Navigating investment property advice can be challenging for any investor. With so many financial flows and more access to information than ever, it is all too easy to fall into the trap of misinformation.
Paralysis analysis is a common term, but it is very real. Too many streams of advice can cause real estate investors’ heads to spin and their feet to stay put.
In many cases, bad investment advice does not come to you on purpose. But whether it’s a well-meaning friend or family member, or a professional who just doesn’t have the full picture, bad investment advice can sneak in and have devastating consequences for your financial future.
As real estate investors, it is up to us to do our due diligence. That is why we have prepared a litmus test for advice on real estate investments. With this system of self-checks, you can put every piece of advice to the test to see whether or not it’s worth your time.
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Is this advice general?
One of the first signs that the advice you receive may not be top-notch is that it is general. While real estate advice comes with time-tested principles that are trusted across the board, really useful and actionable advice should be tailored to your needs and circumstances.
Generic principles can be helpful – this is not to say throw them away. However, they must be carefully assessed as they may not apply to you entirely in your situation.
Generic advice is a space filler. People give it to you when they don’t know what else to do. They don’t really want to invest in your financial situation, interfere with the complexities you face, and really interact with you wherever you are. General advice may be true, but it may not be helpful.
Examples of generic real estate advice are advice on the rent / price ratio of 1%, or buying commercial real estate contracts with a maximum rate of 8%. While both are good advice, they are also filling advice that anyone can give.
This is most of the advice on real estate forums. Pieces of advice that others have heard time and time again that are so general that they are not advice at all. Weigh such wisdom against whether it really applies to where you are now. If it doesn’t give you the tools for an actionable plan and clear direction, it just isn’t that helpful.
Does the consultant have a personal preference?
One of the reasons we turn to professional financial advisors, beyond their credentials, is their inherent lack of bias. While you may have friends or family members who are financially savvy, their advice will always come from bias. They have a vested interest in your success and the way you succeed. For example, it may be beneficial for both parties to guide you to invest in their efforts or to follow a similar path, but perhaps not personally.
When it comes to real estate investing, we must have the same standards when it comes to who we listen to. Friends and family will always struggle with objectivity. Often times, real estate consultants will struggle too. They have an idea of who you should invest with, what properties are best for your portfolio, and what their idea of success looks like for you. Their advice will always be somehow closed to what they know, and what they know is often what they are selling.
I am no different. There is no way I can give anyone advice without my own experiences and prejudices that color my advice. I acknowledge this fact and you should too!
That’s why it’s important to seek investment advice from industry voices you trust. A real estate license is not the same as the qualifications of a financial advisor, just as building a large portfolio or having many completed deals does not mean someone can give good advice.
However, there are many examples in Pyjama People forums where trusted voices have been providing common sense advice for years. These voices often have years of experience, and it’s hard to ignore how unbiased their advice is. They have no personal interest in you or your investment.
I happen to think I give pretty good advice, but when it comes to buying single-family homes for rent, it makes sense to find another voice to verify the advice I am giving.
Does it depend on your situation?
One of the features you’ll notice about most online financial advice is that it makes assumptions. Too often advice is given without even asking basic questions.
Each of us has different needs, desires and goals, and each has a different starting point. From money invested to short and long-term goals, details matter and can change the effectiveness of advice. It assumes you have money and certain steps are already within your reach. It assumes that your goals match their goals and therefore the advice given may be way off target.
Beneficial real estate investment advice does not make assumptions about your circumstances or your goals. A good advisor asks questions and first of all determines whether he or she can advise you the best. An experienced commercial real estate investor will first determine whether someone needs advice on commercial real estate or single-family homes. If it is the latter, they will delay and maybe push votes that they know are better suited.
Real estate advice is not standard. When asking for advice, it is important that you go through both the answers and the advisor. I’ve read a lot of disagreements on the forums where advisors just ignore the question altogether. Instead, they mock the one who seeks advice for even thinking about investing the way their question is asked. Make sure you get advice from an advisor who is really looking for the help you need.
Does the advice ignore the complexity?
Real estate investing may seem rather boring and generic when compared to really complex-sounding investments such as derivatives, NFTs, shorting markets and foreign currencies. For me, these investments bring at least mystery and complexity. They almost sound intimidating.
Too often we think of real estate as a very standard form of investing and the advice we hear certainly follows this belief. “Real estate is very simple, you make money when you buy a house” is the advice we often hear. “Buy low and sell high, how hard can it be?”
The reality is, there are hundreds of ways to make money by investing in real estate. Depending on the route you take, the advice you receive may override the complexity of what you are trying to achieve.
You can invest within your self-directed IRA, which comes with a very special set of rules. You can use a 1031 scholarship to defer tax payments on your winnings. You can own a property directly or you can own some of the many properties in a REIT. Each has pros and cons depending on why you’re investing in the first place.
Make sure to seek the advice of outside professionals whose sole job is to make sure you don’t break the rules or clash with the IRS. From SDIRA custodians to 1031 brokerage firms, there are real estate industry professionals who have qualified designations to assist investors. They are there to keep you out of trouble, so follow their advice.
This has nothing to do with buying low and selling high, and everything to make sure that a good investment doesn’t go bad because a complex investment was too simple.
Does the advice come from experience and credibility?
A simple question to ask any advice received is whether or not it is credible. While you hope your advisor is a credible source, we should always do our due diligence and carefully consider advice.
You don’t necessarily want advice from hyper-rich, hyper-successful individuals. You can certainly draw wisdom from it, but understand that the rich make investment mistakes all the time. The difference is that they can take the risk and take a blow much faster than most.
At the same time, an investor who is on their third investment and decides it’s time to share all of their wisdom and knowledge with the world may not be the best person to seek advice from.
It’s not about the size of someone’s bank account, but about the experience and track record as an investor. Can you clearly see where they are leading others in achieving their investment goals – whatever they may be – with sound advice? You want to get advice from someone who will tailor his or her advice to your needs and circumstances.
When seeking advice, you shouldn’t be focused on someone’s personal success story, but on how well they can connect the dots between where you are and where you want to be. It’s about devising actionable, risk-managed strategies for your future and providing advice in a way that is understandable and recognizable. Next, you should be able to track their success and see where their advice has led to real success.
The great thing about real estate forums like the one on Pyjama People is that real people there give advice on a daily basis. That can be both good and bad and frankly leads to a lot of generic or bad advice.
The conversation is great, but investors need to understand how to apply a litmus test to the advice they are getting and who is giving it. The more successful you are in removing the advice that doesn’t apply and the more you focus on the best votes for your chosen niche or investment strategy, the faster you will find actionable and targeted advice.