Recently my friend Mike wrote me and said “I reread the 7 Habits of Highly Effective People over the weekend. It won’t be the last time I read that book this year”. It’s pretty rare he comments on a book so I pulled it out and gave it another viewing. My 1989 copy is so old the pages are yellowing and the text is faded. I guess you could say it was like buried treasure in my book shelf.
As I flipped through it and soaked in some of the long forgotten golden nuggets the book contains, I pondered what the seven habits of a highly effective real estate investor would be. It occurs to me that none of the habits of a real estate investor are particularly extraordinary. In other words – anyone could be a highly effective real estate investor if they wanted to be. Of course, this is only my opinion, and without scientific study. But check out my thoughts and feel free to send me yours.
Habit One: Know Your Goals
“If you do not change direction, you may end up where you are heading.” – Lao Tzu
Most of the real estate investors I know set out with a goal. One of my MBA alumni started off simply by selling his home to buy two lots side by side and built an 8 unit townhouse complex. He has turned that project into a company that sells and builds hundreds of homes in Toronto every year. Some goals are simple, but lead to big things. Other goals are big and have to be broken down into simpler shorter term goals.
Your goal does not have to be big (although I like to start with my five year goal and make smaller goals for each year to help me get to my five year goal). But I think that if you do not have any idea of what you want to achieve then your first step is going to be difficult to determine. And, you can’t just say I want to be rich. A goal by my definition has to be as specific as possible, measurable and with a time frame.
Habit Two: Make Your Money when you Buy
“Price is what you pay. Value is what you get.” – Warren Buffett
It’s very risky to pay over market value for a property in the hopes that the rent will go up, the area will improve, and/or the property’s value will increase. This is an entire article unto itself, but essentially you want to buy a desirable property below market value, in an area with a lot of potential for future growth. Really, it’s not unlike beginning with the end in mind. Envision yourself trying to sell that property and what, if any, problems you may encounter when you try to sell (e.g., is it such a unique property you’ll have a limited buyer pool or is it in a “challenged” location that may never improve, which will severely impact your ability to sell). If there is something that concerns you when you’re buying it, then unless you can easily fix that problem, it’s something that will likely concern the next purchaser.
Habit Three: Hire Help
Unless you want to buy yourself a job when you buy a property, hire a property manager. Unless you are an accountant, hire one to help you with taxes and bookkeeping for your properties. And, in most cases, we also recommend you hire a real estate agent. Just take some time to find one that will work with you to achieve your goals.
I always tell Dave that we should only be doing the things that are the highest and best use of our time or the things we really enjoy. We should hire someone else to do everything else. Of course, when I say this I am also advocating we hire someone to paint or clean our own house. These are both things that I loathe doing and feel someone else can do better and for less cost than my time is worth. Dave takes a different stance on things – why pay someone else to do what we can do for free. But, as we find ourselves with less and less time he is starting to realize he can’t do everything and there are professionals out there that can do the job better and faster than he can. So, even “do-it-myself” Dave is finally paying the experts to do what they do best so he can focus on what he does best!
Habit Four: Use Just the Right Amount of Leverage
“A bank is a place that will lend you money if you can prove that you don’t need it.” – Bob Hope
Every single money-making real estate investor that I have met has made money in real estate, in a big part, due to the ability to use leverage. Even the richest people will eventually run out of cash if they keep buying property. Leverage allows you to use a small portion of your own money to buy a property. The less money you put in the higher your potential return on investment. In really simple terms, if you put in $10,000 on a $100,000 property and earn $5,000 in a year your return on investment is 50%. If you had paid cash for that $100,000 property your return would only be 5%. Too much leverage equates to too much risk though, so find a balance. If you buy a $100,000 property and only put in $2,000 of your own money and the market value of that property drops to $90,000 you now owe more on that property than it’s worth.
Habit Five: Find Good Partners
“Keep away from people who try to belittle your ambitions. Small people always do that, but the really great make you feel that you, too, can become great.” – Mark Twain
I love the success stories where someone with nothing but big dreams and a lot of initiative ties up one or more properties with contracts. They had little to no money, so while they had the properties under contract, they went out and found people who did. I am not going to name names here, but maybe one day I will introduce our readers to at least one of the three guys I personally know of with a story like this. But the bottom line is that it’s tough to make your millions in real estate if you aren’t willing to partner with others. Your partner might be a family member, a friend, a colleague, a company or someone you haven’t met yet. Dave has partnered with friends, family, and myself to help us build a nice real estate portfolio in only a few short years.
Habit Six: Be persistent
“Genius is one percent inspiration and ninety-nine percent perspiration.” -Thomas Edison
The other characteristic of the three guys I’ve mentioned above, and every other investor I have ever met is being persistent. You will hear “no” a lot. Get ready to face the objections and find creative solutions. In our experience we’ve been turned down by:
- Potential partners not wanting to get involved in a deal we’ve invited them into,
- The banks – on just about every deal we had trouble getting financing and had to deal with multiple lending issues,
- Family – sometimes we try the bank of parents and we almost always get rejected but we still try because the interest rates are so favourable,
- Insurance companies – so few companies want to deal with out of province landlords and it seems like we’ve been turned down by nearly every company in Ontario where some of our properties are located (we’re in B.C.),
- Property Managers – sometimes the company you want to work for you doesn’t want to manage the property you own.
And even though we have been turned down by all of the above at one time or another, we keep pushing ahead to reach our goals. Don’t let the “naysayers” stop you.
Habit Seven: Research – Always be learning
“I am always ready to learn although I do not always like being taught.” -Winston Churchill
The best investors are the ones that ask a lot of questions, keep their eyes open for new opportunities and do a lot of research. Many get right into the details of a city. They go to the municipal offices and pull the official plan. They get zoning details and applications. They talk to the city councilors about plans, they attend city council meetings and know everything that is happening in an area. Besides the above, many of the really successful investors will always be learning about:
- Local transportation plans,
- New economic forces that will impact their investment area,
- Changes to political leaders that will impact the real estate values (if you don’t believe this is a critical one ask just about any investor in Toronto that owned land around the legislated Greenbelt),
- House values,
- Land values,
- Listings to sales ratios for an area (shows sales pace and amount of supply in a market),
- Latest demographic and economic trends for an area, and more.
Not every good investor I know possesses every one of these habits. And I know there are habits that many good investors have that I haven’t covered. But as I thought about the most effective and successful investors that I have met or read about, I realized that almost all of them did possess each of the above habits. And, that anyone could really do what they did if they set out to establish these habits and practices in their real estate investing.
If you’re like me, now you’re trying to remember Stephen Covey’s 7 Habits. Just in case you can’t remember Covey’s seven habits, here is a very brief summary to refresh your memory:
- Be Proactive: There are things we can control and things we cannot. Focus positively on the things you can control and worry less about the things you can’t.
- Begin with the End in Mind: Envision your funeral – what do you want people to say about you. Now, think about what you have to do to be that person. From there, develop a personal mission statement that encompasses your values and your vision of yourself.
- Put First Things First: Focus on the important tasks. Don’t spend time on not important and not urgent tasks; try to delegate urgent but not important tasks.
- Think win/win: It’s not your way or my way, it’s a better way. There is plenty out there for everybody – the abundance mentality versus the scarcity mentality.
- Seek first to understand, then to be understood: Seeking to understand takes consideration but seeking to be understood takes courage.
- Synergize : Finding that solution that is likely different than any other solution pursued because you’ve understood and been understood and you’ve sought out win/win scenarios. It’s the old saying of one plus one equals three.
- Sharpen the Saw: Practice in a balanced way. Covey talks about the four dimensions of renewal which are essentially physical well being, mental well being, emotional health, and spiritual strength. Maintaining balance in these areas keeps your saw sharp and ready to act and work on the other habits.
Published on June 18, 2008