Welcome to FountFunds.com! I’m excited you’ve found me. My name is Lance Lewis and I’d love to briefly share with you my story for why I started FountFunds.com.
Real estate niches can be more nuanced than you can shake a stick at. Many people have been pointing out how critical it is to focus on one or maybe two versus endlessly falling for the “ADD squirrel moment.”
As a matter of fact, one of the first things that was noticed after moving to one part of the country in 2011 were the various hassle free investments to foreign money coming in from lots of places around the world. Not all of the situations were bad, but some were doggawn awful. They would buy terrible houses in the wrong part of town, slap lipstick on a pig, rent it out to someone who was unlikely to pay for more than a month or two, and then sell this “investment opportunity” to out-of-stater usually, out-of-country—investors.
These out of country investors were used to houses costing well over a million dollars. When they saw what appeared to be relatively decent houses for only $60,000 or $70,000, they immediately thought it was the deal of the century. I saw similar stories with investors from China, New York, Los Angeles, and elsewhere who made the same mistake.
Generally speaking, these properties could never bring in sufficient cash flow to keep them up (some widely experienced hiccups with low end rentals in the wrong part of town) and turned into deferred maintenance. The out-of-country owners would inevitably lose a substantial amount of money hoping the property would eventually turn around only to inevitably sell it at a loss (and sometimes a huge loss).
Making Assumptions
Obviously there were some very questionable business practices going on here, but that doesn’t change the fact that many of these investors didn’t challenge their own assumptions going in. If someone were to switch from stock market investing to real estate investing, that person would immediately understand that what they know about stock market investing cannot be safely applied to real estate.
This obvious truth gets blurred when moving between niches within real estate. And while you shouldn’t switch around willy nilly, it does make sense to add or switch niches sometimes. In fact, we had a lot of success switching from (or more aptly put, adding) student housing in one city to working-class and middle-class housing in another shortly after the Great Recession.
They wanted to get back into buy and hold, so moving away to a less expensive, higher cash flow market. Unfortunately, even here we took some of our assumptions with us.
For one, being used to student housing and middle-class housing, we weren’t prepared for lower-end areas and made some of the same mistakes out of country money made. Assuming a cheap property that looked good on paper actually made for a good investment.
Later, our lack of screening didn’t cut the mustard, not having a problem collecting rent with college students (co-signing parents for leases) and rarely had problems with our mid-level property. We had to significantly increase our screening and watch our vacancy go up, bad residents, and evictions going up for close to a year.
Now, it should be noted that these assumptions weren’t explicitly taken. knowing that lower-end properties would require more attention and have more delinquency. Even paying much more attention to screening criteria upfront. It just wasn’t enough. Still falling far short of where it should have been.
The same lesson could be applied to relatively high-end flips recently. Not flipping much? Sometimes property just sort of falls into your lap and is a good deal, so go with it. If you make sure it shines substantially more than normal rentals, but the fact it has been a long time since your last flip of this kind still hurts.
If the HVAC system is fine but rather old. On a rental, this is no big deal. On a higher-end property though, homeowners obsess over such things. This fact can hold you up substantially, break your budget, and cut into your profit because you ended up needing to replace the HVAC system even though you had not originally planned to.
Homeowners, especially in nice areas, expect substantially more than tenants. You knew this, but it didn’t fully ring true. Assumptions from one niche have a way of sneaking into your mindset when approaching a different niche.
Stitches for Niches
What we learn here is that there are stitches for switching niches. You know what you get when you assume, but one thing you should assume is that if you switch niches, everything comes at a cost. Home runs at first are few and far between and no matter how much you understand the niche, you will make some severe mistakes in the learning process and should plan up front for those costs.
This should make you realize that the “ADD squirrel moment” is something to avoid. Then again, at times there are opportunities in a new niche that are so compelling you should jump at or it makes sense to add one or switch entirely. In such cases, though, you should make sure to spend extra time learning it and understand going in you will likely incur the costs of making “beginner mistakes.”
You should furthermore challenge each and every assumption you have. Put them on paper and make sure you don’t just know it—like we did with screening for lower-end properties—but fully embrace it.
Whatever your nievita with you whenever you switch niches—whether it be from wholesaling to flipping, flipping to holding, houses to apartments, apartments to commercial, rural to urban, low-income to luxury, properties to notes, etc. The only way to mitigate the expenses those assumptions will incur is to explicitly list them and challenge them from the outset.
Regardless, prepare for the unexpected that comes from growing pains.