Don’t Invest in Real Estate on Unfounded Optimism and Emotions
“Luck is when opportunity meets preparation.” – Seneca
Theresa Bradley-Banta, who is a multi-award winning real estate consultant, author, and speaker, and an active real estate investor, experienced asset manager, and owner-operator of single-family rentals, multifamily properties, and international single family development projects, 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.
I interviewed Theresa on my podcast a few years ago and she provided her Best Ever advice, which is a sneak peak of the information she will be presenting at the conference. Her advice addresses the question why shouldn’t you invest based on unfounded optimism and emotions?
Originally published in the Best Real Estate Investing Advice Ever: Volume I
Theresa’s Real Estate Background
Theresa got started in real estate in 2004 by purchasing and managing rental properties. In 2005, she attended a national wealth-building seminar with her husband and decided to add passive real estate investing to her portfolio. At this seminar, they came across two investment groups whose services they ended up utilizing for their first out-of-state investments. These investment groups identified properties in Ohio and New York, purchased them using Theresa’s funds, and then conducted a majority of the work (renovations and management), making for strictly passive investing.
Theresa’s experiences working with these investment groups shed some light on two issues. First, the difficulties faced when investing out-of-state. Secondly, as a passive investor, Theresa did not have a lot of say in what was happening. The combination of these two issues led her to decide to invest in her own backyard, working primarily as a renovator and flipper of residential real estate.
Over the last 12 years, Theresa has been involved in many aspects of the real estate business. She has flipped properties from $50,000 to $2.5 million across the nation. She founded Theresa Bradley-Banta Real Estate Consultancy, which has won 11 American and International Real Estate Rewards. Theresa is the author of “Invest in Apartment Buildings: Profit without the Pitfalls.” In 2006, Theresa was involved in her first out-of-country business endeavor in the capacity of an investor and advisory group founder for a development deal in Mexico.
The Mexico deal was a residential development project outside of a resort area. The project involved developing the land into lots that were used for building residential residences for either vacation homes or people’s second homes. This deal came about during an annual wealth-building seminar that she attended in Mexico. During this seminar, members of the wealth-building group tossed around the idea of a development project over margaritas. One of the members at the table had built a home in Mexico and lived there for half the year and another woman knew someone who was currently doing developments in the area. Due to the experienced members at the table, they decided to move forward with the project.
Theresa was able to get in on the ground floor by leading the advisory group that oversaw the covenants and restrictions for the development, which will eventually be the Home Ownership Association (HOA). Up to this point, HOAs had been a pain during the other investments that Theresa had done, so being on the other side was a very illuminating experience.
There are international challenges that make ownership in Mexico different than ownership in the United States, so the education piece on what is or isn’t allowed is very important. Since she had met so many good people that knew the Mexico laws, had already developed real estate in Mexico, and had experience living in both the United States and Mexico, Theresa had a team with the education and experience that gave her the confidence to move forward with this deal.
Don’t Invest on Unfounded Optimism and Emotions
Theresa was obviously excited about the prospect of investing in Mexico, but she made sure that she did her due diligence and was surrounded with an experienced team before making the decision to move forward. She did not invest based on her excitement alone because Theresa’s best advice is to “never invest on unfounded optimism and emotions.”
For example, let’s say you find a deal on a 2-bedroom rental where the numbers look great and you really want to close on the property. Your real estate agent advises against the purchase because 4-bedroom rentals are in demand in this market, not 2-bedroom rentals. You erroneously believe that the property is in demand and respond by saying “I am optimistic things will change. I am optimistic it will be better.” Theresa thinks this is a huge mistake.
Advice in Action #1: Don’t invest on unfounded optimism. Just because the numbers make sense, does not mean the deal automatically makes sense. Be patient, perform your due diligence, and make an educated decision on whether or not to move forward.
Another example is when people fall in love with a property or have an emotional attachment to a property. Theresa was looking at a building on the East Coast with a client that was the coolest building. It was an old school house that was converted into apartments and had a “cool factor” because of the layout, space, staircases, foyers, etc. The numbers were solid, and the current owner said nearby schools would provide perfect potential tenants. However, tenants with numerous collection issues and late payments currently occupied the property.
At this point, Theresa’s client was in love with the property and was enthusiastic on making an offer, but Theresa took a step back, and went to the local police to get a police report. The police stated that the tenants in that market will likely never change, at least not in the next five to ten years, making it a very high risk deal to do.
It is easy to say that a property is so cool that you can just picture the right tenants in there. If you only go on this optimistic assumption, when you are the owner, you will find that you can’t easily change that market. From Theresa’s experiences, she finds that it might take 5-10 years before you see any significant changes, so the tenants who were living there when you closed the deal will be type of tenant you find in that market for quite a while. As a result, you will have some serious problems on your hands.
Advice in Action #2: You can only reposition a property so much. There a certain things you can change about real estate, but location is not one of them. If you purchase a property with the optimism that you will somehow be able to change the market, you will run into some serious issues.
There are times you can influence the direction of a neighborhood through community service efforts, getting involved in local government or other methods, but it’s an uphill battle. If you decide to do that, then I commend you for taking that approach, but I don’t recommend running your numbers assuming it will turn around.
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!
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.