Quality Real Estate Deals Trump Quantity
By JD Esajian on November 10, 2014
If you don’t have a plan when you enter the business, there is a chance that you will find yourself being pulled in several directions. You will find that, through a distinct lack of experience, you will gravitate towards those you are working closest with. This means everyone from your realtor to your attorney can influence the direction you head. You can be blinded by what everyone around you is doing and think that the best way to grow your business is to just buy, buy, buy. What you don’t realize is that buying the next best property that comes your way may be doing more harm than good. It is not how many properties you own. but how profitable your portfolio is.
Not every property you buy is a good purchase. Even if you stand to make a small profit flipping it or see potential monthly cash flow by renting, it still may not be a great deal. It is easy to paint whatever rosy picture you desire, if you really want the house. In reality, overzealous investors fail to consider what the worst case scenario may be. This is what you should base every purchase on, instead of the alternative. If you aren’t prepared to handle the worst, than you are exposing yourself to potential problems down the road.
Your goal shouldn’t be to own a certain number of houses, more so than picking the right houses. It is easy to think that every property you own will be successful, but there are unforeseen issues with every rental. What if your tenants stop paying? What if the taxes suddenly go up? What if multiple items need to be replaced at once? Obviously these won’t happen all the time on every property, but all it takes is one property to create a problem. If a majority of your reserves are allocated to buying new properties, you won’t have the resources to fix problems when you need to. If you have ten properties, you may have issues with two or three of them that can affect everything else you do in your business.
By narrowing your focus on fewer quality deals, you can eliminate as much risk as possible. You can never totally eliminate the chance that something goes wrong, but if you take your time and stay away from speculative deals your portfolio will be much stronger. Every investor thinks that things will always go smoothly, but they fail to acknowledge that problems happen to even the best investors. If you aren’t prepared for this, it can totally wipe out your business. One bad property with minimum cash flow and no reserves can be foreclosed if your tenant stops paying for just a few months. Within 90 days, you can go from having a property you are pleased with to one that you wish you never got involved in. Many times, the numbers are right in front of you – if you are willing to really look at them.
Buying with the hope of appreciation is also a recipe for disaster. If your goal is to accumulate as many properties as possible, under the assumption that the market will take off in the near future, you may be waiting a very long time. The market may appreciate, but that is certainly not a guarantee. You should look at current market conditions only when evaluating a property and any increase in value should be viewed as a bonus. A large segment of investors got spoiled last decade when they saw 20% increases in only a few months. To say that was the exception rather than the norm is a dramatic understatement. History says that home values will slowly increase over time but this will be minimal unless you either put work in or buy the right home in the right area. The more houses you own does not mean they will all take off and you are sitting on a pot of gold in the future. In today’s market you need to do more than just buy property to see value down the road.
There is also something to be said about the time and effort it takes to make money on a given property. If you have to focus a majority of your efforts to make one single property profitable you are taking time away from growing the rest of your business. There are many times that a property that is easier to acquire with a smaller monthly cash flow is the better purchase than other properties you are considering. If you have visions of turning a property into something it isn’t you will be in over your head and it will sap all of your time. The path of least resistance and acquiring reliable properties with a smaller bottom line but will pretty much run themselves allows you to look at other properties and grow your portfolio. There is nothing wrong with hitting a few singles on deals rather than looking for the home run on every property you buy.
The quality of every deal is much more important than the quantity of properties you own. You are not judged on the size of your portfolio, but rather how well it performs for you. The name of the game for investors is always keeping your business moving forward. One bad property can wipe away everything you have done with three other properties. If you keep your focus on good deals everything else will take care of itself.