to think that a few people talking about real estate don't present an insurmountable problem for others in the business or for those planning to start. We all have to find our way in the world and that usually includes making (and then learning from) a few mistakes. But this lack of knowledge can be very dangerous when the misinformation and opinions come from people who call themselves real estate experts.
The importance of paying attention only to real authorities was first driven home for me when I heard how veteran comedian Buddy Hackett told a young and upcoming comic how to deal with the mountains of advice that TV executives, promoters, friends and family will give her as she builds her comedy career. Buddy's advice was simple yet profound: âListen politely, smile and allow them to feel helpful . . . then turn around and seek out and take advice only from those who have walked the final 30 feet.â
What did he mean by the final 30 feet? When I heard the answer, I saved it and have used it ever since. To paraphrase, Hackett said:
As a comic, only take advice from those who have walked the final and most important 30 feet from backstage to alone in front of a mic with nowhere to hide. Then, and only then, will you know the advice comes from reality and not theory. They'll understand the emotions, the work it takes to get it right. They'll have made the mistakes and created the laughs, not just read about how to do it.
These words of wisdom can be applied to virtually any decision we face in life. Hackett's point was that the world is full of inexperienced pretenders who can and will steer you wrong. Some will be confident that their opinions are correct. Others won't care. Be careful to choose advisors who have the final 30-feet experience in real estateâand look for advisors who have chalked up decades of experience.
Now back to the conversation at Starbucks. I'm sure that young lady thought she was repeating truths; she wasn't deliberately misleading her companions. But without having bought, owned, managed or experienced a lot of real estate transactions in all market conditions, she truly lacked the final 30 feet of experience needed to advise others about the financial and emotional realities of what it's like to face tough investment decisions. Book theory, number analysis, charts and graphs are just theories and numbers if you haven't done what it really takes to be a successful investor. Veteran investors know there is no theory when you are in the trenches and making real-life decisions.
That is why Buddy Hackett's advice served me so well as I built my business and real estate portfolio into what it is today. By continually seeking out people who had already achieved what I wanted to achieve and who had solved the problems I wanted to solve, I could avoid the mistakes they'd made. I still let the inexperienced share their theories and opinions. But now I smile politelyâand quickly move on. Apply this to your own real estate investment business by looking for people who understand what the fundamentals are all about!
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