Navigating real estate investing advice can be challenging for any investor. With so many financial schools of thought and more access to information than ever, it’s all too easy to fall into the trap of misinformation.
Analysis paralysis is an overused term, but it is very real. Too many streams of advice can leave real estate investors’ heads spinning and feet feeling stuck in place.
In many cases, bad investing advice doesn’t come to you maliciously. But whether it’s a well-meaning friend or family member, or a professional who just doesn’t have the full picture, bad investing advice can sneak in and have devastating consequences for your financial future.
As real estate investors, it’s up to us to do our due diligence. That’s why we’ve put together a litmus test for real estate investing advice. With this system of self-checks, you can put any piece of advice to the test to see whether or not it’s worth your time.
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Is this advice generic?
One of the first signs that the advice you’re receiving may not be of the highest caliber is that it’s generic. While real estate advice comes with time-tested principles that are trusted across the board, truly helpful and applicable advice must be tailored to your needs and circumstances.
Generic principles can be helpful—this isn’t to say throw them out. However, they should be judged with scrutiny, because they may not totally apply to you 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 want to truly invest in your financial situation, involve themselves in the complexities you’re dealing with, and really deal with you where you are. Generic advice might be true, but it may not be helpful.
Examples of generic real estate advice would be the 1% rent to price ratio advice, or to only purchase commercial real estate deals with 8% cap rates. While both are good pieces of advice, they are also filler pieces of advice that anyone can give.
This is the majority of the advice on real estate forums. Pieces of advice that others have heard time and again and are so generic that they aren’t really advice at all. Weigh such wisdom against whether it actually applies to where you are right now. If it doesn’t give you the tools for an actionable plan and a clear direction, it’s simply not all that helpful.
Does the adviser have a personal bias?
One of the reasons we go to professional financial advisers, apart from 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 a place of bias. They have a vested interest in your success and the manner in which you succeed. For instance, guiding you towards investing in their endeavors or following a similar path may be mutually beneficial—but perhaps not personally beneficial.
When it comes to real estate investing, we need to keep the same standards in place when it comes to who we choose to listen to. Friends and family will always struggle with objectivity. Oftentimes, real estate advisers will struggle as well. They have an idea about who you should invest with, what properties are best for your portfolio, and what their idea of success for you looks like. Their advice will always be closed in some way toward what they know, and what they know is often what they sell.
I am no different. There is no way I can give advice to someone without my own experiences and biases coloring my advice. I recognize this fact and you should too!
Because of this, it’s important to seek out investing advice from voices in the industry that you trust. A real estate license is not the same as the credentials of a financial adviser, just like building a big portfolio or having lots of completed deals doesn’t mean someone can give good advice.
However, there are many examples on the forums of BiggerPockets where trusted voices have been giving common-sense advice for years. These voices often have years of experience behind them and it is hard to ignore how unbiased their advice is. They don’t have a personal stake in you or your investment.
I happen to think I give pretty good advice, but when it comes to buying single-family homes for rentals, it just makes sense to find another voice to verify the advice I give.
Does it assume your situation?
One of the characteristics you will 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 objectives, and everyone 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 that you have money and that 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 investing advice doesn’t make assumptions about your circumstances or your goals. A good adviser asks questions and determines first and foremost whether they are the best person to give you advice. An experienced commercial property investor will determine first if a person needs advice on commercial property or single-family homes. If it is the latter, they will defer and perhaps push voices that they know are better suited.
Real estate advice is not one-size-fits-all. It is important that when asking for advice, you review both the answers and the adviser. I’ve read plenty of disagreements on the forums where advisers simply dismiss the question altogether. Instead, they deride whoever is seeking advice for even thinking about investing the way their question is stated. Make sure you get advice from an adviser who really seeks to understand the help you need.
Does the advice ignore complexities?
Real estate investing may seem rather boring and generic compared to really complex-sounding investments like derivatives, NFTs, shorting markets, and foreign currencies. For me, anyway, these investments bring up mystery and complexity. They sound almost intimidating.
Too often we view real estate as a very standard form of investing and the advice we hear sure follows this belief. “Real estate is real simple, you make money when you buy a property,” is advice we often hear. “Buy low and sell high, how hard can it be?”
The reality is that there are hundreds of ways to make money investing in real estate. Depending on the route you are taking, the advice you get may ignore the complexities of what you are trying to accomplish.
You can invest within your self-directed IRA, which comes with a very special set of rules. You can use a 1031 exchange to defer tax payments on your gains. You can own a property outright or you can own a piece of many properties in a REIT. Each will have advantages and disadvantages depending on why you’re investing in the first place.
Be sure to seek out the advice of third-party professionals whose only job is to make sure you don’t end up breaking the rules or run afoul of the IRS. From SDIRA custodians to 1031 exchange companies, there are professionals in the real estate industry 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 do with making sure a good investment does not go bad because a complex investment was oversimplified.
Does the advice come from a place of experience and credibility?
One simple question to ask of any advice received is whether or not it has credibility. While you would hope that your adviser is a credible source, we must always do our due diligence and consider advice with scrutiny.
You don’t necessarily want advice from hyper-rich, hyper-successful individuals. You can glean wisdom from them, certainly, but understand that the wealthy make investing missteps all the time. The difference is that they can absorb the risk and take a blow much more readily than most.
At the same time, an investor who is on their third investment and decides it’s time to share all their wisdom and knowledge with the world may not be the best person to take advice from either.
What matters is not the size of someone’s bank account, but the experience and record they have as an investor. Can you see clearly where they lead others in achieving their investing goals—whatever they may be—with sound advice? You want to take advice from someone tailoring their advice for your needs and your circumstances.
When you take advice, you should not be focused on anyone’s personal story of success, but rather how well they can connect the dots between where you are and where you want to be. It’s about crafting actionable, risk-managed strategies for your future and giving advice in a way that is understandable and relatable. Then, you need to be able to track their success and see where their advice has led to real success.
The beauty of real estate forums like those on BiggerPockets is that real people are giving advice there daily. That can be both good and bad and quite frankly lead to a lot of either generic or poor advice.
The conversation is great, but investors have to understand how to apply a litmus test to the advice they are given and who is giving it. The more successful you are at weeding out the advice that does not apply and focusing on the best voices for your chosen niche or investment strategy, the faster you are going to find actionable and focused pieces of advice.