Read an Excerpt
The Real Estate Coach
By BRADLEY J. SUGARS
The McGraw-Hill Companies, Inc.Copyright © 2006 Bradley J. Sugars
All rights reserved.
Part 1 Follow the Rules
As the clock struck 11:00, Brian pushed open the door to the Coach's office and gestured to his wife to walk in. As the door swung closed behind them, the Coach appeared from his inner office, smiling.
"Good to see you two," he said, hand outstretched. "Come on into my office and take a seat."
Brian glanced over to Sarah as they entered; he clearly liked what he saw.
The Coach took a seat at the large round table that filled half of the ornate office. His new clients followed his cue and seated themselves. It was just as well that it was a comfortable office, Brian thought. They were going to be spending a lot of time here.
Brian could immediately tell that the Coach was highly organized. He watched as the Coach picked up a manila folder from a neatly stacked pile on the desk and handed it to Sarah. Together they read the label on the front cover.
Follow the Rules
"You know," the Coach began, "it always amazes me how many people just dive straight in and buy their first investment property before they have stopped to think about the big picture. I mean, most people seem to just want to get a foot in the market before they even have a half reasonable idea of what they ultimately want to achieve, how they are going to achieve it, what structures they need to set up, and what principles they will use to guide them. And the real scary thing is that most of them don't even seem worried that they haven't gotten the basics in place first. If the truth be known, they probably wouldn't even know what the basics are."
He stopped and cast a careful eye over his new students, eager to see whether what he was saying was making an impression.
"If there's one thing I want to impress upon you today it's this: Don't, whatever you do, fall into this trap and make the same mistakes that the vast majority of so-called investors do."
He paused to let that sink in.
"My main message today is to follow the rules. Follow the rules and you'll find it's really quite simple."
Sarah nodded as she glanced over to her husband.
"Now you both have good incomes, right?" the Coach paused as they both said yes.
"So, does a good income equal rich or even plain old wealthy?"
Sarah jumped in, "Probably not, but it helps."
"Great answer, income rich doesn't mean you have wealth behind you. You see, simply put, the aim of working is to not have to work."
The Coach went on before they could ask any questions.
"You make money from a job and should put some aside to invest over time; the more you put away and the better you invest determines how long you have to work before your investments will pay for your lifestyle."
"But Coach, we have no surplus; we are always paying our bills," Brian felt embarrassed as he said it.
"Brian, that's exactly why you need to start investing. Put simply, you don't need to be rich to invest, but you have to invest to be rich."
Sarah was busy taking notes but lifted her head to ask, "So, you're saying we can retire early?"
"Great point, Sarah. Retirement is a function of money, not age. If you have enough invested you can retire at any age; problem is people would rather buy the latest shoes or watch or perfume on a credit card than buy an investment property. That, my friends, is going to have to change."
Brian knew that they could easily cut back in a few areas. In fact, he'd thought about it before but really had no goals that meant he had to do it.
"The basic idea of becoming wealthy is to first develop your cashflow through your job or your own business, and then to turn it into physical assets that in turn produce a cashflow all of their own."
As Sarah turned the page in her folder she noticed the Coach had already printed some notes for them.
"We all think we know what an investment is," the Coach began. "We use the term almost every day. People talk about investing in property, shares, art, stamps, coins, antiques, and vintage cars. But which of these are really investments?"
Brian looked up quizzically.
"What do you mean, Coach? Surely if you buy something with a view to selling it sometime in the future for a profit, then that's an investment."
The Coach settled back in his chair and ran his fingers through his neatly groomed hair.
"It really all comes down to what we do with these things we 'invest' in," he continued, emphasizing the word invest.
"What do you mean?" Sarah asked.
"Understand this: Most people focus on only the first part of my definition for an investment. As long as it appreciates in value, then they regard it as an investment. They are concerned only with the projected capital value of the item they have bought. But here's the real point. A true investment must also produce cashflow along the way. It must produce an income stream while it's increasing in value. See, most investments only increase in capital value slowly. There are exceptions, of course, but in general, this is a longer, slower process."
Brian nodded; he could see where this was leading.
"One other thing: most people who regard themselves as fairly familiar with investing also make the mistake of believing it's just about a return on investment. They seem to think that as long as their investment is producing a cashflow of, let's say, 11 percent a year, they are doing well. But I say you need to ensure you get a return of investment first. You need to be sure your initial outlay is safe before you begin receiving a return on your investment. Far too many people have invested in dubious schemes based on a healthy projected return on investment, only to find they lost their initial outlay after they had banked the first few returns. Does that make sense?"
Both Brian and Sarah shook their heads. Again Sarah found the Coach's note first.
The Coach stopped Sarah from jumping ahead in their notes as they discussed the next lesson.
"It's important to clearly understand why you want to invest in property in the first place," the Coach said. "If you don't, then you run the risk of disappointing yourself."
Sarah was thinking she knew what the Coach was talking about; it had been her one concern about entering the real estate market as an investor.
"Decide on your outcomes up front and then you will be in for no surprises. See, you buy an investment property for one of two reasons only: capital growth or cashflow."
"What do you mean by that, Coach?" Sarah asked.
"Either you go for the long-term value in the property—what you will be able to sell it for in years to come—or for the income it will produce for you week in and week out from the time you bought it."
"But can't you have a property that is good for both, Coach?" Sarah asked.
"You'll find it's usually one or the other, Sarah. See, a good income-producing property will usually be found in a lower socioeconomic area, and these properties don't usually appreciate that much in price. Capital growth properties, on the other hand, are those in more prosperous areas. They usually don't attract a great rent, but they will appreciate nicely in the long term. When we get to discussing building your property portfolio later on, I'll show you how and why you need to buy both types of properties."
"Now, out of those two reasons for buying property, you've got to remember that one of them is far more important than the other; can you guess which one?"
Brian had already turned the page and guessed right with capital growth, but then the Coach asked him to explain why.
"Not really sure, Coach," he replied.
"Well, at its most fundamental, your job or business brings in the income, and your property investing is where you get that money you make to grow over time."
Here's what Brian had read.
"Let's look at the rules that will guide you as you invest in the real estate market. The thing to bear in mind is that there is a difference between an investment and a speculation. A huge difference. So what is that difference?" he asked, and leaned back in his chair. His question was met with blank stares.
"Well, the difference is that when you invest, you do so in accordance with a set of rules. Remember, follow the rules."
Both Brian and Sarah nodded.
"You see, most investors are really gamblers, they have no set plan and no set of rules to follow, and they make investing choices based on quick decisions. This is nothing more than speculation at best, and I want you to become investors and high-quality ones at that.
"There are in fact three sets of rules you need to play by. These include the overall rules of the game, your own rules of the game, and specific rules for the specific game you are playing at the time."
Sarah got ready to take more notes. She knew the Coach was about to elaborate.
"The rules of the game are the general rules as laid down by the government, local authorities, banks, legal institutions, real estate agencies, and local conventions. You have basically no control over these rules."
Sarah was grateful she knew shorthand.
"Your overall vision, mission, goals, and objectives will determine your rules of the game. They will be established according to your overall situation and circumstances. They will reflect your modus operandi, ethics, morality, wishes, and desires. You set these rules, and you can change them. If you do decide to change your rules, first check with a mentor or someone whose opinion you respect, to see if it is really your rules you need to change, because the environment you operate in has changed, or if you are just becoming lazy or careless."
Brian was writing as fast as he could but was thankful that he had Sarah to rely on if he fell behind.
"Your specific rules for the specific game you are playing at the time will vary according to which marketplace you are dealing in at that moment—whether you are dealing with an inner-city unit or an outer suburban refurbished house. They could also vary according to which city you are dealing in and whether you are buying a house to live in yourself or one that you are buying for capital growth only. Again, these are your rules and you can change them to suit your situation."
Sarah was impressed.
"Now I understand the value of having a set of rules, Coach. I can appreciate how important they are."
"And they become even more vital when you consider that you could be playing many games at the same time," the Coach continued.
"You could be investing in different markets. Generally speaking, there will be different rules for the following types of properties: inner city units, inner city houses, fringe city units, fringe city houses, outer city units, outer city houses, satellite units, and satellite houses."
"In addition, there are different rules governing new units, existing units, and refurbished units as well as new houses, existing houses, and refurbished houses."
Brian whistled in surprise.
"Each market is different," the Coach went on.
"The investing rules for buying a new inner city unit are quite different from those that apply when buying an existing house in an outer city suburb. Then there are rules for property you intend living in yourself, property you intend renting out, property you want to buy and then sell again quickly, property you intend holding onto long term, property you aim to get capital gain from, property you're buying for a rental purchase plan, and property you're buying through vendor finance deals. In fact there are about 27 different types of residential real estate categories—I like to be involved in several of these at a time."
"Between now and next week, I want you to go and look at 11 houses at open houses or such and start to see what's for sale and what's rented," added the Coach as he glanced at his watch indicating their hour was complete.
Both Brian and Sarah felt mentally exhausted by the time their first session ended. They also felt strangely stimulated. The Coach smiled as he showed them to the door; he had seen this countless times before and knew they had the makings of great real estate investors.
As they got to the car, they saw the last page of today's notes.
Brian was amazed at how quickly the week had flown following their first session with the Coach. Sarah had felt drained; such was her intensity in their session. She remarked to her husband that it had reminded her of the first time she had signed up with the gym all those years ago.
Brian, too, had felt the difference. He had never felt better; his stomach pains seemed to have become a thing of the past and that relieved him. He had stopped beginning to fear for the worst.
They found themselves looking forward to their next session so much so that it began to dominate their discussions. This, they agreed, was a good thing, as it drew them closer together by giving them something in common to become passionate about.
They were discussing this when the Coach opened the door in response to their knock.
"Hello, Coach, how are things?" Brian asked as the door opened.
"Good to see you two," he responded. "Come on in."
He led them to his office and beckoned them to their seats. He handed them their folders for the session, and outlined the main topic on the agenda for the session.
"It's a strange thing, but the more you know, the better the decision you can make," the Coach began. "It all comes down to the quality of your teacher or mentor. See, the better your teacher, the better the knowledge you will have. And the better your knowledge, the more informed you will be, which will enable you to ask better questions and thus make better decisions. This will, in turn, have an impact on the actions you take and the results you get."
Brian nodded. This was, after all, quite logical, yet he could see right away that it was probably one of the main reasons he hadn't quite achieved all he had dreamed of.
"When you are investing in high-cost commodities like real estate, you really want to minimize your risks because mistakes here can be very costly. Most people simply can't afford to make too many mistakes, can they?"
Sarah nodded. This was the major worry she had about becoming a real estate investor.
"So how do we ensure that we won't be taking too many risks then, Coach?" she asked.
"By doing your homework well," he replied. "And by that I mean you need to be getting out in the market, becoming an expert in what is happening. You need to inspect at least 50 properties before you begin negotiating 10 of them. And of that 10, you'll only negotiate an agreed deal on 3 and probably receive finance for just 1. That's the level of activity you need to be aiming for."
Brian whistled in surprise, as he knew how hard it had been for them to get to see just 11 properties that week.
"Think of it this way: If you inspected 50 properties, you'd soon get a good grasp on the market in that particular area, wouldn't you? You'd quickly get to know what good value is and what isn't. You'd also get to know which agents are good and which aren't."
"We'd be starting to minimize our risk," Brian responded.
"That's absolutely right," the Coach replied.
"As with any profession, job, or skill, the more you do of it the better you get. Buying real estate is no different; the more you see, the more you know. The more people you ask for ideas and advice, the better your decisions will be. And so on."
The Coach directed them to the first page of this week's notes.
"You'll remember from our last meeting that I refer to investing in property as 'playing the game.' If you want to get into real estate investment, you have to abide by the rules of the game. Every game has rules, and playing the property game is no different."
Brian nodded and smiled. Sarah had always accused him of being more interested in sports than business.
"The first thing you need to do is understand the rules of the game you are playing. See, imagine what would happen if you went to watch a football game and only one team knew the rules. The other team wouldn't stand a chance, would they? They would be taken to the cleaners."
"It's the same with property investors, isn't it?" the Coach continued. "If they don't know the rules of the game they are playing, they will lose big time, won't they? I have seen far too many people make expensive mistakes simply because they didn't know what they were doing."
He paused to let what he had just said sink in.
"And remember, there are different rules you need to know depending on what market you are investing in. The rules can also be different in different countries and states. Local governments also have their own rules—for example, when subdividing blocks of land and building townhouses, the rules can differ from city to city."
Sarah completed her notes and asked: "So, Coach, it's up to us to find out what the rules are depending on what we want to do in real estate? I mean we need to really do our homework well before we take the plunge and start buying."
The coach smiled. "You learn fast, Sarah."
"So how do we find out what the rules are, Coach?" Brian asked, beginning to feel the slightest hint of that old stomachache once more. Must really be connected to stress, he thought.
"That's where having a good team on your side comes in," the Coach replied. "Talk to estate agents, lawyers, building contractors—anyone you think may have the information you are looking for. And even if you don't know what you are looking for, still go see your team. Show them what you are planning and ask them what you should take into consideration. Get talking—and really listen."
After a short pause to let them complete their notes, the Coach continued.
"Generally speaking, local government rules around the world are fairly similar. You pretty much need a permit for everything you want to do. It's important that even as a novice investor you understand that you have to follow the rules, rather than try to beat the system. Remember, rules are made to be followed," said the Coach with a wry smile as he had them turn to their notes.
"Now that we have discussed the rules of the game, we need to think about yet another set of rules that you must obey if you are to win the real estate game long term," the Coach began. It didn't surprise him that both Brian and Sarah had a look of astonishment in their eyes.
"What other rules can there possibly be, Coach?" Brian asked.
"Think back for a minute, Brian. Why are you doing this? What is your motivation? And what will ensure that you meet your goals?"
There was a short silence before he replied rather hesitantly: "You mean our own rules?"
"That's right, Brian. Your own rules. See, you need to bear in mind that there is a difference between investing and gambling, or as some refer to it, speculation. What's that difference, Sarah?"
Excerpted from The Real Estate Coach by BRADLEY J. SUGARS. Copyright © 2006 by Bradley J. Sugars. Excerpted by permission of The McGraw-Hill Companies, Inc..
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