Five Real Estate Investing Fundamentals

By Jeff Watson, The Jeffery S. Watson Law Firm LTD, General Counsel National REIA

One of my favorite movie moments is when Ernest Borgnine, portraying the legendary football coach Vince Lombardi, stood in front of the world champion Green Bay Packers at the beginning of training camp and held aloft an oblong object proclaiming, “Gentlemen, this is a football.” What Vince Lombardi taught the Green Bay Packers then applies to real estate investing today.

Practice them over and over again. Consistently do the fundamental things that make you a successful real estate investor.

The vast majority of “investors” today suffer from what I call “squirrel or shiny-object syndrome.” They have a little success in one area, but then they are suddenly distracted by something else and go to another area, and then another, and then another. The bottom line is they lose their focus and intensity, and they don’t continue to practice the same thing over and over again. Let me remind you, slow and steady wins the race!

In addition to becoming good at the basics, I urge real estate investors to establish their investment parameters. • What kind of investments or deals do you want to do? Are you going to do loans? Are you going to use options? Are you going to buy rentals or tax liens? Are you going to invest in commercial properties? Pick two or three (no more than that) of these things and get very good at doing them. Do them over and over again. • Determine what you are looking for in each of your potential investments. • How much capital per investment are you willing to put at risk? • How much time will you put into this investment? • What is the length of time you want your capital to be out working? • What is the projected rate of return you are seeking? • What is the minimum rate of return you want from your cash and/or time in each of your investments?

When I say “rate of return,” I’m not just talking about an interest rate. • Do you want your investments to result in your receiving monthly income payments, either interest only or something else, so each investment is generating a monthly cash flow to you? These are just some of the parameters you need to establish for yourself. There is no one book, manual or class where

you can learn all this information. No, it requires your spending some time working on what you think is best for you. That means you may have to do one of those activities in which investors should engage on a regular basis but often don’t – think and plan. As you think and plan, you will be able to clearly define your investment parameters in a way that you can clearly communicate with others who may want to do business with you.

Another key component of real estate investing involves your due diligence process. There are two very crucial questions to be asked at the beginning: 1. Who is involved?

2. How are they involved? Allow me to explain why these questions are so important. It doesn’t matter how papered-up or how careful your lawyer is when drafting the agreements. If the person on the other side is a person of weak or poor character whom you know has a tendency not to honor their word, it will not be a good deal. You want to be in a situation where someone you know who has very high character and is a capable investor is involved in the transaction. You still need to know HOW they are involved. Are they going to be involved in a way that will make sure the deal goes well, or are they just on the periphery and their name is just being “borrowed” for marketing or window-dressing purposes? Once those key questions have been answered and you understand who is involved and how, and you have done some basic due diligence on them, then you are able to determine if you want to proceed with further due diligence on the deal or investment. Even though you may have a long, successful track record of doing multiple deals with individuals, it never hurts to check up on them again to see if things have been going well in other aspects of their lives. Allow me to share a brief story to illustrate this point. A client of mine indicated that he had made a series of large-dollar, hard-money loans to a rehabber who always got the properties finished in great condition, and they sold for top dollar. After doing several of these deals, he began to feel very comfortable with this borrower. Unbeknownst to him, this borrower was having marital problems. Once those problems grew to the point where domestic relations court and lawyers became involved, this individual’s rehabbing business fell apart, and one of my client’s loans was put in a great deal of jeopardy. Fortunately, things worked out and full payment was made, but it was late and destroyed my client’s belief that this rehabber could be counted on to perform and pay on time. Make sure you develop the type of relationship with the individual with whom you are doing business that allows you to look them in the eye and ask them how they are doing and what else is going on in their life so you can pick up on what issues may be on the horizon that could affect the way you are doing business with them.

There is one last fundamental principle that investors need to understand that I want to share with you. You need to organize your paperwork. You need to have all your baseline transactional documents saved in Word format so you can easily do your own word processing and create nearly-completed drafts of your documents to be reviewed by the appropriate outside professionals and other parties to the transaction (yes, get a professional review each time). By always working from a baseline document, you have a template in place so you aren’t reinventing the wheel every time. You are also able to maintain a greater degree of privacy and security over what you’ve done with other deals. I often see individuals who grab the last document they used (last lease, last trust agreement, last operating agreement, etc.), and they begin making edits to that one for the next deal, not realizing that there may be holdovers, both digitally and facially, in that document. Has that ever happened to me? Embarrassingly, yes. I have taken steps, however, to prevent it from happening again in the future. That’s why I’m sharing this concept with you. Whatever the type of document, whether promissory note, mortgage, deed of trust, option agreement, due diligence checklist, or borrower questionnaire and loan application, have them saved in a baseline format that you can quickly modify for the particular deal on which you are working. This will allow you to be much more organized as you prepare these documents on your own to be sent to your lawyer or other licensed professional for review and then used in the transaction. Remember, it’s all about getting good at the basics. Make sure you master the basics of real estate investing, establish your parameters, do thorough due diligence regarding those with whom you are working, and work from the same, consistent set of documents so you can continue to repeat your successes. National REIA