What Driving a High Performance Vehicle on a Race Track Taught Me About Real Estate Investing– Part2
Updated: Jun 20, 2019
The Further You Look Ahead, The Better Your Performance Will Be
When I was driving on the race track at a very high speed, maneuvering and pushing my limits on the road, the main lesson that I learned is that I gained confidence in my abilities only after I understood the road and the different challenges that I met going forward. Knowing what was waiting for me around the corner improved my performance and I was able to apply all of the lessons that I had learned that day.
The same principle applies when it comes to real estate investing. As a passive investor, you need to closely examine the business plan and make sure it is forward-looking in the near future, while still always having a plan B in case of an economic downturn. Look at the deal’s sensitivity analysis and determine if it still works if the exit occurs during another recession. Looking at a new deal and verifying the worst-case scenario will make sure you invest in the right deals and improve your returns.
Make Sure You Have a Security Wall, But Don’t Focus on It While Driving
One of the main lessons but I remember from that day came from one of my instructors, who tried to instill confidence in me by assuring me there is a wall around the race track. He said: “You have a security wall, but when you’re out there driving do not focus on the wall, because you are very likely to crash right in it.” So, I did. Knowing that I had the wall made me feel confident about driving fast and I was able to trust the car’s ability to perform. At the same time, though, I wasn’t looking for the wall and didn’t focus on its existence, which would’ve taken my focus away from the track.
Security in real estate investing can come in many forms: Capital Reserves (money set aside each year for unexpected capital expenses), Insurance, and other reports that the syndicator provides. Making sure that you have those security walls is crucial, but once you made your investment, focusing on the security walls (obsessing over all the things that could go wrong) will make your life miserable. Prepare for the worst and hope for the best.
CPR Is Key When Something Goes Wrong (Correct, Pause, Recover)
An interesting technique to deal with an obstacle is the CPR method presented by my instructor: don’t freak out if something went wrong. You’ve got to correct the mistake (straighten your car if it goes sideways for instance), pause for a second to process what happened, and then recover by continuing to drive. Simple? Yes. Hard to implement on the field? Absolutely. When I screwed up in the field, my go-to method was to stop the car completely to re-evaluate my mistake. But after a few times, I noticed that this method was slowing me down. It was much better when I switched to CPR. When I made a mistake by driving too slowly, I corrected myself by driving faster – even though my instinct was to stop – then paused for a second to think about what just happened, and kept driving. It was a much better method, and it didn’t force me to stop when I was confused or afraid.
I know a guy that refuses to invest in real estate because he made one bad investment many, many years ago. He didn’t lose his money, he simply broke even, but it resulted in him believing that real estate is a risky business and to instead put all his money in bonds (“because they are safe”). He never took the time to evaluate why he didn’t make a substantial profit or try a different investment. He just quit real estate. If something happens with your investment – whether you or someone else made a mistake; don’t call it quits. You must focus your resources and energy on fixing the problem. After the issue has been taken care of, pause for a moment to process what happened, learn from the mistake and move on to the next investment.