Think of the most financially successful person you know.
Chances are that person, in one way or another, is involved in real estate. Is this because real estate is a superior asset class compared to other types of investments? Or could it be that investing in real estate requires a different mindset?
I’m convinced that real estate requires the investor to have a different mindset. And it is this mindset that increases the investor’s chances of success. Before you read any further, please understand I am not recommending real estate as an investment. What I am saying is helping our clients think like real estate investors can improve their chances of positive investment outcomes. But thinking like a real estate investor may require a mindset shift.
The first way we need to think like a real estate investor is to have a long-term perspective. Remember that successful real estate investor. Most likely that person is a long-term investor and not a short-term house flipper. In our industry, the house flipper is akin to the day-trader who is in and out, focused only on quick appreciation. Successful real estate investors generally buy long-term real estate assets that appreciate over time and generate predictable cashflows.
We measure what we value.
“How much real estate do you own?” If you put this question to a real estate investor you’ll usually hear something like, “I own one hundred doors.” Well, that’s interesting. Why wouldn’t they say something like, “My real estate portfolio is worth ten million dollars”?
Most real estate investors focus on the number of units they own and the cash flow each unit generates. Appreciated value in real estate is important, but it only becomes the primary consideration when the owner is calculating taxes or considering liquidation. Any other time appreciated value doesn’t really matter.
I believe this real estate investor mindset shift could be extremely valuable for our clients’ investment portfolios. Helping clients change their focus from appreciated value to the number of units they own and the amount of cash flow generated within their portfolio is a more useful measurement than the rate of return (ROR) over the last quarter. If ROR is the focus, put on your seatbelt. You and your clients are about to go on an emotional roller coaster. Instead, help them focus on what real estate investors focus on – the number of units (“doors”) they own and the cash flow those units generate.
The benefits of applying the real estate investor mindset.
Every day our clients are inundated with “breaking news” about the stock market or some investment product that promises to save their financial future. When I talk with my real estate investor friends, they usually seem so calm. They’re not worried about the latest economic headline. Why? I believe it’s because, compared to the average investor, they have a better understanding of what to focus on. They don’t let temporary valuation reductions (i.e. market volatility) interfere with their long-term investment goals. Their real estate investment goals generally relate to a certain number of “doors” they wish to own someday. And they know those “doors” will generate the cash flow required to live out their dreams in the future.
We can help our clients shift their mindset. Instead of focusing on daily fluctuating portfolio values, clients will focus on the number of units/shares they own. They will understand how those shares generate the cash flow they need. In helping them shift their mindset, we help them develop a long-term view that can significantly improve their potential investment outcomes.
To learn more about using Real Estate as an analogy to shift your clients’ mindset, check out the resource in the link below. Shifting our client’s mindset from fluctuating daily values to a focus on owning high quality units/shares is one of the core principles of the Portfolio Waterfall planning process. If you would like to learn more about how to apply this investment philosophy in your practice, please contact me anytime to schedule a strategy call.
