It has been a long time since I remember being in a real estate market like the one we are currently in. This phase of the cycle has been a long time coming, but I’m seeing something that has me concerned.
Some real estate investors are making serious, long-term, tactical mistakes right now by taking on too much risk or overleveraging. In their zeal to become “transaction engineers,” they are taking on too many different types of deals. My concern comes from not only my own experience, but also from wise advice from very successful businessmen.
The CEO of a privately-held, multi-billion-dollar company recently tweeted, “In a world of constant change, sometimes the most innovative thing we can do is to keep steady, dig in, and persevere. As it turns out, faithful hard work never goes out of style.” When a man as humble as Dan Cathy of Chick-fil-A (who was recently seen giving away free food to travelers in the Atlanta airport during the electrical failure) shares that type of wisdom, I pay attention.
We all know that a correction in this real estate market cycle is inevitable. We just don’t know for sure when it will begin to occur, and we know that we don’t want to be caught like we were last time with too many open projects, too much debt, and too many other risks. The best thing you can do at this time in this cycle to avoid that mistake is to focus on and be diligent about one or two key strategies that are already on your desk instead of spreading yourself thin by trying every innovative and creative deal that comes along.
Doing that may require you to become better at articulating one of the most powerful words in the English language – “NO!” You may have to say “no” to new opportunities that would distract you and take you away from the key projects which you are already doing.
I’m going to share with you the strategy I’ve shared with a number of investors who have begun their careers in the last eight years and have only seen a market starting from the bottom and going up. They have yet to experience the market down cycle. I told them to carefully evaluate their portfolios, eliminate (sell) the bottom 10-30%, and use the profits from those properties to reduce the debt on their better-quality rental properties.
I realize many of you will reject this information, believing instead that this type of leverage is a very powerful growth tool. Remember that what leverage can bring UP, leverage can bring DOWN. Ten to twelve years ago, I was working with numerous investors with large portfolios who were upside-down, barely cash-flowing, and struggling to figure out what to do with their properties. I don’t want anyone else to have to go through that painful experience.
I respectfully submit that for many investors, five free-and-clear rental properties are better than ten leveraged properties simply due to the elimination of risk.