Real Estate Investing - Want to Retire Early? Better Focus On Quality!

2 months ago

I quit my job and retired from engineering at the ripe old age of 31. On the journey towards that end goal, I inevitably made many mistakes along the way. In hindsight, I could have achieved early financial independence even earlier in life and I certainly could have set my future up even better had I focused on making sure I ALWAYS did the following with my approach to investing:

When in doubt, focus on accumulating quality assets!

QUALITY, QUALITY, QUALITY.

That's the secret recipe for long-term success and how to become wealthy.

You know, when I was younger and I was just hitting my stride in real estate investing, I made the very stupid (and costly) mistake of chasing after yield. Deep down, I knew that I wanted to check out of the rat race ASAP, so I did about the most foolish thing that you could possibly do:

Everything I invested in was all about that cash flow, baby!

We're now rewinding the tape back to 2013/2014 when I kind of went gungho and overboard on turnkey investing. You might have heard the sales pitch yourself from the many hundreds (if not thousands) of turnkey solicitors out there who are working day and night around the clock to try and get you to buy one of there properties.

I'll confess, I was duped by some very slick salesmen.

Heh, looking back, I now realize why they needed to work overdrive to try and convince suckers from out of state to touch their crap!

OK, not all turnkeys are turkeys, but sadly, most of them are.

The thing is, chasing after Day 1 cash flow (yield) is just plain stupid!!

Here's a huge wake up call for anyone reading this and is new to real estate investing -- There's a bloody good reason why these properties are so cheap in the first place and why their yields (on paper) look so astronomically high and enticing.

It's because long-term, it's a losing proposition.

Never forget, with real estate, expenses only go up over the years. So, if you're buying turnkey properties today and paying a premium for them, you're essentially buying a "stock" at 52-week (or all-time) record highs; that would be my equivalent analogy.

So, there's definitely no value-add that you've got going for you. Next, you quickly find out the ugly truth with turnkey properties and why those projected cash flow numbers look so juicy on Day 1...

Turns out, your turnkey property will never perform better than Day 1!

Congrats, over the years, when all that deferred maintenance starts to add up (not to mention RISING property taxes, HOA, insurance, etc.), well, shit, your gross rents aren't going to be climbing much to offset those expenses...

What about appreciation on the property itself?

Hah!

Yeah, good luck with that b/c you're seriously going to need it! If these properties had appreciation potential, they wouldn't be selling so cheap where the 1% Rule worked to begin with... High Quality properties (in today's market) don't ever sell for at or above the 1% Rule! Speaking of the 1% Rule, in a normal/good market it's a useless "rule" to use. If anything, do the opposite of what it's trying to tell you to do; if the property meets the 1% Rule, run for the hills!

And straight up -- High quality properties ALWAYS appreciate over time, and I'm not talking about just rent appreciation or property value appreciation; they go hand-in-hand and you won't find one without the other.

The combination of rent appreciation + property value appreciation is the secret to early FI and early retirement for real estate investors!

But while we're at it, I don't care if we're talking about: stocks, real estate, mining stocks, whatever; you win the day (and your freedom) when you focus on gobbling up the absolute highest quality assets!

QUALITY, QUALITY, QUALITY!

Knowing what I know now, if I could rewind the tape, I never ever would have touched a turnkey property! Why bother? Do you know how much "opportunity cost" I sacrificed by buying mediocre rentals out of state when I could have instead been more constructive with my efforts and loaded up big on Bay Area property? Or Seattle? Or Austin? Even Portland would have been a much better choice.

Damn, talk about shooting myself in the foot!

Since 2013, 2014, those turnkey properties in my portfolio are still being rented out for roughly the same amount each month... On the flipside, my high quality Bay Area rentals have all shot up by $500/month or more in rental rates (Zillow says the increase is even more drastic).

The proof is in the pudding.

So yeah, I remember when I was a total dumbass and I was crunching numbers trying to compare which properties to buy...

Option A) Turnkey rental out of state that had a pro-forma stating 15% cash-on-cash return on Day 1.

Option B) Bay Area rental that had a pro-forma stating 5% cash-on-cash return on Day 1.

Man, do I wish I had a rewind button so that I could go back in time and capture more of that 5% Bay Area cash-on-cash return, instead... which would today be about, what? 8%? 15%? Couple that with some massive appreciation and your total leveraged returns would be over 100% for sure... Oh, and because of soaring rents, as long as you're fair with your tenants, for the most part they will almost feel obligated to leave you alone (passive investing at it's finest) in fear of you jacking up the rents again. The wins keep adding up and the rich get richer. Seriously.

As for Option A? Yeah, fine, I'll give you 15% on Day 1... Now that we're in Year 3, Year 4, what are we at now? 10%? 7%? Depending on the location you bought, it could be even lower than that, sadly. When expenses go up but rents are flat/down and the property itself isn't becoming more valuable and coveted, you as a landlord lose!

Look, I'm not completely ripping on turnkeys (just mostly) -- Those investments can work but it's a very painful "grind it out day-by-day" approach that offers way more headache than upside potential. From a risk vs. reward proposition, it's just a bad deal. Whoever is shouting in your ear that cash flow is more important than appreciation has no clue what they're talking about (or has never experienced any kind of meaningful appreciation with their properties).

News flash -- All high quality properties appreciate in value! There's ALWAYS demand for them which is what you need to succeed long-term in the real estate game. Whenever there's more demand than supply, you as a landlord can't fail!

Yeah, you can say that I've paid a steep price in my tuition bill.

Here's a "quick tip" for any newbies into real estate, or even seasoned pros who could use a refresher from time to time; before buying any rental, ask yourself this:

"Would I want to live in this house myself?"

That, and:

"When it's time to sell, will this property elicit a crazy bidding war? Will homeowners be fighting tooth and nail and outbidding each other to try and win the bid? Will I be getting handwritten letters from people who are desperate to buy my house?"

Bay_Area - 1.jpg

If the answer to either question is no, it ain't high quality and it's not worth your time. You want to own rentals in locations where the majority of owners are homeowners, not investors! Otherwise you don't have a very good (viable) exit strategy at all.

Here's something a real estate mentor taught me a long time ago, and I failed to listen closely enough:

"There are no free lunches when it comes to real estate. Everything is priced the way it is for a good reason."

#Truth

So, let me ask you this:

"Which property would you prefer to own?"

Property #1 (San Jose, California):

Bay_Area - 1 (2).jpg

Property #2 (South Chicago):

Chicago - 1.jpg

If you selected Property #1, you're a winner! If you selected Property #2, you've got selective reading skills or you're easily swayed by lipstick on a pig.

When it comes to real estate, how nice the rehab job is doesn't mean jack shit; the only things that matter are: schools, jobs, crime rate, weather (to a much lesser degree).

You cannot fix location no matter how much $$$ you dump into your property! It's better to own the ugliest house in a good neighborhood than to own a mansion in a shitty location.

When you've got all that good stuff in abundance, everything else will fall into place. Easily. If you're trying to get to early FI and retirement at a young age via real estate, your job as an investor is to accumulate as many high quality rentals as you possibly can. It ain't about total number of units, just how many high quality units you can amass.

So fuck flashy pro-forma numbers that don't mean shit and are a total lie.

You win the day with QUALITY! I'm speaking the truth here, so never ever forget that, or you're going to pay a steep price like I did!

Fight On!

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Wait 2 or 3 years to buy and reserve some means now...... its a giant bubble that's going to burst in my opinon.

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I didn't mean to imply that buying any kind of real estate was a good idea right now, but in the long run, the highest quality properties will always retain their value and appreciate. If the end goal is early FI and early retirement and the strategy is to employ Buy and Hold Forever type of investments, the high quality stuff will separate itself from the pack slowly and then rapidly over time. It took me a few years to really grasp this reality but after 3-4 years worth of experience and datapoints I can see the truth quite clearly now.

Cheers!