Whether direct investing, crowdfunding, REITs or Collaborative SMART Investing, the 7 fundamental laws of Real Estate investing remain the same:
Law One – Understand the Fundamentals & Invest in Yourself FIRST
It’s been said that ignorance is the difference between truth and perception. This adage also applies to real estate, when new investors excitedly pour capital into new, seemingly promising deals without a proper education on industry fundamentals. Relying on the advice of (well-meaning) friends and family is an inadequate education and often leads to losing one’s investment. (See IQ Pillar in the 8 Steps to Wealth through Real Estate Micro Degree – the starting point) Thankfully, the information age has made it possible for everyone to learn about investing in any asset class—but many may not know where to start.
To get started, here are a few excellent resources that will provide a solid understanding of building wealth through real estate investment:
- Think and Grow Rich by Napoleon Hill
- Rich Dad, Poor Dad by Robert Kiyosaki
- Real Estate Riches by Dr. Dolf De Roos
- Property Going Global by Scott Picken
These books provide a good starting point, but it will be up to you to continue to build on that foundation and consider investments carefully before pulling the trigger. As with any asset class, the world of real estate is cyclical - what goes up, must come down, eventually. Investors should take the time to plan for all possible scenarios, diversify across multiple regions and industries, and avoid over-exposure to real estate or any single class of investments.
Law Two – Do Your Homework, take responsibility!
Investing based on your emotions or a gut feeling is usually not a wise decision. Smart investors run the numbers through their systems first and make decisions based on sound financial facts, not only the possible returns the investment can generate.
With an understanding of the numbers, they can also calculate the risks involved and ensure they can properly manage them. To achieve this they need systems and this is why you need your SQ (Discussed in the 8 Steps to Wealth through Real Estate Micro Degree).
As with any investment plan, it is imperative for investors to do their homework first. One of the most important things to consider is the track record and expertise of the real estate developers or sponsors (partners) who have turned to technology platforms or other intermediaries to raise capital. Investigate their history - including past development projects - so you can determine if they are worthy of your investment. How did they perform when the markets changed?
I learnt a great lesson from Pieter Feenstra in 2009. We had just had the Global Financial Crisis and Pieter said, “In rising markets anyone can make money. Even a turkey can fly in a hurricane. What you need to focus on is how they performed when the market changed.” (Based on this we also ask developers for a 10-year track record as we are interested in how they fared in the last economic cycle.)
Remember, developers are required to submit a company profile along with their real estate offering when they utilize a technology platform. It is then up to the platform to conduct due diligence on each partner to ensure they are viable before they are ever listed on their website. A good real estate technology platform will have processes in place to assess the basic risks and rewards of its offerings for potential investors and should provide a transparent analysis of the investment. (See the Wealth Migrate GIDDS System)
Nevertheless, investors should also perform their own due diligence process to assess risk and potential returns. Expect the best, but prepare for the worst by exploring various scenarios that could arise, and then develop strategies to manage them.
With so many platforms to choose from, keep in mind that not all of them are created equal, so look for one that has thorough understanding of the real estate industry by vetting the company’s founders and management team. A team that has an equal balance of real estate experience and technology is more likely to have quality offerings that attract backing from investors. Also, real estate platforms that actually have “skin in the game,” meaning that they are invested in their own listed offerings, have their interests aligned with investors and thus have investors’ best interests in mind.
My Uncle always taught me that the best way to manage risk was to, “Work out what the worst-case scenario is, and if you could manage this, then everything else is upside.”
Law Three – Buy from a Motivated Seller
The internet has made property viewing now instantly accessible, and investors are bombarded with a plethora of deals. However, one principle remains steadfast: the best way to make money in real estate is to buy the smart way. When buying from a motivated seller, an investor is dealing with someone usually in an emotional state and therefore can negotiate the best deal possible, and will no doubt get more favourable terms since the seller is in an inferior position.
Since the economic recession, there have been excellent opportunities through bank repossessions or real estate developers who may be facing foreclosure on their projects. At this point, it is no longer about profit for these sellers; it’s all about survival and the need to sell quickly. Numerous opportunities existed for savvy investors to pick up real estate from stricken developers. As with stocks, “buy low, sell high” also applies to buying real estate, whether you’re investing in whole properties or buying shares of many different investments through crowdfunding or using Collaborative SMART Investing.
When purchasing a property outright, the best way to be in the superior negotiating position is to assure the buyer that you (the investor) can move and act quickly. Cash buyers and those with pre-approved financing from the bank are such a seller’s ideal investor, and most experienced investors look to buy real estate at 20 to 30 percent less than general buyers will pay. By investing alongside “the crowd,” investors also have access to better deals through platforms that allow them to move quickly like cash buyers did in the past. They can use the collective buying power of the crowd and purchase deals at discounts, that the individuals can’t get access to. (The CQ Pillar is covered in the 8 Steps to Wealth through Real Estate Micro Degree on how to get involved with other buyers and find the right partners)
Law 4 – Build Relationships to Build Your Wealth
Networking and forming key relationships can help you build wealth, particularly in the world of real estate investing. Even though technology increases efficiency, nothing replaces old-fashioned relationship building and your CQ will go a long way to determining your success.
Start by reaching out to like-minded partners who are considered experts in this field and find ways to work with them, as they are experts in their own particular market niche. Look for genuine investment technology players who have actual real estate experience and start building and nurturing those relationships. Time is one of your most precious and valuable assets and should be used to develop a strong network of contacts, including real estate agents, brokers, developers, bankers and successful real estate investors. You never know who will be able to help you, or what kinds of opportunities could come your way by having a strong network of contacts. In turn, you will also be able to offer your expertise and assistance to others.
There is significant value in working with an experienced team, and greater results can be achieved when people work together instead of alone. Studies have shown that a flock of 25 birds in formation can fly as much as 70 percent farther than a solo bird using the same amount of energy—and the same is true with crowdfunding investments or Collaborative SMART Investing. By leveraging collective buying power, new real estate investors can benefit from the wisdom of the crowd and invest alongside the veterans and mentors.
Law 5 – Look at Cash Flow / Income, then Capital Appreciation
The economic recession has taught investors valuable lessons when it comes to real estate investing. From the biggest funds in the world to retail investors, those who focused solely on capital appreciation, without having a “Plan B” in place, historically have not fared well, selling off their best assets or going bankrupt.
Mindset plays a big part in this (IQ), but it is also all about the FQ (covered in the 8 Steps to Wealth through Real Estate Micro Degree). Middle class investors are always chasing the quick buck, the capital growth and the Top 1% are chasing reliable and stable income. Let’s explore this. The middle class invest in houses, most often not generating an income and in many countries the investors actually have to pay in monthly. Why would they do this? They are focused on the capital growth. The Top 1% invest in commercial buildings as they are more interested in the cash on cash return, which is the net income they get on the investment every month or quarter. This makes them far more resilient to downturns and when winter comes - and it always comes - the middle-class people who are chasing capital growth are often forced to sell. This could be retail investors selling their investment houses or even the big funds who are run by people with middle class mindsets.
It is actually during the leanest of times (winter) that investors can make their best returns. The reason why is simple: savvy investors see opportunity in a down market, focusing on both the upside potential and – crucially - projected income. These investors not only have a Plan B in case of a downturn, but they are also better positioned to “ride the wave” despite fluctuations in the market while maintaining more liquidity. Strong cash returns on investments put them in a much better position to buy from motivated sellers. As Warren Buffet said, “be fearful when others are greedy and be greedy when others are fearful.”
It is virtually impossible to know whether any individual investment is a golden ticket - there are no guarantees or “sure things” in real estate, despite anyone’s best efforts. A good rule of thumb is to limit overexposure to any particular asset class, be it bonds, equities, real estate or other investments. In the face of low government bond yields, investors are searching for higher yields, particularly in alternative assets like real estate. However, as the latest global recession demonstrated, investors must prepare for economic downturns and ensure debt and equity investments are properly balanced. If you buy the right property in markets where the fundamentals are right, capital growth will come as a bonus.
Real estate technology platforms can offer unprecedented transparency and a variety of investments. Moreover, Collaborative SMART Investing allows investors to diversify globally, which mitigates overall portfolio risk by not tying up assets in one country or currency. Income-producing real estate investments and diversifying between debt and equity assets can help investors realize immediate returns while still providing opportunities for capital appreciation. It is all about DIVERSITY.
Timing is everything (FQ) and you need to know WHEN to invest and have the financial knowledge to make sure you are making the right decisions.
Law 6 – Portfolio Investing and planning for the Exit
Most investors invest without an exit strategy. It is critical that you understand the value chain of real estate so that you can move up the value chain. The reason that less than 1% of people retire wealthy is because they are investing at the wrong stage of the value chain. You need to do the 8 Steps to Wealth through Real Estate Micro Degree to fully understand how you can do this.
Another lesson I learnt is that the real wealth is created in real estate by using a portfolio strategy and focusing on the exit. This is a concept I learnt from my Co-Founder, Hennie Bezuidenhoudt, who is a very wealthy and experienced man and he taught me and our investors how to do with this medical commercial real estate (CQ).
We started investing in medical commercial in America in 2014. Our strategy was to buy buildings where the equity required was between $1m to $10m USD. Using leverage this would mean real estate deals of $10m to $25m. These deals were too BIG for the moms and pops, doctors and dentists, and too SMALL for the big funds or REITs and so provided a great sweat spot to be able to buy quality assets with a cash on cash return of 8% to 11% in USD and net IRR’s of 15% plus for investors. Our strategy was to create a portfolio, season the rents and then on-sell this to a fund or a REIT. It is critical to understand the value chain of real estate and wealth to understand how important this deal is to creating your long-term wealth.
In April 2018 we were offered by a REIT to buy the entire portfolio for over $100 million, providing returns better than the projected returns for our investors and this in only 3 years. This is using IQ, SQ, CQ and FQ to achieve results.
How can you use technology to leverage your investments and wealth?
Law 7 – Growing a Globally Diversified Real Estate Portfolio and creating the system to allow you to create the freedom you want in your life
The final law is the one which Einstein calls, “The 8th wonder of the world, Compound Interest.” Using a platform, you can reinvest your returns from your investments and thus you are getting growth on top of growth. Due to the small investment minimums, it allows you to reinvest all the returns, whether from cashflow or capital growth. In the portfolio sale above, our investors are using a 1031 exchange, which allows them to roll their capital growth into the next real estate investment, paying no tax.
I have learnt one thing from wealthy people. Other than focusing on income-producing assets they also have the financial discipline to invest a portion of their income every month. My wife and I have taken 15% of our salary every month and it goes straight to our trading account on Wealth Migrate monthly, so we invest (before we spend it), in real estate.
Once you know where you are and where you want to go, the purpose of the Micro Degree for the 8 Steps to Wealth through Real Estate is to allow people to build their own personal path to wealth and to provide you with the tools to allow this to happen. It is about helping you create generational wealth.
It does however take discipline, and this brings us to the final pillar, which is PQ - your WHY -as this will allow you to have the discipline to have these financial controls.