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Why Becoming A Successful Real Estate Investor Is All About Building Healthy Habits?

Posted On Thursday, 09 June 2022 20:46
Why Becoming A Successful Real Estate Investor Is All About Building Healthy Habits?

Real estate investing is different from other forms of investing in a lot of ways. But at the same time, it has one thing in common with all forms of investing: Good habits are the key to success.

But what does that mean? It will probably sound confusing to anyone who has never done any sort of investing before. Many people do not know what the world of investing is like. They do not know how frequently loans are given out, nor what the meaning of “liability” is.

This is normal. What is not normal is understanding how to take on risk regularly and still not come out at a loss. That is a skill that can only come about through practice.

So, let’s talk about how to practice investing to build healthy habits.

Investing is all About Gains and Losses

Imagine that you have $100,000 to spend on real estate investment. If we are being honest, it is far easier to make a profit with that much money than it would be if you had less money to start.

But all the same, it is still possible to lose money. And moreover, the amount of money you make with $100,000 will be very different than the amount of money that an experienced investor makes in the same amount of time. So, what makes that amount so different?

It is because an experienced investor will not just be trying to make money. They will also be trying to avoid losing money. You see, the issue is that the most intuitive way of approaching investing is to look at it as a fancy way of buying into a lottery, complete with a jackpot.

But you should not be trying to do anything so dramatic as double your money. Even a 150% gain is unlikely. Your goal with that $100,000 is not to turn it into $200,000, as that is far too distant. That kind of goal will just make you impatient and look for risky ways to make money.

To get into more detail on how to do this and why, let’s talk about gains and losses individually.

Dealing with Gains

Let’s say that you invest in a property, and it works out. You pay into a loan that someone is getting to renovate a property, and they pay back the loan with interest. What do you do then?

The natural response is to reinvest all the money you have, from the principle to the gains, into the next loan you want to finance. After all, a higher amount of money means a higher gain.

That might not be the best course of action. If you spend $100,000 and make $105,000, that does not mean that investing $105,000 will make you $110,000. In fact, it does not even mean another $100,000 investment will make you $105,000. All it means is you gained $5,000.

If you have $100,000 in total, then you should not be committing all of that money to the same investment each time. Even if you think that investment is really, truly special, remember that it can always go south. And if you need to back out, it hurts less to back out of a $10,000.

Dealing with Losses

Which brings us to the next thing to think about: Dealing with losing money. So, you went and invested $100,000 in a single project and it did not work out. Or rather, it is not working out. Part of the problem with real estate projects that do not work out is that they limp along for a while.

This can create a toxic feedback loop. You spent so much money on the project that you do not want to accept the loss, since the loss is a massive impact to your principle amount of money.

But at the same time, you cannot invest in anything else while your money is still tied up in that bad investment. That is the problem with centralizing your money into one project: Once it goes there, it stays there till the project either pays out or succeeds.

The Empire Fallacy

Lots of people like to call this form of centralization the “gambler’s fallacy”, which is basically the thinking that you have to justify your losses by committing even more deeply to those mistakes.

And indeed, it is that: A bad project will never turn a profit, and anyone who thinks it will is lying to themselves. The specific lie they tell themselves is very important to examine, however. 

People in the middle of bad investments tell themselves, “If I can just make a little bit of profit, I will pull out and break even, or at least mitigate my losses.” This goes beyond the gambler’s fallacy. This is the “Empire Fallacy”, named for the fall of almost every empire in history.

From the Roman Empire to the Japanese Empire, near the end of their time as empires they all said the same thing: “If we can win just one more battle, things will turn in our favor.”

The problem with this thinking is that if your investments were going to pay out, they probably would by the time you find yourself talking like this (source: Teifke Real Estate). 

The best way to deal with this kind of loss is to get out and find something else to invest in that will make you money.

Conclusion

Thinking in terms of gains and losses, and being realistic about those things, is the best way to build healthy habits in real estate investments. Because what you are really doing is not trying to make a huge amount of money every day from your investments.

You are trying to develop a strategy that allows you to make gains most of the time. Sometimes there will be losses, and you have to accept that. It is easier to accept that if you do not over-commit to a certain investment. All you need to do is build a strategy that makes you gain more than you lose over a period of time.

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