Several months ago, I asked a question on the Commercial Real Estate Forum here at CRE Online for article suggestions–topics that readers would find most valuable. Pete H-NYS responded with this comment:
I’d love to hear your thoughts on how to strategize at the beginning of a career, what kind of size operation to shoot for. As a me-and-me-alone fellow by temperament, what I’m running into now, as I feel more capable of stepping up to larger properties, is the realization that I can’t do anything bigger without trusted sub-managers.
If I had strategized about that earlier, I might have made different choices in getting this far. I suspect a lot of us that get fired up by the ideas on this board are starting from Square 1 and testing the limits of our abilities just to get the first deal done…which we learn from, and which helps us contemplate stepping up.
If, at that first stage, we had some guidance about what direction we’re ultimately hoping to head, we might make choices that would position us better for the next step.
Anyway, I’d love to hear your thoughts.
I met Peter a few years ago at a seminar and can tell you he is one of those people teachers dream about: He listens, applies, and acts on the concepts taught. He has successfully acquired several properties and turned them into rewarding investments.
His question reveals his experience, now aware that investment choices have effects that are often more life-changing than financial rewards. Indeed, different investment types carry different levels of demand for time and attention that affect our lifestyle.
I can only wish I had been as good a student early in my own career.
Failure is a harsh, and effective, teacher
I’ve often told the story about my early years as a builder and budding developer. I was so burnt out trying to manage a multiple hodge-podge of projects that I woke up one morning and my bleary eyes and half-asleep brain thought the “6:11” on my digital clock was flashing: “SELL! SELL!”
As it turned out, that was a dark omen of things to come.
I made colossal mistakes due to the lack of a coherent plan. I grabbed at every deal that came along with no thought to where I may end up. I took on projects that sucked money and time into a black hole of disappearing returns. This was the 1980s, when the going business model was based on acquiring enough stuff to get rich and then sort out the details, right?
I wound up broke, burnt out, miserable, and near physical collapse. It took me years to recover financially, emotionally, and spiritually from complete failure.
“Failure is the opportunity to begin again, more intelligently.” –Henry Ford
As Mr. Ford’s wisdom assures, I had the opportunity to begin again.
Misery is optional
Mine is not an uncommon experience. Many investors start out with a scatter-shot approach–chasing deals just because they’re there with little thought given to the lifestyle sacrifices and time commitments that don’t show up on spreadsheets.
Investing without a plan is a dangerous and expensive education. Owning a diverse collection of properties and half-finished projects (with nothing in common but the owner) is a special kind of misery. I became the stereotypical “tired landlord,” and I was a textbook example of a motivated seller.
I’ve written an article about 2011 being a turning point in the market when great opportunities will produce years of upside performance. But prior experience tempers my exuberance. Today I pay attention to the consequences of my choices.
It’s no secret that some of the largest real estate fortunes in history started at the bottom of a downturn. But lesser known is that some of the biggest failures (including my own) had roots in the same conditions. Whether you are an experienced investor or just starting out, this is a good time to consider that failure is not a prerequisite for beginning intelligently.
Keep your eyes on the prize
“It does not matter how sharp a saw is, if it’s set at the wrong angle, it cuts crooked.” –Cornelius Van Tile
What makes the difference between spectacular success and stupendous failure?
The answer, in a word, is Focus.
If I can define where I want to be a year, five years, or ten years from now then, working backwards from that picture, I can focus my efforts today on making the types of investments that will get me where I want to be. I can act decisively, secure in the knowledge that each step taken is in the right direction.
A well-designed investment policy follows a few simple guidelines to focus time, effort, and capital only on deals that fit the plan and avoid the rest.
How will I manage my investments? This is the most critical question. I avoid projects I can’t manage efficiently or won’t enjoy owning. I decide whether to be an active or passive investor, guided by my life priorities. Otherwise I’m buying a job.
How much debt am I comfortable with? How much capital can I invest? The sum is the size of deals to focus on.
Do I want my investments to provide immediate income, long-term appreciation, equity growth or tax benefits? Those are the four sources of return in real estate. Deal structure can be designed to emphasize any one or combinations, but not every deal will allow the right structure for my needs. I focus on the ones that do.
Where will I invest? We don’t make markets, we serve them. A great deal in a bad market equals a bad investment. I focus my efforts in markets that show strength.
The answers to these basic questions keep us on course toward specific goals and help avoid painful mistakes. Most importantly, by taking the time now to develop specific criteria we can “begin, more intelligently” without the need for “again.”