Don’t Fall In Love With Your Real Estate Investments

A common problem I see with beginning investors (and some more experienced ones too) is getting too attached to your investment. You don’t live there so don’t let that interfere with how you renovate, landlord or manage your buildings. Far too often we base our decisions as if we were going to be the end user.

Renovating / New Construction

Whether you are renovating an existing property or constructing something from scratch you need to keep your emotions out of your decision making and use materials and quality consistent with your area and future tenant / buyer. Don’t use granite countertops when formica might be more appropriate, for example. Choose the proper flooring for your eventual end buyer whether that means high end hardwood floors and carpet or lower end carpet / laminate or lino.

Keep finishing quality consistent with similar homes in your area. Visit other homes for sale or show homes to get an idea of where you should be.

To Keep or Sell

Sometimes our emotions dictate whether we should keep or sell a building. Don’t keep a building when market conditions, logic and the numbers tell you to sell or vice versa.

In general, fix and flips, new construction and condo conversions are investments that are set up to get in quick, do what you need to do and then sell. Timing is crucial in order to avoid a downturn in the market and keep interest / carrying costs to a minimum. Conversely, rental properties are designed to benefit from long term ownership.

However, sometimes circumstances change, either within our own personal life or with the economy of your area that may require a change in direction against the norm. Keep emotion out of it. Don’t make your decisions based on what has happened in the past or how much money you have already spent. Make decisions on what is the best course of action going forward.

For example, you may have already spent $2m to build a new warehouse. This may be $1m over budget and 6 months over schedule and you are still not done. Do you continue pouring good money after bad or do you cut your losses and sell? A lot of people might continue based on the logic of, “I have already spent so much” or “I really loved the design and I want to see it finished”.

It may well be the best decision to continue on. Just make sure you are making a logical / non-emotional decision based on the best action from today going forward. You can’t do anything about the money already spent and the time already taken. What is the best plan you can make starting today?

If the original plan was to fix and flip a residential building but the economy turned on you or you can’t get the resale value you thought you would (or that you need) move swiftly to see if you are not better off to refinance and keep the property as a rental until things get better.

Similarly, don’t stubbornly refuse to sell a rental that you have had for a long time when logic would dictate a sale simply because you have owned it for so long and grown fond of the building and the people.

Condo Bylaws / Legal Agreements

Emotions can cause problems when legal documents are being drawn up too. Far too often people getting into partnerships or joint ventures don’t even do up agreements because of friendship, family ties or not wanting to insult the other party.

You have a better chance of saving your friendship or family relationships if you both get lawyers to draw up an agreement up front. When the verbal agreement is still fresh in your minds and you are still friends.

If you are constructing a new condominium or doing a condo conversion and doing up the original bylaws I would also recommend just using a plain Jane, vanilla set of bylaws. Do not design the bylaws based on you living there. Over tinkering with bylaws will get you into trouble eventually. Even if you will eventually live in one of the units treat the drawing up of the bylaws as if you will sell all of the units.

I have done several of these and learned this the hard way. I spent a ton of time and money on lawyers the first time fine tuning the rules as I would like to see them. After the units were sold and the new buyers set up their new condo / home owners association the first thing they did was hire a condo management company. The first thing the management company did was bring in their tried and true bylaws. All that time and energy wasted.

Sometimes a new development needs some specific changes. Fine. Put those in. But in general you don’t want to give too much power to the individual owners vs. the condo board. Remember you won’t be living there. Let the owners self determine their own future. If a majority wants to repaint the complex black and purple who are you to say no? If they want to allow large dogs who are you to stop that when you draw up the original bylaws.

You are not going to lose potential sales by having generic bylaws.

Summary

Treat your investments as a business and keep your emotions out of it. I am not saying you shouldn’t be polite to your tenants. Just remember they are not your friends. If tenants aren’t paying their rent, then move swiftly to remedy the situation. This is a business relationship.

Read more about this topic in Cash Management in Real Estate Investing.



Leave a reply