3 Lessons From the Hard-Knocks School

“Lessons are not given, they are taken.” – Cesare Pavese

In a short time, the real estate holdings I’ve acquired in my “side business” have easily surpassed all other investments I’ve ever made. I went from a negative net worth to six figures, with relatively little effort. Today, I have ownership in 11 rental units valued at over a million dollars, and enjoy the benefits of cash flow every month.

But the truth is … I could have done better. I missed out on hundreds of thousands of dollars in profit. One reason is because I’m a fairly lazy investor, when it comes down to it. Real estate is truly a part-time endeavor for me.

The other reason is more heartbreaking. Because for all of my good intentions … the fact is, I still managed to make some pretty major mistakes along the way. And those mistakes could have been avoided.

Suffering my way through the Hard-Knocks School of Real Estate, there were three pivotal lessons that helped me “trim the fat” from my efforts and start seeing real, tangible results.

Now, these aren’t your typical lessons about how to figure out cash flow or where to look for motivated sellers. That information is all available from a variety of sources. The lessons I’m talking about were often contrary to what I’d read from “experts.”

Hard Lesson #1: You Don’t Have to Be “Trapped” in a Bubble Market.

In my opinion, this is the most important “un-taught” lesson in real estate.

When I began reading real estate books, they all started out by telling me to invest in or near my own town. They reasoned that I would be familiar with the different neighborhoods, and it would be easier for me to manage the properties. Sounds like pretty good advice … in theory.

Let me tell you, I wasted a lot of time, energy, and enthusiasm trying to make things work for me in Southern California.

I had no cash to invest, so I needed positive cash flow in low-risk properties. I needed to buy with no money down. Period. Since I was a beginner, I didn’t realize that trying to find cash flow real estate in Southern California with no money down was like trying to capture a unicorn.

I’d missed a step. I had begun by focusing on individual properties. I’d run the numbers, one by one – a very time-consuming task. What I should have done first was run the numbers to analyze the local real estate market as a whole.

Undertaking specific research about the area would have CLEARLY revealed that Southern California just wasn’t the right market for my investment goals.

The following are criteria I should have looked for. They will help you determine if your local market is, in fact, the ideal place for you to invest.

• Check the average price of homes in the city. How do prices compare to other cities?
• Compare the average price of homes to the average rent. This is a critical ratio for investors interested in cash flow. If homes are selling at 15 or more times annual rent … it’s going to be difficult to see cash flow.
• Look into the affordability of homes. In an affordable market, the average home price is no more than four times the average household’s income.
• How is the economy? Job and population growth are essential to continued home appreciation.

Every local real estate market in the world is different (and constantly changing). Understanding which market is realistic for your goals will relieve you of frustration, and you’ll find profits are easier to come by.

When I came to central Texas, I found the perfect market for my goals. It was suddenly much easier to buy cash-flow property, and I wished I’d discovered this secret much sooner. Which is why I’m excited about Justin Ford’s Investor’s Guide to America’s Best Value Real Estate Markets. With specific profiles of over 100 U.S. markets, it is the first and only such tool I know of – a quick reference to nearly any real estate market you’re interested in.

Hard Lesson #2: Don’t Just Know the Numbers, Know the Numbers COLD!

This lesson may sound elementary … but more than any other technique, it quickly made me an expert in my chosen target area.

You need a complete and updated list of every property for sale and recently sold in your target area – and you need to create that list with an Excel spreadsheet.

I discovered this secret by accident. My real estate agent in Texas e-mailed every available duplex, triplex, and fourplex to me in a spreadsheet. The details included rents, size, neighborhood, and price. You can easily create this on your own.

I combined this newfound treasure with Justin’s “Matrix” technique for tracking properties and comparing price per square foot and other vital stats for spotting a good potential deal. When I do this, it helps me feel absolutely confident about every offer I make. Which brings me to Hard Lesson #3 …

Hard Lesson #3: Strike While the Iron’s Hot.

The moment you see a property that you think might fit your criteria is the moment to submit your offer. Don’t pause. Don’t over-think it. Simply make the offer.

Your standard offer should include an “out clause” if the deal turns out not to be right for you. But there are two good reasons you should never wait to make an offer:

1. It’s important to get in the habit of making offers based on strict value criteria … lots and lots of offers.

2. You don’t want miss out on deals just because you’re sitting around thinking about making offers.

This point becomes more and more “obvious” to me as time goes by. For instance, I was interested in a $225,000 duplex last year. The area was good and improving. Rents were on the rise, and the property would have cash flowed. Yet, for one reason or another, I didn’t make it happen. Two months ago, that same property went back on the market and sold within days for $285,000. That’s an easy $60,000 that could, nay should, have been mine.

Unfortunately, I have many stories like that one. I’ve definitely learned this lesson the hard way, and it’s cost me hundreds of thousands in profits.

Now, don’t get me wrong. Losing potential deals is a lot better than losing money. And because I’ve insisted on adhering to the under-value, cash-flow principles found inETR’s real estate success programs, I’ve made money in all my real estate investments. And as I continue to apply the three lessons learned above, I intend to do a lot more of these profitable deals.

[Ed. Note: Kam Weiler is contributing editor for ETR’s Main Street Millionaire program, a licensed real estate agent, and a deep-value real estate investor based in central Texas.]