Never Fall In Love With Real Estate

One of the first lessons my dad (who has invested in Real Estate for decades) ever taught me in Real Estate was to NEVER fall in love with a property. It’s just four walls and a roof, if you get attached to properties in this business, you will make mistakes.

Here's a scenario for you: Think about a married couple looking to buy their first home ever. The wife is excited, her dreams of a perfect marriage, buying a home with a white picket fence, popping out a couple kids are finally coming true. They start hunting for houses on Zillow, finding beautiful homes just outside their budget then start touring a few properties. The husband, trying to impress the wife because the marriage is young and he wants to start their lives on the right foot, starts to truly believe they can afford an overpriced home that his wife loves. He thinks if they lower their expectations, his wife won't be happy and it's downhill from there. So what does he do? He offers on a house he can't afford, with multiple offers and his wife convinces him to offer whatever it takes until they get their dream house. Now they live in an overpriced home that they can’t afford which means they’ll be stuck with this property for a long time. 

Morale of the story? NEVER fall in love with a piece of Real Estate.

This is a very low stakes scenario, but very relatable. Personally, my wife tried to convince me not to buy our first condo because it was ugly inside… The first time we looked at the condo, I asked her before we walked in to take a deep breath and walk inside with an open mind. She still hated it, and I still bought it… The reason being is we purchased the property at an AMAZING price, it needed about $10K of work, putting in flooring, paint, etc. and it was ready to go. Why did I like the deal? Because I was walking into $100K in equity (2 years later the condo doubled in value, luckily), and I could rent the property for $800+ more than my monthly expenses once we moved out. NEVER fall in love with Real Estate.

Now, to put this into context, in my last post I spoke about our first failure in Kansas City. Were we absolutely in love with the deal/property? No, but we put a lot of time, energy and effort in so we were a bit disappointed. We got home from the trip and got right back to work. Within a week, we found an 8 unit deal in Tucson. Great location near University of Arizona, large units, great price, fully upgraded, rents significantly below market. I was all in! This was a deal we could handle and make some good money on. We put in an offer and found out there were 6 other groups also offering on the property. Us, and 2 other groups were in a best and final and we had 2 days to come back with the new offer. 

We dove in deep. Took a look at the property records, demographics, tenant base (their jobs, were they families? Students? etc.), rent growth at the property and in the surrounding areas, etc. We wanted to make as educated of an offer as we could make (As we always try to do). We had a potential property manager go out to the property, facetime us and give us his professional opinion of the property and the area. 

We still really liked the deal, so we had a decision to make. Our first offer was at $1.5M and we knew we were in contention. We had three options. We could offer $1.6M with a significant deposit to show we meant business and all but ensure we got the deal. We could offer $1.525M which was the smart choice, showing we didn’t need the deal, but we had some wiggle room. Last, we could keep our offer where it was with a low probability of being in contention. Our numbers were pretty slim as it was, but it was a safe project with conservative projections and had a bit of wiggle room. We decided to offer $1.525M with the plan to negotiate back down to $1.5M or below once we got into contract.  We found out that we lost the deal to a group who came in with all cash. 

Was this a smart decision? At the time, we felt like it was. Looking back we still feel that way. Why didn’t we offer the $1.6M and wrap that puppy up? You guessed it… Because you NEVER fall in love with Real Estate. This business is very reputation based and overpaying for any deal let alone your first deal is no bueno. As comfortable and conservative as we were with our projections, we felt the best decision was to not overpay just to get into our first deal.