I have been writing many articles lately with advice for real estate investors. Those articles, when read in sequence, provide a road map for current and future investors to navigate the sometimes difficult decisions that come with owning investment property. However, one decision that should not be difficult is the decision to hold steady with your long-term investment properties and allow them to work the way real estate is intended to work.
Often times, we as real estate investors in a world full of instant gratification, look for that same instant gratification from our properties. At Memphis Invest, we are careful with the way we market and advertise our services. The last type of investor that we want to attract is one without the patience to let their long-term real estate investments actually perform over time.
The biggest risk to a long-term investors real estate portfolio is their short-term view! This instant-gratification, short-term viewpoint when it comes to long-term investing leads investors to make mistakes and evaluate properties on a "what have you done for me this month" basis rather than looking at a return over time. This article is written to be read along with the other articles in a sequence that teaches us to let time (increase our principal) and renters reduce our debt.
I am often reminded of one of my favorite Moliere quotes that "...the trees that are slow to grow bear the best fruit".
The Biggest Mistake Real Estate Investors Make
The real estate investing world is littered with stories from investors who have made mistakes. Often those mistakes involve simply not having a plan and in some cases not having a clue as to what they were doing. Long-term investors however should never fall into either of those categories. There are two very simple steps that long-term real estate investors should follow.
1. Develop a plan for using real estate to build long-term wealth. Let us ignore the word wealth for a minute because so many of us may define it differently and just focus on the hyphenated word long-term. It literally means that an investment is being made for an extended period of time. In my world, that does not mean 12 months. It does not mean 48 months. In my mind, long-term is defined in years and generations and I am investing for more than just myself. I purchase long-term investment properties in hopes of passing those investments onto my children. So with that plan in mind, I never look at a monthly return on a property. Sometimes the monthly return is normal, sometimes it is low. There are vacancy and maintenance factors, but neither effect my long-term view on a monthly basis. If I have put the right team in place, those expenses will be over-come and the long-term reasoning for investing will still hold.
2. Because this is a long-term buy & hold strategy, there is no excuse for a real estate investor to not understand the investment before moving forward. Take your time. Ask questions and get good solid answers. If you are told that there will never be a vacancy or a maintenance bill, then move away from the investment. That is a lie! If you are told that you will make the exact same return month in and month out...like clockwork and your money will land in your lap like "mailbox" money without deviation, then you need to move on from that investment. Long-term investments will fluctuate up and down and the return an investor gets will move up and down. There will be vacancies and there will be maintenance. Those are facts. An investment will give a varying return year to year. Understanding that and not allowing yourself to act "blind-sided" by vacancies and maintenance are crucial to your success as a long-term investor.
So the biggest mistake that investors make in my experience is using short-term mindsets to make long-term decisions. Short-term mindsets include making decisions based on a single month or even year of performance on a property. Short-term mindsets include failing to take into account principle pay-off. Short-term mindsets at their most extreme include making a decision on a property based on the timeliness of rents collected or the "feeling" that an investment is not a good one.
Short-term mindsets lead us as investors to expect immediate gratification from an investment meant to retain and grow in value as well as appreciate in return over time. I could not encourage investors any stronger to be patient and look at their investment decision with an expectation of long-term return. Especially when making those investments passively. Allow them to work!
Related Content: There are many mistake investors can make and you can download a great video we recorded for real estate investors. You can download and watch our video "11 Mistakes To Avoid As A Real Estate Investor" and take notes!
The Long-term Investment Viewpoint
As a long-term investor, I want to own my properties for life. Can I sell early? Yes. Have I sold early? Yes. My selling decision has always been based on appreciation and IRR. IF I can earn a higher return on my investment dollars and the two investments require equal amounts of my time and effort and both are long-term investments, then I have no problem selling a long-term investment property and re-investing. However, As sure as I may sell one, I am buying another. I firmly believe that allowing time to give me the greatest return is the true value of my real estate investments. That requires me to focus on my long-term return and not my monthly performance.
Even if my investments fluctuate. Even if I have a bad year. I am not selling an investment property because it performed poorly. That is a short term, instant gratification view and I try to avoid it at all costs. I want to see each of my property investments for what they are. I want to hold them for long-term and patiently allow renters to provide me a return on my properties.
Time is our greatest asset. As investors we simply need to exercise patience and keep our long-term view point to evaluate our investments. They will pay off and patience will be rewarded!