There’s no single, uniform image of what a real estate investor looks like.
We’re now in a new era for the industry, and real estate investors now come from all financial backgrounds, investment experiences, and locations. Investing success can be achieved in a variety of ways, by completely different people. No two investors’ success stories will be exactly the same.
However, in our experience as investors, consultants and developers, observing investments and the people behind them, we have identified a few key characteristics that a significant number of successful investors cultivate and embody. In particular, we’ve learned that when it comes to investing — especially long-term investing — building discipline and strong fundamentals is crucial.
Importantly, the first step toward developing many of these key attributes is just being aware of them. In that spirit, here are 5 key characteristics that can lead to investor success — both in real estate and beyond:
1. Having a Clear Sense of Financial Goals.
Having a firm grasp of why you want to invest can inform every other decision you make as an investor.
Without defining what success means for you, you may not be able to identify potential obstacles or properly assess the timeframe you have available. You’ll be at risk of making investment decisions that don’t actually serve your best interests. When investors do know the specific goals behind their investments, they’re usually better equipped to make more deliberate decisions, and those lead toward more meaningful outcomes — meaningful in a way that really matters to them, personally.
Knowing your goals can also protect you from acting impulsively or responding to news that actually should not affect your big-picture outlook — potentially a disastrous mistake in real estate, an investment that often thrives in the long term.
Patience is one of the most frequently championed traits in successful investors — one of the simplest, too. However, it is relatively rare to find it practiced to its full potential in the investment world. Patience can be crucial for success in many investment types, but in real estate, time is an especially valuable trait.
The power of patience in this industry is related to the nature of the investment itself: as a physical, hard asset, commercial real estate’s value is subject to a range of factors that simply cannot be rushed. Before they can deliver an optimal return, many properties require investors to add value through renovation, ground-up construction, and/or the time to generate income from tenants.
Yes, it can be slow going, watching a real estate investment really grow and blossom. But, when handled prudently, the returns can be worth the wait.
Finally, as with any investment, patience to stay the course through fluctuations in the market can ultimately pay big returns. No investor wants to sell low or prematurely, but temptation can be constant and nagging, thanks to fear of the market being uncooperative or making a sudden turn. If an investment is well-founded for the long-term, however, those moments of turbulence will often be completely forgotten in later months and years.
3. Keeping your eyes on a big-picture view of history.
When considering the validity of an investment, it is easy to suffer from short-term memory. Successful investors, however, often have a longer-scale sense of the market.
An understanding of a market’s history can help an investor contextualize and weigh the significance of varied developments. Without a big-picture view, an investor’s at risk of misinterpreting their reactions to market changes, which they may not fully understand. No market is predictable, but history does have plenty to teach, in terms of patterns, likelihoods, and signals.
For example, many potential investors have been spooked away from real estate thanks to narratives that now surround the 2007-2008 financial crisis: people understand or experienced firsthand the damage suffered by the housing market because of abuses like subprime loans and increased housing speculation. Real estate’s losses and contextual risks were widely publicized. On its own, that is enough to scare reasonable, responsible investors away.
The larger collection of data does not make the 07-08 market any less traumatic for those who suffered its losses — but it does help illustrate how a fuller point of view can inform wise future investment choices. If your sole point of reference is the 07-08 crisis, you might form a strong but incomplete assumption about real estate investing, whereas a larger, more inclusive dataset starts to paint a more precise, potentially helpful picture.
4. Understanding how to balance risk and reward.
Every investment has its own risk profile and an assessment of its projected risk against its potential return. Many of the most successful investors do not just choose a single level of risk that they are comfortable with. Instead, they find a balance of risk levels and return expectations across a variety of investments, and they benefit from the big picture, overall performance.
In real estate, that means distributing a portfolio across a range of properties that cover a spectrum of low, medium, and high risk/return projections. Each investor can weigh their particular risks and expected returns based on their own sense of risk tolerance and goals. When optimized, the result of that balance is a more stable overall investment (thanks to the security of the lower-risk investments) with the possibility for higher returns (thanks to the increased potential of the higher risk investments).
We carefully consider the development each will require to serve our investors’ goals and how it’ll contribute to a portfolio’s overall balance.
5. Appreciating the power of diversifying into both stocks and alternative assets, like real estate.
Real estate can play many different roles in a portfolio: it might be the foundation that supports an investor’s ventures into other investment types, or it can be the crown jewel at the peak of a portfolio, strategically added to raise the portfolio’s potential for returns or to minimize its overall risk.
In either case, many portfolios really shine when real estate is included in their diversification strategies. A real estate investment can play a crucial, diversifying role even for sophisticated portfolios that already have exposure to more traditional investment types.
Unsurprisingly, some of the most successful real estate investors are successful investors in general. Although the composition of their individual portfolios varies, they often include exposure to several markets and asset classes. Why include real estate? It represents a time-tested way for these investors to achieve exposure to an alternative asset, the behavior of which often has a low correlation with the holdings in the rest of their portfolios.