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The Seven Habits of Highly Effective Real Estate Investors

Sometimes a search through your bookshelf is like a treasure hunt. As I plucked Stephen Covey's 1989 Seven Habits of Highly Effective People from my shelf, I believe I found some long lost gold. Flipping through the yellowed pages, I soaked in some of the long forgotten golden nuggets the book contains, and I pondered what the seven habits of a highly effective real estate investor would be.

I believe that none of the habits of a successful 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 here's what I believe makes up the seven habits:

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. Someone I know 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. Visit now : florence residences

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. If you aren't starting out with a big bucket of cash, it's tough to make 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. We are millionaires from our real estate investing thanks to a couple of great partners that contributed equity to our investments along the way. We would likely only half of what we own now without them.

Habit Six: Be persistent

"Genius is one percent inspiration and ninety-nine percent perspiration." -Thomas Edison

The other characteristic of ever real estate investor I have ever met is that they never ever give up. 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.

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.

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Real Estate Investment in a Recession

Have you ever noticed how buyers flock to purchase property in droves when real estate prices are at their peak, yet buyers are relatively scarce when prices are most affordable? Notwithstanding the fact that this occurrence defies the generally accepted investment strategy to "buy low and sell high", one can't help but wonder why attending social gatherings during the real estate boom years of 2005 and 2006 would inevitably lead to engaging in a conversation about someone's real estate investment and the promise of future profits to be derived from the venture. It's not all that surprising that many of those recently boasting about their real estate exploits have softened their tone while seasoned investors, dormant for the past six or seven years, have begun to once again start purchasing lucrative investment property. Despite news about the recent real estate and financial industry tribulations that the public is seemingly bombarded with every day, the last few months of 2008 provided a relatively quiet, yet dramatic, surge in real estate sales.

The National Association of REALTORS® (NAR) has reported that residential home sales have increased by an astonishing 115% when the last quarter of 2007 is compared against the same period for 2008. Have the experienced investors purchasing all of this property been ignorant to the steady stream of media reports warning of declines in real estate values? The answer is no, they have simply been waiting for the right time to emerge like a small swarm of locusts to steadily reap houses for sale like crop. In fact, their buying presence has been so prominent that national housing inventories of homes for sale have significantly decreased during 2008's final quarter, a reliable sign that demand is beginning to once again catch up with supply.

But how do these brave souls know precisely when they are buying at the bottom of the market? Do they throw caution to the wind and simply force themselves to muster the courage to purchase property despite the fact that values may continue to decline in the future? The simple answer is that savvy real estate investors do not purchase property with the expectation of immediate appreciation in value. Rather, investment real estate should be purchased based on the property's potential for positive cash-flow. Positive cash-flow occurs when a property's rental income exceeds the owner's costs to maintain the property. Consequently, when a property provides a positive cash-flow, a decline in real estate prices is of little concern since the owner can simply enjoy the income his property generates until the market revives and the property can be sold for further profit.

During the real estate boom years our nation became blindly infatuated with the appreciation of real estate prices, which represents the amount of value that a property will gain over time. So called house "flippers" brazenly leveraged money to buy numerous properties with the expectation that their values would increase, thus enabling them to sell the properties for handsome profits in a short period of time. These novice real estate quasi-moguls, often addicted to HGTV and other television shows created to promote the industry like Flipping Out and Flip This House, regularly failed to consider property cash-flows prior to making their purchases. Why bother when real estate values will always continue to appreciate, thereby alleviating the need to hold properties for long? After the housing bubble burst, many of these speculators realized that they shouldn't have built their investment houses out of sticks, and social gatherings became pleasant once again.

Seasoned investors build their investments out of bricks by carefully and conservatively analyzing a property's cash flow potential prior to purchasing. The primary reason that these investors have been sitting on the sidelines for many years is that most real estate prices have been far too high to generate positive cash-flows and a reasonable return on investment. It hasn't been until recently that both residential and multi-family housing prices have retreated to levels where rental income will cover monthly mortgage payments and other operating costs. Further, with the construction of new housing and apartments decreasing to a virtual halt, a still rapidly growing local population, and many families displaced from foreclosed properties, an investment property's owner is free to choose from a tenant base that is now stronger than ever. One can clearly see why a decline in real estate sales prices typically accompanies an increase in monthly rental prices.

No matter what the year 2009 holds in store for real estate investing, it is essential to remember that investing in real estate should always be considered over a long term. Although the opportunity for a "quick flip" may present itself, the distinguishing benefit to sound real estate investments is their ability to provide income no matter what the economy throws your way.