How to Avoid the Shiny Object Syndrome in Real Estate Investing
“I do not regret the things I’ve done, but those I did not do.” – Rory Cochrane
Brie Schmidt, who is buy-and-hold investor with 90-units and owner of a brokerage company, is one of many speakers who will be presenting at the 1st annual Best Real Estate Investing Advice Ever Conference in Denver, CO February 24th to 25th. Check out her custom music video below.
Also, Brie has had multiple appearances on my podcast, with the first being over two years ago. In our first conversation, she provided her Best Ever advice, which just scratches the surface of what she will be presenting at the conference. This advice includes:
- A creative financing method for newbie investors
- A step-by-step approach on raising money for your deals
- Why you need to set your investment criteria and stick to it, no matter what
- How to avoid the shiny object syndrome
Originally published in the Best Real Estate Investing Advice Ever: Volume I
Brie got started in real estate when she obtained her real estate license in 2004. After a little less than a year, she realized that she hated being a real estate agent. Brie didn’t like dealing with first-time homebuyers or the emotional buyers. Therefore, in 2005, she left real estate and took a corporate sales job. She always kept her license as a back-up plan so if anything were to happen with her corporate sales job, she knew she could always go back into real estate.
In 2010, Brie and her husband began searching for their first property in Chicago. They quickly discovered that it was actually cheaper to purchase a 2800 square-foot three unit multifamily than it was to purchase a 1500 square-foot single-family residence. They decided it made sense financially to go the multifamily route with the intentions to eventually convert it into the home of their dreams.
When they initially purchased the property, Brie never thought she would end up becoming a real estate investor. However, being a landlord ended up being a lot easier than she had expected. As a result, during the next four years, Brie and her husband acquired additional units, bringing their total to 59 units. In 2015, she started working with partners and acquired an additional 21 units, bringing her total to 80 units.
Creative Financing for Newbie Investors
Since Brie and her husband planned on living in the three-unit property, they were able to obtain a 3.5% down FHA loan. The property was recently rehabbed with granite countertops, stainless steel appliances, and other amenities, so the initial and ongoing expenses were very low. After putting two tenants in place, they were able to live for free because the rent they collected every month covered their monthly expenses.
Advice in Action #1: If you are looking for a way to get into the real estate game, but do not have a significant amount of money saved up, consider following Brie’s entry strategy. Find a two to four unit multifamily property and commit to living in one unit and renting out the others. This enables you to qualify for a 3.5% down FHA loan. You will be able to get your first property for very little money down and you will be able to live for free or at a discount since the tenants are covering the mortgage. If the property requires major repairs, no problem. Another loan program, the 203k FHA loan, allows you to include the renovation costs in the loan. You will put down 3.5% of the purchase price plus renovations instead of having to pay for the renovations out of pocket.
With the one and a half year break between purchasing the first and second properties, Brie and her husband were able to save up a significant amount of money, which they used to purchase the additional 24 units with conventional residential and commercial loans. At the moment, Brie says “if we were looking to buy at the same pace, I think my husband would kill me!” She had to promise her husband that there would be a stopping point because he was afraid that she would never stop. Unfortunately, they were in the situation where they were financially tapped out and couldn’t continue to fund deals personally. Brie and her husband were planning to acquire another 8 to 10 properties in 2015, so they had to brainstorm creative methods to finance these purchases.
After speaking with family and friends, she discovered that her brother had a significant amount of equity in his personal home. Due to Brie’s prior successful deals, her brother was confident enough to agree to pull the equity out of his house and give her the money to invest for one year. Brie will use this money as a down payment assuming that she can pay her brother back in a year. The loan is only going to cover a portion of the down payment. The remaining balance of the down payment will be covered with money Brie and her husband accumulated from their jobs and the income from the other properties in her portfolio.
Brie’s current market is Milwaukee, Wisconsin. The last deal that she purchased was a package of properties. Brie purchased them for slightly over $500,000 with a gross rental income of a little over $12,000 per month. This results in around a 14% cap rate. If she can replicate this deal, the resulting cash flow, in combination with the cash flow from her other properties, would be enough to pay back the loan.
Advice in Action #2: You will eventually get to a point in your real estate career where you are either tapped out of funds or have obtained the maximum amount of conventional loans. This is an obstacle that a majority of investors will face, but it doesn’t mean your real estate career is over. In the same way that Brie was creative and was able to obtain a loan from her brother, you will also need to use your creativity to overcome this hurdle.
- Create a list of everyone you know
- Sort them into different categories (family, friends, works, etc.)
- Next to each of their names, write down how much money you believe they would be willing to invest.
- The goal is to get one person from each category interested in investing
- Once you get one person interested, you can name-drop that person to the other people in that category.
It is important to keep in mind that if you personally only have enough funds to cover a portion of the down payment, you can still use the method above to cover the rest.
Instead of creating a document, you can email email@example.com and put “Investor Spreadsheet” as the subject. You will receive the spreadsheet that I use to raise millions of dollars for my apartment communities.
Know Your “Floor” and Stick With It
Brie’s best advice ever is to “know your floor, and stick with it.” A floor is an investment rule that you set which you commit to never going breaking. Your floor can be quantitative (i.e. cash on cash return, cap rate, price point, rehabs over $XX, XXX, etc.) or qualitative (foundation issues, neighborhood class, property type, etc.). She is personally facing this situation, since she is looking for a property to use her brother’s loan on, and as a broker, she goes through this with her clients all the time.
Since Brie took the loan from her brother with the understanding that the loan had to be repaid in a year, she has to be picky, know her market, and stick to her 14% cap rate floor when seeking out potential deals. However, she is very excited to buy something so she can be done with it and take a break for a while. As a result, she is finding herself looking at properties that are below her floor. In reality, Brie knows that she needs to walk away from it and stick to her floor. Even if it is a smaller buy than expected, she still needs to stick to those numbers, even if it is an emotionally difficult thing to do.
Brie also has to reinforce this advice with her clients all the time. This includes working with first-time homebuyers or people looking to purchase a multifamily and live in one unit while renting out the others. Sometimes they are so excited to officially become a homeowner or a real estate investor, they stretch the numbers, tweak the deal, and lie to themselves in order to make the numbers work to justify the buy. Joe was guilty of doing this on his first multifamily deal. It is a lesson that he only needed to learn once.
When setting a floor, everyone has different objectives. It can be a wide variety of things since each market and situation is unique. Therefore, it really depends on the person. For Brie, she has set her floor at a 14% cap rate in Milwaukee and a 10% cap rate in Chicago. For her clients, their floor may be a property that fits within a specific budget, or a multifamily that allows them to have the tenants cover the mortgage so they can live rent-free. The point is: you have to decide what your floor is, stick to it no matter what, and know how to walk away and be patient for the next one.
Advice in Action #3: Do you know what your floor is? If so, great, commit to sticking to it. If not, sit down and figure out what your floor is:
- Write down what your real estate objective is.
- Figure out what criteria a property needs to meet in order for you to meet this objective.
- Write down the following statement, inserting your objective and your floor into the blanks: “I know that my real estate objective is __________. In order to reach this objective, I must buy a property that is above my floor, which is _________. I commit to sticking to this floor. If a property is below _________, then I need to walk away.”
Sometimes, looking for real estate can be frustrating. It took Brie and her husband 7 months to find their first property and it was an exhausting experience. They were worn down and wanted a deal so badly that they probably would have taken almost anything, so they had to take a step back. They had to remind themselves that they couldn’t compromise their goals. If the numbers are bad and the property is bad, then the deal is bad, and you have to walk away.
Avoid Shiny Object Syndrome
There are many different opportunities in real estate. The longer you are in the industry, the more people you get to know, and the better your track record gets, the greater variety of opportunities you get presented with. It is incredibly important for you to stick to your floor, know exactly what approach you are going to take, and not to get distracted by shiny objects.
Here’s a situation that Brie faced when she got an inspection report back on a property in Milwaukee. The inspector discovered that the whole basement had structural foundation issues, which would require a significant amount of money to repair. After adding this expense and re-running the numbers, Brie saw that if the costs came back as expected, it would still be a profitable deal. However, since the cost was just an initial estimate, the numbers could more than double if the issue turned out to be more severe. More importantly, Brie doesn’t buy properties that involve structural issues or mold problems, so she was able to avoid falling into the “shiny object syndrome” trap and walked away.
Advice in Action #4: To put this situation into perspective, Brie was quoted $20,000 as the price to rebuild the basement. If you were to purchase a $100,000 property at 20% down, you would also need to spend $20,000.
- Would you rather invest $20,000 to fix a foundation problem or would you rather use that money to invest in a $100,000 property?
If you find yourself falling into the “shiny object syndrome” trap and are contemplating spending a large portion of money on something, ask yourself:
- Is there a better investment I could make with this same amount of money that would result in higher returns?
Maybe you could use it as a down payment, or to update the kitchens of another one of your rental units, etc.
Want to learn more on buy-and-hold investing and a wide range of other real estate niches? Attend the 1st Annual Best Ever Conference February 24-25 in Denver, CO. It’s the only real estate investing conference whose content and speakers are curated based on the expressed needs of the audience. Visit www.besteverconference.com to learn more!