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Acquisition Strategy: Bridging the Gap

Come around you rovin’ gamblers and a story I will tell
About the greatest gambler, you all should know him well.
His name was Will O’ Conley and he gambled all his life,
He had twenty-seven children, yet he never had a wife.
And it’s ride, Willie, ride,
Roll, Willie, roll,
Wherever you are a-gamblin’ now, nobody really knows

–        Bob Dylan

What is so interesting about real estate investing is that many(non – investing) people think of real estate investing as akin to gambling, with the idea that buying houses is really a crapshoot – you may get lucky or you may bust.  Being a ‘gambler’ of some sort in my (rare) spare time, and also being a real estate investor, I get the unique perspective of looking at these two very different disciplines somewhat objectively, and I can tell you with great surety to that these are two entirely different worlds.

Let’s examine, first, the similarities between gambling and real estate investing:

In gambling, you can:

–        make money

–        lose(lots) of money

–        Fall victim to sick twists of chance and luck.

–        Put your ability to make money into the hands of fate

–        Be swindled

Real estate investing share theses same traits, clearly.

However, here are some traits that gambling DOES NOT share with real estate investing:

In gambling, you cannot:

–        select the hand you are dealt

–        be redealt a new hand when the odds are not in your favor

–        Make a conscious decision to choose the odds that favor you

–        Beat the ‘house’

However, real estate investing holds all of these things to be true – you can:

–        choose where, when, and for what reasons to invest – in a poker game, the cards that come to you are the only opportunity you have to make money, good or bad.  Real estate allows you to make very selective choices about the properties you consider acquiring, and due diligence allows you to gather enough information to do so.

–        resell poor investment opportunities that do not perform.  In a game of chance, such as Roulette, you cannot ‘exit’ or resell a poorly delivered outcome that results in a loss.

–        Make a conscious decision to emulate investments that, historically, have performed well(see: Determining Probable Outcomes: Analyzing Real Estate Prospects Using Historical Data by Robert Feol)

–        Choose where, and when, to engage the ‘house’

The thing that I like about investing in real estate, and let’s be clear here: I am talking about residential real estate investing with the idea of garnering positive cash flow and appreciation through intermediate to long term holding of the asset(think land lording here) is that the choice to invest ultimately lies in YOUR hands.  Too many times I hear investors who have made poor investment choices(real estate) talk about how they ‘didn’t know it was in a bad area’ or ‘the person who sold me the house really took advantage of me.’

The problem with this type of logic is that it was YOU who sat at the closing table and signed your name to the documentation that gave you title to the property.   You made the choice to buy the house, and no one held an assault rifle to your head to do so. As such, there is a certain gravity of the situation that is real estate investing, and the onus of responsibility is on YOU to insure that your house(s) is/are not a poor investment.  Naturally, you do this by verifying due diligence, collecting numbers, analyzing rents and appraised values, and in doing so you allow yourself to sleep at night knowing that you bought a great deal or you walked away from a potentially disastrous one.

Bridging the Gap

I refer to ‘Bridging the Gap’ as the distance between looking at a property and becoming an owner and taking title to it.  For most new investors, they are afraid of ‘Bridging the Gap’.  They look at investment opportunities the way they would look at a high end luxury car – something that is nice to dream about having but they will never own.

Rather than having this approach to real estate, it would be easier to institute a system that allows you to identify potential investment opportunities and determine if they would work for you, and become a possible candidate to move forward with and purchase.

A crude but simple flowchart would be:

1)     Is the property in a reasonably safe area?  If so, move on to question 2.

2)     Is the property priced at a substantial discount?  If so, move on the question 3.

3)     Is the property structurally sound?  Does it seem solid and free of structural repairs that could be costly over time?  If so, move on to the next question.

4)     Does the property need cosmetic repairs(read: paint, carpet, and cleaning?) If it needs more than this, a new investor would certainly want to turn away.

5)     What are the projected rents for the property?  Will they produce positive cash flow?  Move on to the next question if this is the case.

6)     Are there hidden expenses associated with the property that you need to be aware of?  For example, is the property taxed commercially, which will add to your taxation each year? (This happens often with multi – family units.)  What does the insurance look like?  Is it exorbitant?  Or, are the ancillary expenses in line with normal projections for the area?

Assuming that a property meets all of this criteria, you may want to consider looking at purchasing the property, because it really could be a great deal.

The key to “bridging’ the gap is to have a set of guidelines that allow you to objectively evaluate a property and determine if it warrants further consideration or if needs to be passed upon.  And, for those of you looking to make real estate investing a substantial or even full time portion of your income, you need to be looking at LOTS of opportunities.  Sift through the dog properties and find the ugly ducklings that can easily become swans.

By taking pride in your portfolio and seeing it as an overall package of vibrant, well – valued properties that perform, you are giving yourself a huge advanage over many investors who see residential real estate investing as a segmented and disjointed hobnob of properties which may or may not effectively work together.

By learning how and when to “Bridge the Gap’, you are effectively avoiding being a real estate gambler who has nothing to show for their time except ‘bad beat’ stories.

Most gamblers end up going broke.

So all you rovin’ gamblers, wherever you might be,
The moral of this story is very plain to see.
Make your money while you can, before you have to stop,
For when you pull that dead man’s hand, your gamblin’ days are up.
And it’s ride, Willie, ride,
Roll, Willie, roll,
Wherever you are a-gamblin’ now, nobody really knows.