I Should Have Known Better
When I returned to Hawaii from the Vietnam War, I asked my rich dad how I could get started in real estate.
His reply was, “First get educated. I’ve taken you as far as I can go. You need to take the next step.”
A month later, I was watching television and saw an infomercial for a real estate course. I purchased the course for $385, which was a fortune at the time since I made only about $600 a month as a Marine Corps pilot.
It was after the course ended that my real education began. Everything the instructor taught us came true. He said, “The first problems you will run into are real estate agents. Most real estate agents are salespeople, not investors. They would not know a good investment from a bad one.”
This is still true today. For months, all I heard from real estate agents is, “You can’t do that. Those deals do not exist.”
The next thing the instructor said was, “Find a mentor, someone who did invest in real estate.”
Since my rich dad was already my mentor, I went immediately to him. Rich dad’s first words were, “How can I teach you something until you do something?”
For the next few months, I drove around in my spare time, looking at properties, talking to real estate agents, finally doing something as my rich dad had suggested.
After I finally put an offer in on a property, I ran back to my rich dad and proudly showed him the offer. As you can already guess, he ripped it to pieces. Although it was painful to find out how little I knew, that experience was priceless because I was finally doing something.
A month later, I found a one-bedroom, one-bath condominium on the island of Maui, one block from a gorgeous white sand beach. I was excited that I finally found a great investment.
I bought three of them, with credit cards and seller financing. Each month, I made a net $25 per unit. I was making money, not losing money. Rich dad was correct. When you find a great investment, you will find the money.
I wish I could say my education was complete after I bought the three units. Little did I know that the next phase of education was about to begin, an education in property management.
After owning the three condos for a few months, the septic system on the entire development burst, and the sewage run-off ran into one of my condos. Next in my real estate education was how to deal with developers, homeowners associations, lawyers, and a smelly rental unit.
Start Small & Close To Home
Since these properties were on another island, when there was a problem I had to take time off from work, drive to the airport, park my car, take a flight, rent a car, drive an hour to the property, work on the problem, and then hurry back home, missing a day’s work.
That was expensive.
Today, I can handle properties far away – but when I was just starting out, I should have found a property as close to home as possible, less than an hour’s drive away.
After you have purchased at least ten properties (because each property will have a new lesson) then you can start expanding your operational radius.
I can’t emphasize this enough—when you’re starting out, start small, and close to home.
Invest a lot of time and a little money in your first deal. Most people do just the opposite—they invest very little time and a lot of money and wonder why they lose! You want to keep your risk small because you’re on a learning curve.
Here are some benefits to staying close to home with your first real estate deal:
#1 First-hand Knowledge Of The Area
One of the smartest moves a real estate investor can make is to keep her finger on the pulse of the area in which she’s investing.
This will give you important insight into things like whether the rents are going up or down, if businesses or stores are moving into or out of the area, what the property values are doing, and if the overall trend in the area is increasing or decreasing.
One of the best ways to accomplish this is by personally inspecting the area you’ve zeroed in on. Jog, walk, or drive around the neighborhoods you’re considering regularly. Note any changes, and pay particular attention to For Sale signs.
How fast do they go up—and come down? Who are the most popular agents? Talk to people who live in the area and ask them about it. You might be surprised at the answers.
These are just some of the factors that you’ll want to stay on top of so that when a property does come up for sale, you’ll be the expert in that area. You’ll know quickly whether it’s a property and an area that is worth pursuing further, and you’ll be able to act fast and get a jump on the competition. This saves you a lot of valuable time and money in the long run—as well as a lot of headaches.
Now, some people think they can rely on brokers for this type of information. To an extent, you can—if you know and trust the broker, and you have the means to go and check out an area and property yourself.
Remember, a broker’s job is to sell you a property, so you’ll need to look at everything they tell you with a critical eye. That takes experience. But until you’ve made many investments and built many relationships in the real estate community, there are plenty of properties right in your backyard.
Become an expert at home before thinking of expanding into the next “hot market.”
#2 Streamlined Search
If you think that there are always better deals in other cities, you’ll spend all of your time chasing down hundreds of potential properties all over the country or world. This is exhausting, because you’re all over the map, literally.
And in the meantime, you’ll miss out on the deals sitting right under your nose, just a few miles away.
Are there good deals elsewhere? Certainly! But by focusing on a few key areas close to home and becoming the local expert at little-to-no-cost, you’ll be amazed at the number of good deals that are right past your doorstep.
And by staying focused on one smaller area, you’ll be the first to know about opportunities.
#3 Savvier Problem Solving
This is also important because you may purposely buy a property that has a known problem— and that’s not necessarily a bad thing. In fact, it may be precisely why the investment ends up being a great deal.
One of the best things to look for is a property that someone else has walked away from because of a problem. If you can figure out how to fix that problem, you can instantly increase the value of that property.
One of my favorite examples is when Kim and I came across an apartment building in Phoenix, Arizona, with a 37% vacancy rate—a pretty high number. Nobody else would touch it. But we asked ourselves the following question: “How can we solve this problem?”
It turned out the property was being run as a hotel: People could rent a fully furnished apartment for anywhere from a week to a year. One not-so-small problem: no one wants to be in Phoenix in the summer, so most of the units sat vacant during those months.
To make a long story short, we did our research and converted the property from short-term hotel rentals to regular long-term rental apartments. The vacancy rate went from 37% to 3%—and the property’s value soared. We were winning on both cash flow and capital gains!
#4 Easier Access To Maintenance
If a problem arises on your property, you don’t want to have to catch a plane, rent a car, go to the property, find a plumber or electrician, rent a hotel room, wait for the problem to be fixed, drive back to the airport, and catch a plane home.
It’s a pain in the rear end, and it costs a lot of time and money.
As your investments get more sophisticated, and the properties get larger, you can hire a property manager to do some of this work for you—but trips still factor in.
And until you reach a certain level of investment, it’s very difficult to find a dedicated and useful property manager. In truth, managing repairs from afar is more trouble than it’s worth.
#5 Better Communication
Whether you’re in the process of buying a rental property or you already own one, there are a lot of people to stay in contact with: a lender, property manager (if that applies), tenants, maintenance crews (landscaping, pool, handymen), etc.
It’s much easier to stay in direct communication when you’re only a few miles away—you have the opportunity to develop relationships because you can pop by the property to have an in-person chat. Nobody can dodge your calls or pull the wool over your eyes because it’s easy to see for yourself what’s really going on.
Investing in real estate remains one of my favorite ways to build cash flow. With the right deals, it’s possible to get infinite returns.
Editor, Rich Dad Poor Dad Daily