Many investors wonder if they should give away all of their secrets and strategies. Most investors network with competitors in one way or the other. After all, real estate is a smaller business than you think. If you work locally, you’re going to know everyone. They’ll know you. But, should you share your secrets with your colleagues? Lessons are hard to learn in real estate. And when you learn a lesson the hard way…you really get hit. It can be tough to decide if you should give away all of your secrets when you’ve worked so hard to get there. Should you just share with everyone? This is a popular topic among investing circles.
Real estate is hard work, and don’t tell yourself otherwise
Real estate investment is a very special business. Why? Because everyone talks about how great it is. That’s why so many people when they hate their jobs think to themselves, “I think I’ll get my real estate license.” For some reason, it’s made to seem like a breeze. The truth of the matter is that just about anyone can get their real estate license if they have a brain and a few hundred bucks to take the classes. Depending on the state, the actual test can be challenging, but you can re-take it as many times as you want. There are advertisements everywhere about how to get rich in real estate. The idea is not a new one.
Let’s assume real estate is easy. Why isn’t everyone wealthy from investing?
If real estate were so easy, do you think there would be free seminars right and left? Would there be infomercials about it? Would an advertisement that you’ve got to “X” out of pop up on every website you visit? Probably not. Real estate is very popular. There’s a continuous flow of new people every month trying to get into the business. It is true that real estate holds a heck of a lot of opportunity. But, should you give away all of your secrets?
These “free seminars” claim to give out all of the real estate secrets. If that were true, wouldn’t everyone doing real estate be rich? There actually are some real estate clubs in the business where you can go to talk with other investors, and supposedly learn from each other by sharing information. People love to say that “you get what you give.” Does this actually apply to sharing your real estate secrets? Do you really get more back in business when you give back your information? A common argument is that “there are no secrets anyway” in real estate. That everything’s already been done, so you aren’t competing with another by sharing what you’ve learned and experienced.
The market is limited, contrary to popular belief
Real estate investing is actually a pretty small market. Many times, you’ll hear the phrase “There’s enough real estate to go around for everyone.” You may think that, but you’d be wrong. Real estate investing is an extremely small market. It may not seem that way to you right now. But you’re selling things that apply to absolutely every individual on the planet. You’re not selling anything unique.
Even on the traditional spectrum of real estate investing such as auctions, foreclosure, or any other things that are pretty good potential deals, those deals are still limited. Real estate is a tiny marketplace. Anything that can appeal to the entire general public is a small market. Therefore, there are a limited number of opportunities. “There’s enough real estate to go around for everyone,” is in fact false.
The market is also hard to get into
A key factor regarding real estate investor is barrier entry. If you’ve got a limited market, this means that market is going to be harder to get into. Some argue that the way into the business is through money. The barrier, ultimately, is knowledge. Knowledge will be far more powerful to you when entering the market than anything else.
Giving away business secrets can and will breed competition for you
Giving away business secrets can destroy your career. Two facts about real estate is that the barrier to entry is knowledge, and that there is a small market when it comes to investing. Given those two things, wouldn’t giving away your secrets hurt you? Yes. It’s not a surprise that real estate investors have a pretty bad reputation in the real estate business. Now, why is that? There are a couple of reasons:
A. Agents, mortgage brokers, and closing companies don’t make money off of investors, so they consider them a loss.
B. Many people in the real estate industry don’t like to hear that you are a real estate investor. Actually, most people in general don’t like real estate investors.
C. People think that real estate investors are greedy, and make money off of people going through hard times. They especially do not like commercial investors.
Ultimately, people do not like real estate investors. Yet, they serve a very crucial role. The market is limited, but investors play a huge part in the world, for the better. The problem is that there are lots of unethical investors that have aided in forming the bad reputation. However, for the most part, most investors are honest, ethical people with high integrity. The bad investors are all of these things as well…it’s just that they aren’t competent. They have absolutely no idea what they are doing; either they have bad intentions, or they simply have absolutely no idea what they are doing. Either way, the same outcome occurs. When a deal goes sour, it adds to the bad reputation. Which again, is very unfortunate, because investors serve a very important role in each and every community.
Be selective about what you share; choose the information wisely
You’ve got to learn to be selective about the information that you share. It can hurt your business. Intellectual property is very important to your business. Now, what is meant by intellectual property? The intellectual property of a real estate investor is any one or the combination of their trade secrets, patents, trademarks, or anything that a business builds up that adds intrinsic value. Intellectual property is simply invaluable. Those are the secrets that you should never shared. Unless, of course, you’re prepared to involuntarily share them with everyone which is going to create competition for you.
This should be obvious, but never share all of your secrets to anybody who lives locally. You’re just asking for competition. In fact, while you’re at it, you should just go ahead and write them a check ahead of time and at least spare your pride. Real estate is based on knowledge and the experience learned based on the deals that you’ve done. Don’t give that away to the peers in your hometown.
To sum it up, be very wary with what you share to others. Some secrets are universal, and aren’t really aren’t even secrets at all. Some people just don’t realize obvious things, and it’s okay to help people understand the basics.
Here are some tricks that many real estate investors follow:
Owning real property is a goal for many investors. When done properly, investing in real estate can offer a number of benefits for individuals including the ability to diversify income streams and capture long term capital appreciation. However, there are a number of ways investors get it wrong when it comes to real estate and the costs can be quite significant. As you consider whether investing in real property is right for you, keep these key considerations in mind.
Consider real estate as a diversification tool.
One of the benefits of owning real property in addition to traditional investments like stocks and bonds is the diversification it can provide to your income and asset holdings. Having multiple sources of income helps reduce the impact to your finances, should one stream dry up. The real estate market isn’t directly correlated with the stock market either, so holding both types of assets can be a good thing.
Keep in mind that real estate can only help diversify your assets if it’s a component of your net worth – not a big piece of it. Also consider location as part of your diversification strategy as physical location is a main driver of a property’s relative value. It is important to be familiar with the local market, but don’t overlook the added risk if your own home is in the same community. Of course being a long-distance landlord carries a different set of risks, so try to find a balance.
Don’t over-concentrate in one asset class.
Just as real estate can provide diversification, it can just as easily concentrate your holdings in one volatile asset class. Investors just starting out may have a higher risk of real estate concentration risk as the property may represent a much larger piece of their overall net worth. Why may this be a bad thing? The real estate market can be volatile and while you can control how the property is maintained, the majority of factors that drive local and national markets are outside of your control. These factors can range considerably. Consider the impact of a major employer moving in (or out) of a community, changes in interest rates, sharp increase to property taxes, and changes to the public services offered in a community.
Consider an investment property if your cash flows are already strong. Real estate can be quite cash-intensive so if you’re holding too much excess cash and find yourself with a large surplus each month, an investment property can be one way to put those funds to work for you. Real estate is unique in that it requires a lot of cash upfront and ongoing cash reserves to maintain and cover for ordinary expenses, but the investment self is highly illiquid. Unlike a traditional investment where you can sell off some of your stocks as needed to raise a lump sum, you cannot sell a room in your property. Unexpected repairs, prolonged vacancies, or past-due tenants can lead to financial problems if cash reserves are light.
Don’t rush through your cash flow projections.
As any professional real estate investor would tell you, the numbers have to work. Particularly when investing in a buy-and-hold property, your cash flow assumptions must be solid to help ensure you’re making a good investment. Do extensive research to obtain accurate income and expense figures and consider building out a model to tie it all together. A standard model should include provisions such as the cost of capital, expected vacancy rate, taxes, and a discount rate, which is essentially your required rate of return for the investment.
Consider scenario analysis as part of your cash flow projections.
What if you were to invest cash in the market instead of buy property? What tax benefits may you sacrifice by renting your former primary residence instead of selling it? Depending on your specific goals, real estate may or may not be the best way to get there, and cash flow modeling can help you figure that out.
Talk to someone who already owns an investment property. One of the best ways to educate yourself is to speak with someone who’s already faced the same challenges. New real estate investors are often surprised how much work being a landlord can be. It isn’t as easy as it looks on reality house flipping shows.
Hiring a property manager is an option, but will impact your cash flows. As a landlord, you’ll also need to ensure compliance with the numerous local and federal laws. Some states have very strong tenant rights laws. Landlords may expose themselves to financial and legal risks if they don’t comply with housing discrimination laws, proper escrow procedures, building codes, and so on.
Investing in real estate is attractive to many individuals who like the idea of having a tangible asset with passive income potential. However, it is important to objectively assess the opportunity and be realistic about your potential net income after taxes. As an individual investor, it can be challenging to find properties with sufficient cash flow potential to justify the risk and opportunity cost, especially as there are many professionals with a whole infrastructure behind them that are trying to do the same thing.