By Stefan Aarnio, author, entrepreneur and award winning real estate investor
Just like the Jungle, there is a food chain of predators and prey in the Real Estate Investor world. There are organisms at the bottom of the food chain like plants and plant eating animals. The organisms at the bottom are plentiful in number and the food they eat is abundant in nature. As we progress up the food chain, the animals become more sophisticated, larger and more carnivorous. There are far less lions in the jungle than there are gazelles because it will take hundreds of gazelles to support a few lions. The world of real estate investing is exactly the same; most investors belong to the herd at the bottom of the pack. They make very little money investing in real estate and are just producing enough money to survive. Conversely, there are a few highly skilled lions in the real estate jungle that are constantly seeking opportunity. These lions look for weak gazelles that can no longer operate and are looking to acquire their properties at a discount. The jungle can support far less lions than gazelles because even the weak gazelles are hard to catch. Whether we are in the jungle in Africa or the real estate market in Winnipeg, Manitoba, there is always the top 1% and the bottom 99%.
STAGE 3 – FLIPPER – CONSTRUCTION & PRODUCTION
After serving the investment community as a wholesaler and earning a fair share of assignment fees, you may be ready to evolve into a flipper and begin to rehab properties yourself. At stage 3, the flipping stage, you still generate leads and contracts with the skills you learned in stage 1 and 2. However, instead of selling all the leads and contracts, you will keep as many as possible for your own projects.
The difference between a Stage 3 investor and a Stage 1 or Stage 2 investor, is the Stage 3 investor has the ability to finance, fix and sell the houses that Stage 1 and Stage 2 investors cannot. Stage 3 investors will find a profitable contract to purchase, line up the financing, close on the deal, fix the property and sell the property for a profit. This process is much more lengthy, requires more skills and consequently, earns higher profits than Stage 1 or Stage 2 investors. Where stage 1 investors are earning $20-$500 per deal and Stage 2 Investors are earning $2000 to $10,000 per deal – Stage 3 investors earn $15,000+ per deal.
Flipping properties as a Stage 3 investor can be a fully-fledged business where an investor can easily earn up to $180,000 and above. The earnings for this type of investor depend on the investor’s ability to manage time, large amounts of money, team members, employees, stress and risk. Some investors call Stage 3 “big money, big risk” where the profits are big, and the risks depend on the investor’s ability to manage the business. One of the new risks that Stage 3 investors face is this is the first time that deal analysis comes into play. At Stage 1 and Stage 2, deal analysis was a “no risk” game because the early stages of investing have no money invested and no debt. Stage 3 investors however are investing large amounts of money and are potentially taking on loans to fix and flip properties for big profits. If the deal they take on is poorly analyzed, the mistakes can be catastrophic for a young business.
NEW SKILL: FINANCE AND ANALYSIS – All wealthy people use some form of leverage to achieve more results with less effort and earn more money. Where an average man will try to move a boulder with his bare hands, a man who understands leverage will use a fulcrum and a lever to move boulders larger than he could ever imagine. Archimedes, the Greek mathematician, once said “give me a lever long enough, and a fulcrum on which to place it, and I shall move the world.”
Stage 3 investors begin to unlock the power of real estate because they begin to use the leverage of finance and “other people’s money” to earn bigger profits than Stage 1 or Stage 2 investors. Generally in investing, the higher the leverage, the more money you can borrow, the higher the profits can be. Consequently, the higher the leverage, the more money you can lose as well. This is why some say: the greater the risk, the greater the reward.
With the ability to make great profits comes a great responsibility. When a Stage 3 investor borrows another person’s money, he has an obligation to return that money safely. The ability to finance deals with other people’s money is a privilege that very few investors enjoy. To ensure that the borrowed money comes back safely, these highly skilled investors must be able to analyze deals for safety, speed and profitability.
There are deals that can be profitable, but are not safe to invest in. There are deals that are safe to invest in but aren’t profitable.
Typically, my investment philosophy follows that of Warren Buffet, world’s richest investor. Buffet’s first rule of investing is “Don’t lose money”. Buffet’s second rule of investing is “Always obey rule #1”.
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Stefan Aarnio, award winning real estate investor, entrepreneur, author and coach was recently inducted into the Rich Dad Hall of Fame. His book, “Money People Deal: The Fastest Way to Real Estate Wealth” is currently available on moneypeopledeal.com. To learn more about Stefan Aarnio please visit StefanAarnio.com