Feel the fear and do it anyway!

Recently I had the privilege to be a guest on James Nelson’s podcast, Real Estate Investing – Live from New York.  I was on his show promoting my new online real estate investing course, The Great Game of Real Estate Investing.  It’s my third time being a guest on his show.  James is an excellent podcast host.  Unlike some podcast hosts, he’s well prepared, he has insightful questions and excellent comments that enhance a guests’ presentation.  I would highly encourage you to listen to his podcasts when you have a chance.  He’s worth listening to.

The Ninety-Five Percent

During our conversation, James made a passing comment which got my attention.  He said that 95 percent of his listeners never end up buying their first rental property.  Ninety-five percent!!  He went on to say that the advice he gives his listeners to overcome this inertia is, to borrow a phrase from Nike, to just do it!  As simplistic as that advice sounds, it’s good advice.  It really is.

I believe fear is the number one reason people don’t invest in real estate.  And I believe James’s podcast audience is typical of most would-be investors.  They can’t pull the trigger to buy their first rental property.  It’s not because of a lack of money, or a lack of knowledge that prevents them from investing in real estate.  It’s fear, plain and simple.

4 Types of Failure

As we all know, there are many types of fear – fear of public speaking, fear of flying, and fear of heights to name just a few.  But I believe there are four types of fear that prevent people from investing in real estate.  They are:

Fear of FailureFear of the UnknownFear of InadequacyFear of Rejection

Anyone of these fears can torpedo your chances of buying your first rental property.  So let’s go through them, one by one.  Today’s article I’ll tackle the first two fears – The Fear of Failure and the Fear of the Unknown.

Think about this statement: Everything you really want in life is on the other side of fear.  Is that true?  I believe it is.  Think about that first kiss.  Hmmm???
How about the first time you did anything well?  A solo, a speech, an athletic endeavor.  Do you remember that fear you felt that gave way to relief? And then to joy?  So let’s see how fear affects real estate investing.

Fear of Failure

Fear of failure is all about looking foolish in the eyes of family and friends should things go wrong.  But I believe it’s based on wrong thinking which is, “You win or you lose.”   Those who are reluctant to invest in CRE need to adopt a different mindset of, “You either win or you learn.” In everything we do, we either win (we make the right decision), we do the “happy dance,” or we learn what not to do so the next time we have a better outcome.  Sometimes your investment is a home run, and sometimes you learn what not to do so next time has a higher probability of being a success.  Over the years I’ve observed that highly successful real estate investors understand and practice this truth.

In 2009, a group of like-minded investors banded together to purchase a 56-unit apartment that had been taken over by the bank.  Do you remember what was going on in 2009?  We were in the depths of the Great Recession.  The real estate market was in a freefall.  Everybody and their brother was running away from real estate in 2009 and here we were thinking about buying an apartment.  Was I fearful?  You bet I was!

But I kept looking at the numbers and it made sense to me.  Looking back on it now, it was the best investment I’ve ever made.  For every dollar invested we have received to date $10 dollars back in either owner distributions or in increased equity.  But before I could invest, I had to get over the fear of failure.

This reminds me of the well-known quote by Warren Buffett.  “I will tell you how to become wealthy,” he said.  “Be fearful when others are greedy.  Be greedy when others are fearful.”

There is one more truth about the Fear of Failure that we need to address before moving on which is explained beautifully in this cartoon by Steve Moore.  The cartoon is both humorous and serious at the very same time.

Notice the guy on the starting line ready to run the Fear of Failure Marathon.  He looks over to the people on the sidelines who are all saying something like, “Heck no. I’m not going to run in this race.”  And notice what the guy on the starting line says to the people on the sidelines.  He say’s “ditto” which means, “I agree.”  In other words, he too is fearful just like them.

But he’s also courageous because he’s ready to run the race even though he’s fearful.  And that is the serious message contained in this humorous cartoon.  Fear and courage are not mutually exclusive.  And that is how we have to be when investing in commercial real estate.  It is okay to feel both emotions at the very same time.

Fear of the Unknown

Fear of the unknown also stops many people from investing in real estate.  But it need not be that way.  Every new investor could take away much of the uncertainty of real estate investing by answering five questions before they buy their first rental property.

If you’re investing in real estate for the first time, the first question you need to answer is:

Do I want to be an active or passive real estate investor?

An active investor makes all the decisions about the property such as what property to buy, how much to offer, who will manage the property and which lender to use for financing their property.  A passive investor allows someone else to make all those decisions and many, many more.

If you want to be a passive investor, you only have one decision you need to make.

Who do I invest with? 

There is no doubt in my mind that every major real estate market in the country has several reputable commercial real estate sponsors that are looking for people like you to be passive investors in their next real estate venture.  You need them for their real estate expertise, and they need you because they are tapped out of funds to buy the next rental property.  It’s truly a symbiotic relationship.

But if you decide you want to be a passive investor, understand choosing who you want to invest your hard-earned money with is really the only major decision you need to make.  Once you’ve made this decision, you can kick back and relax.

But let’s say you would rather be an active investor.  You have four different decisions you need to make.

Do I want to invest by myself or do I want to be the decisionmaker for a group of CRE investors? 

The advantage of being a solo investor is that you don’t have anyone else to satisfy about your commercial real estate investment strategy.  But the disadvantage of going it alone is that often times you don’t have the financial resources to buy anything more than a small rental property, e.g., a duplex.  If on the other hand, you are the managing member of an LLC with, let’s say with four other investors, you now have significantly more money for a down payment and with more equity the group can buy a larger property.  But the downside is you now have investors you will need to keep happy.

Who do I want on my real estate advisory team?

You should add people to your advisory team where you lack expertise. Each of these advisors should bring their unique backgrounds and experience to the team enhancing your chances that all the potential issues will be identified upfront during the due diligence process instead of being unpleasantly surprised after the transaction closes.  At the very minimum you should consider having on your advisory team a:

Real estate brokerMortgage brokerReal estate attorneyGeneral Contractor/Building inspectorProperty management companyCPA/Accountant

One common issue I have with many of the books on real estate investing is the amount of unnecessary detail they provide about the role of each of these real estate professionals.  I’m going to let you in on a little secret: I will never have an adequate working knowledge for most of these areas of expertise, certainly not enough to help me make an informed decision about whether I should purchase a property!  And that is why I seek out honest, knowledgeable real estate advisors.  I rely on their judgment and so should you.

The very best thing you can do is to be very diligent in finding the absolute best members for your real estate advisory team.  And because you have a trusted real estate advisory team you don’t need to “get lost in the weeds” learning what each of your real estate advisors already knows.

How will I finance the property?

You have three choices: 1) if you’ve done this before, you can go back to an existing lender relationship; 2) you can shop the mortgage market on your own; or 3) you can employ the services of a commercial mortgage broker.  I strongly believe your best chances of getting the best possible loan for your property is going through a mortgage broker, which I will explain in detail why that is the case in Module 4.

How will I manage the property?    

Again, you have three choices: 1) you can self-manage; 2) you can hire an on-site manager who reports directly to you; or 3) you can hire a property management company to manage your property.  Each option has its advantages and disadvantages and which you choose is based on those criteria that are most important to you.

But once you answer these questions, Fear of the Unknown is significantly reduced because you now have made several critical decisions about your future rental property.

There you have it.  Overcoming Fear of Failure is all about changing your mindset from “You win or you lose” to “You win or you learn.” Overcoming the Fear of the Unknown is significantly reduced by answering these five questions.

Winston Churchill said it best when he said, “Success is not final, failure is not fatal; it is the courage to continue that counts.” 

Those are my thoughts on Fear of Failure and Fear of the Unknown.  I welcome yours.  What do you believe holds would-be investors back from buying their first rental property?

Doug Marshall is the award-winning author of Mastering the Art of Commercial Real Estate Investing and the online course The Great Game of Real Estate Investing.

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