Chapter Eight
Is Real Estate Investing Part of Your Journey?
A lot of people who set out to learn about real estate investing soon reach a point where they find themselves overwhelmed, unable to decide what to do next. They are, as the U2 song goes, Stuck in a Moment. That is understandable: embarking on a new direction in life or business always produces some level of anxiety. It's easy to forget that every journey (a new job, friendship, marriage) begins at ground zero, and those first steps are always daunting. However, the result is worth it.
Similarly, casual investors who start on their journey to becoming strategic investors may sometimes hesitate in the early going. They progress from being a little overwhelmed and confused while closing their first few deals and finding the right tenants for their properties to becoming confident and eventually investing with total assurance. An investor never stops learning. Instead, new strategies and tactics are added to her toolkit with every new deal that's done.
Sadly, it is during this journey to becoming a strategic investor that many investors often lose their way. The emotions that cause this are greed and fear. Some will be motivated by greed, and take shortcuts that are costly, and others will be inhibited from acting because of fear. These harmful developments are avoidable, and I want to conclude this book by taking a look at how sophisticated investors steer clear of these minefields.
Minefield #1: Falling Prey to Greed
Admittedly, there are times when all of us take shortcuts in life—and some of them work out in our favour. But in the world of finance, business and real estate, any potential gains these shortcuts promise must be weighed against a dramatic increase in risk. Often, in fact, the scales that balance risk and reward are tilted in the direction of risk. The short-term wins these shortcuts promise are often at the root of bigger disasters down the road.
Rest assured that I speak from experience. I know it is human nature to be attracted to shortcuts, especially in today's seemingly time-compressed world. But I have seen too many investors compromise their intelligence, education and proven system in an attempt to speed up a process, only to suffer great loss, all in the name of expediency. Most often shortcuts involve cutting corners on due diligence, which then leads to emotion taking control of the decision-making process, which leads to unnecessary risks. Sometimes the shortcut begins with ignoring a legal or bylaw issue. At other times it involves falsifying information on a lending application or simply skipping important analysis. Sometimes the shortcut is all about not taking the time to do background checks on potential joint-venture partners or tenants.
Whatever the shortcut turns out to be, the investor knows better, and yet he willfully ignores the risks. Either laziness or impatience may be to blame. Both are costly. And due to the fact that this let's-speed-up-the-results attitude seems to be hard-wired into many people, industries have sprung up that are devoted to attracting the kind of person who always wants to chase the next big thing. People fall for a sales pitch rather than making a decision based on analysis and hard data.
Strategic investors aren't cynics about new ideas—they're realists. They look for business plans that generate financial success rather than ideas that leave their followers exactly where they started or even farther behind. Real estate investment that creates long-term strategic wealth may lack the emotional excitement of the next big thing, but the results are substantially better.
Indeed, strategic investors understand that the best and most lasting forms of excitement come from results.
Sophisticated investors are more than satisfied with following a system that generates long-term wealth. Indeed, it's their end goal!
They also understand that markets are continually shifting and they must adjust their underlying tactics to take advantage of these shifts.
Minefield #2: Falling Prey to Fear
I have also seen investors who look like they're en route to become strategic investors suddenly stop in their tracks. In Minefield #1, the pain comes from going too fast. In Minefield #2 the pain comes from inaction. Investors who succumb to Minefield #2 just do not take the necessary next steps to close on a property. They have all of the same tools at hand that led them to close on properties with solid ROI—so what is happening?
Often it is fear of the unknown or fear of making a mistake. Either way, they're stuck—and many of them aren't able to admit that fear is playing a role in their paralysis; perhaps because they don't recognize what's really happening. More than two decades of experience tells me that even the greenest of newcomers can step into the footsteps of those already investing in the business. What a great feeling to know you can mitigate financial risk by following a proven system. It's like a vicarious hit of confidence.
Fear of failure forces some investors to cling to the safety of the research stage. Some of these would-be investors may never reach the point where they have enough information and get stuck in analysis paralysis for years. Those who can't seem to move forward may give up on their financial dreams, while others will start chasing more get-rich-quick rabbits down the rabbit hole. From fear to greed—yikes!
I sometimes come across people for whom the issue is boredom. Nothing they chase is ever exciting enough. Nothing is worth their time. This is a convenient—and dangerous—point of view, because it completely ignores the fact that fear is what holds them back, not the investment system.
You Must Cut through the Noise
Never, in the more than 20 years I have studied the Canadian real estate market, has there been so much noise. That's a problem, especially since a little bit of investigation reveals that most of this noise comes from people who have never invested in a single piece of real estate. That's not just sad—it's also dangerous for investors who lack the tools to filter out the information that merits attention from the talking heads who have no business commenting on issues they do not truly understand.
Nassim Nicholas Taleb, in his book, Antifragile: Things That Gain from Disorder, points out the importance of differentiating between signals and noise. His research shows that people make bad decisions when they are overwhelmed by instant information flow (Twitter, Facebook, smartphones, etc.).
Because human beings are hard-wired to protect themselves and the people they care about, those walking through a forest are more likely to believe that a rock in the shadows is a bear (danger) than a bear in the shadows is a rock (and therefore no threat). That same response is why we are drawn to headlines, blog posts and social media that use fear to attract our attention. We are programmed to seek out danger in the information we need to process to get through the day. Those who seek our attention know this and use the knowledge to their advantage, by broadcasting fear, panic and bad news. Your job as a strategic investor is to maintain your perspective and not get manipulated by noisemakers.
The strategic investor has mastered the ability to filter information and distinguish between noise and signals. By focusing on signals, like those that indicate impending shifts in the fundamentals of the market cycle, the sophisticated investor ignores the noise and identifies opportunities. This frees her to recognize real danger signals, like those apparent in economic fundamentals that indicate that a property—or geographic region—is not right for her portfolio. In the end, this focus on signals rather than noise keeps us from being caught up in the availability heuristics that the public, or a less-discerning investor, sees as truths. The strategic investor looks behind the curtain.
Abdication versus Delegation
Once new investors learn how to filter noise from signals and to conquer analysis paralysis, the next danger point they invariably encounter occurs as they make the transition to confident, full-fledged investors. They begin to think that they can be less accountable. There are some investors who begin to skip the critical, and sometimes boring, steps that got them this far in their journey. Once that happens, mistakes begin to creep into their portfolios and they find themselves holding a bad property or working with the wrong team members. This phenomenon occurs often enough that it is important to bring to your attention, whether you are just starting out or have been investing for years.
I personally find it odd that once we start achieving some great results, we are drawn to once again look for shortcuts. If a veteran investor is not careful, he can get drawn back to the same bad habits he had at the beginning of his journey. The problem with rookie mistakes is that they eat into all of the positive results an investor has attained—and the bigger the portfolio the bigger the bite. Why do so many veterans end up on such a dangerous part of the road? The detailed answers can be found in journals and textbooks that look at why people make the same errors over and over again, even when they know better. I think greed is a factor that leads people to take shortcuts. But such actions are also motivated by laziness and ego. Let's be honest. A lot of successful people forget what they did to become successful. They forget how hard they worked. Some even start to think they're too smart to fail. My advice is simple: to avoid this problem in your own real estate investment business, remember what got you to where you are.
That's the most productive way to enjoy the journey—and the best way to end up where you want to be.
Ready, Set, Go!
One of my life missions is to help those who are stuck to get moving again. Investor insiders sometimes call this “getting out of their own way.” Once investors learn to get unstuck, I get out of their way because their road—although it will have a few twists and turns—will be a lot smoother. The journey towards their financial goals definitely gets a whole lot easier—and more enjoyable.