8 REAL ESTATE LESSONS FROM MY DAD
These Still Hold True Today
I owe my passion for real estate to my dad. With Father’s Day coming up this seems like an appropriate time to share some of the lessons that I learned from my dad with regards to real estate.
My dad was a broker, builder, investor and property manager. In 2014 he was diagnosed with leukemia. During the following months he had a wealth of information to pass along. On one visit I asked him what he thought were some of the timeless lessons for real estate investors and here is the list he provided.
1. Real estate markets are very local. Know the demographics and how the local market trends are changing. Know the difference between a ripple and a wave.
2. Invest according to your age. When younger, invest for appreciation. When older, invest for cash flow.
I have written another article on this particular subject, “How to Invest For Your Life Stage, Choosing Investments For The Time Of Your Life.”
3. Do not overextend. This includes leveraging and maintaining reserves.
4. Each property must stand on its own. The property must cash flow without accounting for depreciation or assistance from government programs. Use tax benefits to your advantage, but remember that any government program can be terminated at any time.
An example can be found following the Tax Reform Act of 1986. Prior to that time real estate was being purchased by high income earners in high tax brackets to shelter some of their income. A property that had a negative cash flow before taxes could become very profitable when depreciation was allowed. The change triggered the Savings and Loan crisis when many properties no longer had positive cash flow after taxes. Many properties were foreclosed and sold through the Resolution Trust Company.
5. The first book we read on real estate investing was Wake Up the Financial Genius Inside You by Mark Haroldson. Interest rates and prices have changed, but the principles remain the same.
I still think it’s a great book and recommend it for anyone who wants to increase their wealth and cash flow.
6. Cosmetic fixes are a lot less expensive than structural ones.
I think he learned this lesson on his first house. It was in downtown Atlanta, very old and very rough. He bought it for only $5,000. It took a lot of work to get it ready to rent. He did much of the work himself, so it also took a lot of his time. His subsequent houses needed much less work to prepare them as rentals.
7. Screen your prospective tenants well. Call their previous landlord, not just the current one.
8. Real estate is like bananas. You need to buy it in bunches.
My dad did this by building several duplexes in a subdivision, sold some, kept some, and managed most of them. He gained efficiency by having multiple properties close together.
This lesson is a primary reason why I like to invest in multi-family properties such as apartments. They can provide economies of scale with tremendous upside in appreciation and cash flow.
Some of these lessons I have also experienced first-hand, like making sure each property can support itself with its own cash flow.
Recently I have been reminded that I prefer cosmetic improvements over structural changes, even when the profits may appear less.
By reviewing these lessons I feel fortunate to be able to apply and build on the lessons from the past and continue to grow our portfolio.
What are some of the lessons that drive your real estate investing? Have you written them down? We would love to hear from you.
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Mike is a retired aerospace engineer with a passion for real estate investing and teaching financial literacy. He lives with his wife in Daytona Beach, Florida.