Investing in Real Estate for a Lifetime
By Cliff Hockley, President of Bluestone and Hockley Real Estate Services
Executive Director, SVN | Bluestone and Hockley
Investing in real estate is a funny thing. Values go up and down. There are real estate bubbles as demand and population increase and decrease. Of course, you have other impacts to consider such as taxes, crime, economy, and Covid pandemics. What we have learned is that real estate is mostly a very resilient form of investing.
Theodore
Theodore was a reluctant real estate investor in his early 30’s. He was young and did not understand the benefits of increasing property values and how it could improve his net worth. His father-in-law, Max, kept encouraging him to invest but Theo could not see the benefits. Being newly married with young kids, he just never had much money considering he was making $12 an hour at a manufacturing company in a management role and was woefully underpaid.
In any case, his father-in-law took his reluctance in stride and started buying real estate in Theo’s name. Max managed it all, the down-payments, the negotiations, and the management. Theo and his wife just needed to stand by. Max even used his credit card line of credit to make the down payment on a small house that he moved into.
Over ten years of investing, he ended up owning a five plex, a home, and an office building.
The Next Generation
After Max passed away, Theodore sold the office building and traded it into a 13-unit apartment building and a single-family home. Ten years later he traded these assets into 36 units at 5 different locations. As luck would have it, the value of his investments increased, and Theodore refinanced his properties and purchased a 12 plex during a real estate cycle downturn. At each step he slowly increased his net worth, by selling, buying, and refinancing.
This sounds easy, it’s not. You have to be at the right place at the right time and plan ahead. Residential deals were smaller and easier for Theo to finance, but in many cases, you are using good judgment if you look at commercial deals as well. As a business owner and an entrepreneur, it makes total sense to buy your own building and grow into it, and out of it, but you need to set goals and be motivated to build your personal net worth. If you don’t want to build your net worth, why bother.
Covid-19 Pandemic and Planning Ahead
Could any investor have been prepared for Covid -19? I don’t think so. But investors should do their best to not be over-leveraged so they can tolerate and work through moments when tenants do not pay their rent.
Who could have foreseen a residential rent moratorium? Who could have forecasted that the federal government would be willing to help tenants pay their rent? Being disciplined and developing financial reserves can help sustain you as you run into stormy and unpredictable economic situations. Pay your reserves, before you pay yourself!
What we know for certain is that uncertainty is involved in any kind of investing, and it pays to be thoughtful and plan ahead.
Diversifying Your Investments
Having all of your investments in one property may make it easier to manage, but the risk is focused on one spot. It makes sense to diversify to better handle locational challenges. Location, Location, location is the mantra that all of us hear over and over again. After 35 years of investing, I can tell you without a doubt that some locations are better than others. Owning only one location does not protect you from locational challenges, and may not put you into the path of growth, which can increase your upside.
I have invested in properties that always make money, and I have properties that make money on an inconsistent basis. Ease of access, lack of crime, and quality all help to create a good and successful real estate location. Buying in the worst part of town because the price is right may not bring you the desired results.
Real Estate vs. Equities
Is it better to invest in stocks because it is easier to get in and out of the market? Hard to tell. Most investment and wealth advisors I talk to tell you to stick with an investment for the long run, through the economic ups and downs, like real estate. I believe it just depends on your investment strategy. It looks like the playing field might be leveled in 2022 with the Biden administration and the reduction in real estate-oriented tax benefits. Unfortunately, only time will tell if there is a better investment strategy.
Property Management
For many investors, the lack of time to pay attention to your investments keeps you from growing your portfolio. It’s my position the time to hire a property manager is early in your investment career. Property managers centralize data, keep records straight, understand the marketplace and can leverage your time and make you more money.
Include that cost in your underwriting and hire a property management company that is in constant communication with you and your tenants and sends you monthly financial statements so you can track your progress. You could consider a company with a long successful track record like Bluestone and Hockley Real Estate Services and their asset management team.