Human beings are highly adaptable creatures. You can hit us with something “scary”, but when given enough time, we usually figure out a way to adapt to it. For instance, if you’ve ever asked anyone out on a date, you probably remember all too well the initial fear and nervousness that came along with it. If you’ve been rejected, I’m sure you’ll agree that the first time was tough! But if you kept at it, though, over time you probably found that the whole dating game started to get a little easier. You figured out what works and what doesn’t… After enough tries, it becomes just like any other thing… No big deal.
Ever take a cold shower? I’ve never done this myself, but I hear that there are people out there who swear by it. Apparently the first few encounters are absolutely terrible, but over time, the body again find a way to get acclimated.
Very interesting… Which brings me to my own story. I moved to Newport Beach a few years ago for work, and one of the first things I noticed (and appreciated) was the never ending sea of nice beaches. Not only were beaches clean and easily accessible, but the water was also warm. Growing up in Northern California, this was definitely something I was not used to!
It’s embarrassing to admit, but when I first arrived in Orange County, I didn’t know how to swim. Up to that point in my life, I simply avoided the ocean and beaches. Hey, I was from NorCal! The beaches up here aren’t quite as nice, and the water is pretty much too cold all year round… Ok, fine… I was scared of the water and didn’t want to drown. 😉
Great weather and warm water were abundant practically year round in SoCal. At some point, I realized that I had two options:
- Learn how to swim.
- Miss out on all the fun.
I didn’t really like Option 2, so I went with the former. It wasn’t long before I started watching Youtube videos on “How to Swim”. What I soon realized, though, was it wasn’t really of much use for me to keep going through the same videos, over and over again. No, at some point, I would need to put into practice all the theory I was learning.
You don’t become a master at something by watching idly on the sidelines. If you want to learn how to do something, you have to go out there and actually do it!
Just Do It!
So, I did it. I said, “enough with the videos. Today, I’m going out to the swimming pool, and I’m going to dunk my head into the water!” The first experience wasn’t very pleasant. But I gave myself credit for overcoming the initial fear. I had succeeded in submerging my entire body under water! 😉
Day 2, I worked on holding my breath under water. By the end of the day, I was starting to get a feel for it. “Hey, this really isn’t so bad“, I told myself.
Day 3, I began trying to “swim”. Or rather, move my body from Point A to Point B. Yeah, I didn’t get very far, but I was starting to feel comfortable in the water.
By the end of the week, I was able to “swim” from one end of the pool to the other end. My technique was terrible, I didn’t know how to breathe correctly, and I wasn’t very efficient… but I was determined to get better. By putting in the continual effort, day after day, before long I was starting to make progress.
I had completely overcome my fear! I adapted to the water and learned how to swim. What do you know, it wasn’t so bad after all! 🙂
First Property Experiences
Real estate investing is no different than learning how to swim. Or asking a girl out on a date. It might seem scary at first, but if you don’t do it, you’ll probably just keep on regretting it. And you only get one life, so why go through it without giving it your best shot? Rejection sucks, but it doesn’t hurt as bad as regret!
Yes, if you try, you may fail the first time. And the second time, and the third time, etc. But eventually you’ll figure it out. And it will be worth all the effort.
I won my first property in August 2012. I still remember how excited I was to win that very first property… And I’ll never forget how nervous and scared I was on the day of closing!
It’s one thing to put in an offer for a property… It’s a whole nother to have to hand over that cashier’s check to close escrow! Naturally, since it was my first time purchasing a property, I couldn’t help but feel uneasy. Self doubt creeped in and I found myself wondering:
- What if I’m making a big mistake?
- What if I can’t find a tenant?
- What if the tenants trash the place?
- What if I ran the numbers wrong and the property doesn’t cash flow?
- What if the market tanks again?
- What if I’m not cut out to be a landlord?
Truth is, if you allow it, you can play the “what if” game indefinitely. Just like with learning how to swim, I knew it would do me no good to keep asking myself these questions. The only way I was ever going to know for certain whether or not REI was for me was to go out there and actually do it…
After a few months upon winning Rental Property #1, I was starting to get the hang of things. Baby steps. I was learning how to be a landlord on the fly, and I got to experience positive cash flow. 🙂
Sure, there were problems that came up from time to time. I had to deal with HOA yelling at me about satellite dishes, garage door problems, a leaking bathtub that was causing water to flow out of the recessed lighting (yikes!), etc.
However, sometimes the best way to learn is when you are forced to! Hiring a good contractor and having reliable handymen on your staff might seem obvious, but sometimes you just need to get burned a little bit for that knowledge to stick like superglue.
All in all, I was loving the overall experience. Having positive cash flow each month was truly a wonderful feeling. And as they like to say, “success breeds more success“. After just a few months, I found myself wanting more! The fear had completely subsided and I was eager to continue building my real estate empire. In the beginning of 2013, I won my second property. This time around, it wasn’t scary at all…
So, by going out and actually doing it, I learned and became comfortable with a lot of things. Here’s a list of a few of them:
- Learned how the entire process of buying a home works — from opening bid to closing escrow.
- Learned how to work with a real estate agent, lender, HOA, title company, inspector, insurance agent, etc.
- Learned what a short-sale was (Rental Property #2).
- Learned how to screen, negotiate with contractors. Also learned what not to do (hire a really cheap one!).
- Learned how to source a tenant (marketing/advertising, background check, lease agreement, etc.).
- Experienced being a landlord for the first time.
Honestly, I feel like a lot of the above skills/learnings are invaluable… You can’t really put a price tag on them because those are experiences that will help me for as long as I’m in the REI game. Even had the cash flow not worked out too well the first year, I still would have been grateful for getting my feet wet and getting involved with learning how to play the game.
Had I continued watching on the sidelines, I wouldn’t have learned anywhere near as much.
By mid-2013, I started to realize that the surging prices in my local real estate market were making good deals hard to come by. The cash flow numbers just didn’t make sense anymore. Not to be deterred, I started researching into out-of-state real estate investing.
I read books and interacted with other investors on the forums. Again, because I had never done out-of-state investing before, I found myself scared and nervous. I again found myself assuming the worst:
- How do I know I’m not being scammed?
- What if the cash flow numbers being advertised aren’t real?
- What if I buy into the wrong location?
- What if I can’t find or keep good tenants?
- How do I know I can trust this turnkey company?
With out-of-state investing, I will admit that there is inherently a lot more risk involved. The odds of being burned are much, much higher than when buying locally. Most likely, you’ll be buying into a market in which you have no expertise in. You won’t know the location, what drives the local economy, rules, taxes, regulation, etc. And for certain, there will be unscrupulous people out there looking to take advantage of you the first chance they get.
So, how did I overcome the fear? I did my best to mitigate risks as much as possible.
- I decided to only buy one property to begin with. I would test drive before committing to buy more.
- Put down the minimum amount needed in downpayment. Have as little skin in the game as possible.
- Do as much research as possible. Study the area you are buying into. Connect with other investors from that area.
- I was willing (and did) fly out there to meet the local teams. I went on property tours and performed my due diligence. I saw everything with my own eyes.
- Operate with a big picture point of view.
I should confess that I’m probably a bigger risk taker than most… That’s not necessarily a good thing, but I do try and limit my downside by operating with a big picture point of view.
Big Picture Point of View
My endgame is Point Z. I accepted that a long time ago, which means that all the investment decisions that I make must work to reinforce that dream. Point Z, to me is centered around traveling the world and experiencing new, exciting things. In order for that to be possible, I must have passive income streams setup to run passively. At worst, my investments must be semi-passive.
Since I knew that my future journeys would take me overseas, I was very much open to investing in real estate markets outside of the one I am currently residing in. I reasoned, what difference does it make if all my rentals are in California, or if they are scattered throughout the country? In either case, I will still be a few thousand miles away, unable to attend to them, anyway.
Further, since I didn’t yet have my out-of-state markets established, I thought, it would also be a better hedge to not put all my eggs in one basket. In other words, even if I got burned investing out-of-state, at least I would limit my exposure to just a single property in one market.
Also, my early FI blueprint required me to own at least ten rental properties prior to checking out of the cubicle. Again, when you operate with the big picture in mind, things start to appear less scary. I didn’t waste too much time concerning myself with any individual property, because I knew that each piece would ultimately only represent a small sliver of the final pie. Kind of like buying an index fund — you concern yourself with the overall movement of the ENTIRE portfolio, not the singular performance of each individual stock. I believe it’s near impossible to locate a single property that will provide you the best of everything (appreciation, good neighborhood, quality tenants, high cash flow, etc.). Like with stocks, I believe in crafting a blended portfolio where the whole is greater than the sum of its parts.
It’s easy to get lost in analysis paralysis if you are studying up too much, trying to purchase the perfect first investment property. You could easily spend years doing this. Once you have a few units under your belt, you’ll see that you concern yourself a lot less with all the minor details. I’m not saying don’t run the numbers… but in the grand scheme of things, what’s the difference between a 10% cash-on-cash return and a 13% return on a single deal? You win some, you lose some… The important thing is to keep playing. So, focus on buying up more assets.
Vacancy is another thing that drives a lot of first time landlords into quitting. It’s understandable too, because 1/1 vacancy means the cash flow stops completely. You could easily lose a lot of sleep worrying about vacancy… Of you could focus on the big picture, instead, and work on ways to increase your number of units. I always operate thinking that I will someday own ten properties. When I focus on those details, I find myself worrying (and stressing) less. 1/10 vacancy doesn’t seem anywhere near as scary, does it?
Where I Am Today
Now that I own five rental properties and seven units, I’m even less scared with REI investing than before. Because I didn’t let the fear overwhelm me, I’m now comfortable in investing in not just the Bay Area, but also in Chicago and Indianapolis.
Later on this year, I will investigate the Houston/Dallas markets as well… What have I learned from my out-of-state experiences? Here are a few:
- Established networks and relationships with teams in Indianapolis and Chicago.
- Gained familiarity into new markets (laws/regulations, taxes, neighborhoods, etc.).
- Learned how to manage things from afar (loan, inspection, inspection repairs, property management, etc.).
- Got to sightsee some new cities (You could even file this under pleasure instead of business…).
And things will just keep on rolling… The reality is, yes, of course I could still get burned at any time. My investments can always stop performing and I can always start having some miserable experiences…
But I just don’t believe that my time and energy would be best served worrying about doom and gloom scenarios. I’m trying to get to early FI, so I’m just going to keep focusing on acquiring more assets.
I’m also having a ton of fun in the process! I’m broadening my horizons and experiencing new things. I love to learn! Investing out-of-state has actually taught me quite a few things. Again, these experiences and learnings can’t be measured just by looking at ROI.
The fear game is something that will never go away. I’m sure I’ll experience a lot of trepidation when I first start looking into buying a commercial apartment building. Then perhaps I’ll be worried yet again when I start looking for my first out-of-country property. Or maybe someday I’ll want to own an office building? Or a public storage warehouse?
Who really knows what I will want to invest in next? All I know, though, is that I like to play the game and experience things for myself. Yes, it’s always important to perform your due diligence and be as safe as possible… but don’t let that stop you from reaching your goals. It is very important to learn how to cope with fear and not let it become a detriment to your future progress.
At some point, if you ever want to make any REAL progress, you’re going to have to get off the bench and into the game. You cannot become successful by simply watching others do it. You have to do it yourself! Just like what I found out when I finally decided to dunk my head into a swimming pool in Newport Beach. Finally, it was about time I did it! These days, I still find myself wondering, “why did it take me soooooo long to finally decide to learn how to swim?“