How To Think Like A Successful Real Estate Investor

When I first started investing in real estate, I thought I knew what I was doing. 

I had not heard of BiggerPockets at the time, but I’m pretty handy with a spreadsheet, could analyze deals, and found some decent deals and generated solid returns. I was doing pretty well and enjoyed investing. 

A few years later, I decided to merge my full-time career in analytics and my passion for real estate. I applied for and fortunately landed a job at BiggerPockets. It was a dream come true to work alongside experienced investors like Scott Trench, Mindy Jensen, and J Scott—but it was also very humbling. In my first few weeks working full-time at BiggerPockets, I realized how incomplete my knowledge of real estate investing really was. It quickly became clear that I had a few skills but hadn’t yet transformed my mindset to think like an investor.

As an example, over the years, my properties amassed huge cash reserves. I was pretty proud of this and saw it as a huge success. But, if I had been thinking like an investor, I would have recognized these reserves as a failure to reinvest my profits and enjoy the full benefits of compounding. Similarly, my property values were going up and taking my net worth along for the ride, which felt great. However, an expert investor would have seen my return on equity declining and that I was no longer generating cash flow or deploying my capital efficiently. I was doing okay but needed to change my mindset to reach my full potential. 

Over the next few years, I dedicated myself to developing the mindset of a great investor. One that allowed me to fluidly evaluate risk, allocate resources, and generate stable returns over a long period of time. 

It took me several years, and I admit I made some painful mistakes along the way. But I can confidently say I’ve adopted the mindset of an investor. Throughout this journey, I realized that these lessons are not so hard to pick up as long as they are explained clearly and organized. I had done it ad hoc, but it doesn’t have to take so long or be so difficult. So, I teamed up with J Scott to teach other investors how to think like an investor, and we wrote a new book called Real Estate By The Numbers. 

In writing the book, we identified the key elements of thinking like an investor and building your dream portfolio. Here are the five we found: 

1. Learning to Keep Score

If you’re going to pursue any goal, you need to track your progress. Imagine trying to lose weight and not being able to weigh yourself and record your progress. It’s pretty much impossible! 

The same is true with investing. You have to be able to track key financial metrics like your net worth and savings rate to know how you’re progressing against your goals. You need to do the same for each deal by keeping professional records with financial statements like a balance sheet and profit and loss statement. 

2. Financial Concepts 

Every investor needs to know some basic rules about how money works. The most important are compound interest, money’s time value, and tax strategy. Maybe you’ve heard of these terms, but could you explain them to someone else? To be a great investor, you must incorporate these concepts into your everyday thinking. You need more than a simple understanding of these concepts. Gaining a full understanding of the time value of money genuinely changed my life. 

Seriously, it’s powerful stuff! 

3. The Key Metrics

Every investor needs to be able to evaluate their performance with key investing metrics. Maybe you’ve heard of cash-on-cash return? But do you know when to use cash-on-cash versus an alternative metric known as cash-on-equity? Do you know how to use advanced metrics like net present value and internal rate of return? They may sound overly complicated and unnecessary, but they’re not. 

Like me, you might be able to get by for a little without knowing the basic metrics, but to build and manage a sophisticated business, you have to understand what metrics and calculations are appropriate for each question you face.  

That’s how you analyze deals and build a portfolio like a pro. 

4. Financing 

Very few investors have the capital to self-fund every deal they want to do. Pretty much every single investor raises capital, either in debt or equity form, at some point in their career. In fact, most of us use outside capital for every deal we do because using financing strategically can actually boost your returns. Sophisticated investors don’t view financing as an annoying hurdle to cross but as a strategic opportunity to improve their investment’s performance. 

5. Making It Work For You

Every investor is different. Each of us has our own financial goals, risk tolerance, and priorities. That’s why experienced investors know there is no such thing as a “good deal.” There is only a “good deal for me.” 

For this reason, the most important skill an investor possesses is the ability to think critically through every element of a real estate deal and determine if it’s a good first for their particular set of resources and goals. The first four elements: scorekeeping, financial concepts, key metrics, and financing, are all useless unless you can apply them confidently to your own portfolio. 

Final Thoughts

Together, these five elements allow an investor of any experience level to think like an investor and level up your game, whether you’re just starting out or have been investing for years. I’m proud that I’ve mastered these elements to the point where I even wrote a book about it. But I really wish I had learned them sooner. 

If you’d like to master these concepts, check out Real Estate By The Numbers. The book is designed to teach you to think like an investor in a simple and digestible way and comes with all sorts of spreadsheets and tools to help you along your investing journey. 

Learn to think like an investor, and I’m confident you’ll find success as one. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.