The 3 L’s of Success is the twelfth in a series of articles to help you reach your goal. What are your goals? I know you thought about it! You know, it is your dream, wish or resolution you made! Before you can get to where you want to be, you need to know where you are going. You wouldn’t get on a bus, train or plane without knowing where it was going.
Background
One of my first major investments was real estate. I bought my first house when I was twenty-seven (27) years old, but I spent considerably more on my first apartment building. My first apartment building was a nine (9) unit which was a mix of one (1) and two (2) bedroom units. Before I bought my first building, I did not know anything about rental property. I think I spent more time interviewing and talking to various real estate professionals before I found one I could work with. Most real estate people hate first time buyers because it requires more work. Becoming a landlord was not easy!
When my parents bought assets, they generally paid cash. The only exception was their first house. Using a mortgage to buy rental properties is typical, but generally requires a different loan to value. When I bought investment property, banks required a 35% down payment. They treated it like a business with all the risks. The increased down payment meant more equity, but the mortgage at a relatively low interest rate helped me leverage my invested capital.
When I started investing in rental property, I put together a team of professionals which included my attorney, CPA and banker. My banker was an important part of my plan because I needed to get mortgages to buy property. II quickly learned that bankers treat real estate as illiquid. Real estate cannot be sold quickly. They even treated the cash flow as less than steady. Bankers like things that are more assured such as stock dividend on triple A stocks and bonds. I decided to add a business to make me more liquid.
Landlord
A Landlord is an owner of a house, apartment, condominium or real estate which is rented or leased to an individual or business. There are a lot of horrible stories about landlords and tenants, but it is up to you to avoid these issues. Landlord Nightmares provides one perspective. Owning rental property is a business and you can run it any way you like. If you screen tenants well, you can avoid most of the nightmares. You must manage your business for the kind of results you are comfortable. Tenants expect you to run your business well too. They want certain services and repairs provided in the lease.
Leverage
Leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. I used mortgages to leverage my investment. If you bought a business using borrowed funds, you probably would not earn a profit for several years. Rental property is normally leveraged by using a mortgage at a lower interest rate than business borrowing. If you buy the property right, you will earn a positive cash flow right away. If you run it well, your profit increases every year because you either increase rents or allow for natural turnover. Over time, your rental income pays the mortgage off and you achieved a steady income and you still have increased value when you sell your investment. The value of the investment is based on the gross income, hence the benefit of leverage.
Liquidity
Liquidity is the degree an asset or security can be bought or sold in the market without affecting the asset’s price. Liquidity ranges from a money market account which is immediately liquid to real estate which is illiquid. Real estate takes time to sell and price will be affected. When you have to sell your house quickly, price is the first thing that must be reduced. If most or all your investments are in real estate, you are at the mercy of the market. I decided to add a business that would improve cash flow and evaluated as a business. It improved my liquidity and provided diversity in my investments. I was always part of my plan to accumulate a variety of income streams and investments.
Final Thoughts
This is the twelfth article in the series about success; I expect to publish throughout 2012. There will be twenty-six (26) of them, one for each letter of the alphabet. The 3 L’s of success are landlord, leverage and liquidity. I think everyone wants success in life; business and career; however it takes a concerted effort to reach success. The difference between the impossible and the possible lies in a man’s determination.” Tommy Lasorda sums it up much better than I can!
I started this series because I run into so many people who have difficulty reaching success. They want to know my secrets! So I thought I would share them in a format that will be most helpful. I also think this format may make it more interesting and easier to use. My goal in these articles to provide useful and interesting information that will help you succeed. The 3 L’s of Success is now a series.
Photo by: PunkToad
Great article, i’m just getting into investment property research and compartmentalizing the main things like you did here (l’s) is very memorable, thx
Now is a great time to go into rental property. Low values and interest rates make it very attractive. Good luck.
I would really like to expand into real estate in the future. We aren’t ready financially yet, but hopefully soon. Thanks for sharing the wisdom you have acquired over the years. It will be most helpful when we get into this.
Right now, it may be perfect storm! The real estate values and interest rates are low, but there will always be opportunities.
I know. I am trying to get things together before the rates spike.
Work your plan and do what you can. Leveraging your investment with a low interest rate is almost a perfect storm. Good luck.
I think this has been my favorite letter so far 🙂
Leverage can make or break you, which is why liquidity is important 🙂
I’m glad you highlighted that owning rental property is a business and not just a source of “passive income.” Too many get into it and think it will be no work at all!
Not only is it a business, but it requires a lot of work to make it successful.
I agree. This is the best so far.
Like my future, the best is yet to come! I always look forward to tomorrow and what it holds. I think I am an eternal optimist, although I am a realist.
If there’s one thing I believe in..it’s liquidity. Every single good (or bad) financial outcome I’ve experienced could be traced back to having liquidity to take advantage of opportunities.
I believe in access to money or capital. For some that means liquidity. As I get older, liquidity provides many more choices, but access to capital will do the same thing.
Hmm. So bankers prefer stock to property. Well that explains a thing or two. Which is presumably why they were packaging mortgages up a few years ago .
Stock can collapse in price much more quickly than property, even recently in the US. Yes it is completely liquid so you can get out if you need at a loss but property is long term the better bet, even with all the overheads.
I sometimes wonder about commercial property which is more likely to crash than residential.
But you have built yourself a good portfolio there – sounds as if you were into Cashflow 101 before it came out!
When I started investing in rental property, I always had a plan. Investing in general needs a plan to be successful. If I were younger and had more time, I would invest in rental property again. The economies of scale require large numbers and it is definitely a business versus just investing. If you know what you are doing, it can be very lucrative.
Great article! As I’m an investor that owns several rental properties, I’m an avid believer in being a landlord. The learning curve is pretty steep, but once you get it, it becomes rather easy.
I agree that most real estate professionals hate first time buyers as I recall my experience with my first income property. Although I cannot imagine I’m any more liked today than I was several years ago because since I know soooo much more now, it is difficult for them to pull one over on me as so many still will try.
When I invested in income property, I really searched for a good agent I could work with. I benefited from his experience and I gave him all my business. It wasa win/win!