One of the most challenging difficulties for a beginner commercial real estate investor is having the right mindset. In this post, you’ll discover what the wrong mindset looks like, where it comes from and why so many people have it. Most importantly, you’ll learn how to overcome it and be successful in this business.
Stinking Thinking: The Consumer Mindset
There are many challenges when purchasing your first commercial property, but the biggest obstacle you must overcome is “stinking thinking”. This is when you have the wrong mindset when looking at potential opportunities or potential problems. What is the wrong mindset? It’s what I call the “consumer mindset”.
- With this mindset you focus on the cost of something instead of the benefit.
- You have the belief that spending money will result in less money.
Result: Many people believe that only the rich can afford commercial real estate and this is the number one reason a person with a consumer mindset does not own any commercial real estate. They count themselves out and feel intimidated by a deal and create a mental block that causes them to negate every commercial real estate opportunity that comes across their path.
This mental block is detrimental in commercial real estate because then you aren’t open to creative financing techniques, such as seller financing or Master Leases. And these techniques are so helpful for the beginner investor when financing their first acquisition.
Where Does the Consumer Mindset Come From?
1. The first source of the consumer mindset probably came from your parents and upbringing and has been ingrained in you since birth.
2. Our society has a profound impact on how we process information. Companies spend billions of dollars to bombard you with the consumer mindset. This causes you to conform to what they advertise, which is to be average and stay within your limits. Someone with the right mindset does not conform, does not have a goal to be average, and certainly does not stay within their limits.
3. The third reasons for a consumer mindset is lazy thinking. You see thinking is difficult and that’s why a lot of people don’t do very much of it. The customer mindset and commercial real estate investing just do not go together. It‘s like mixing oil and water. In fact, someone with this mindset is probably better off not investing commercial real estate because it will probably lead to failure.
3 Examples of a Consumer Mindset
1. A person with a consumer mindset believes that property renovations cost too much. The focus is on the cost of instead of the benefit.
Example situation: A 24 unit property with only one water meter which meant the landlord was paying the water bill for all the tenants. This was costing $26,000 a year. The cost to install individual water meters for each unit is $1000 per unit, making the total conversion cost $24,000.
Benefit: Once the conversion is done, the $26,000 a year spent on water will be passed off to the tenants.
- The first benefit of this property renovation is an increase in cash flow.
- The second benefit is that as the NOI goes up, so does the property value. If the NOI goes up by $26,000 and he’s in a 8% cap rate area, we divide the $26,000 by 8% which is a $325,000 in increased property value.
A person with a customer mindset would only see the upfront costs and not spend $24,000 to get that benefit.
2. A person with a consumer mindset only buys low cost commercial property because they can afford it.
The consumer mindset focuses on whether a property is low or high priced. However, in commercial real estate, there is no such thing as cheap or expensive. Cost as a factor is unimportant to a real estate investor with the right mindset. Instead, they focus on whether a deal has a low ROI or high ROI. They are focused on their return on investment, not whether something is cheap or not.
3. A person with a consumer mindset does not recover from failure.
Our economy is constantly fluctuating with ups and downs and when there is a recession, financial hurt can happen. Some folks lose properties and properties lose value. A person with a consumer mindset will let a previous failure cause them to give up the dream of owning commercial real estate. They believe that real estate is not for them or that they are unable to recover from that failure.
The Right Mindset: Entrepreneur Mindset
The right mindset to have in commercial real estate investing is the “Entrepreneur Mindset”. This mindset is focused on the Return on Investment (ROI), not the cost. When an opportunity arises, a person with an entrepreneur mindset focuses on these four questions:
- What are the benefits from buying this property? Will it get you closer to retirement or the ability to leave your job? There should always be some sort of benefit with any deal you do.
- What actions must I take to meet my investment objectives? Whether your objective is to leave your job, build a retirement plan, or even ministry or charity work, actions must be taken to meet your goals.
- How can I acquire the property?
- What funding sources would participate in my deal?
Wealth Ratio Goal
A secondary focus for investors with an entreprenual mentality is the focus on wealth ratio. Wealth ratio is your passive income divided by your monthly living expenses. You have officially exited the rat race when your passive income equals your monthly expenses. Your mindset needs to be focused on developing and increasing your passive income through commercial real estate. Once your wealth ratio is up to 1.5 you should be safe to leave your job. Reaching 1 is monumental, but 1.5 should be your goal to reach before leaving your current job.
2 Examples of an Entrepreneur Mindset
Example Deal #1: An apartment deal that can significantly affect your wealth ratio. In fact, it will most likely take you out of the rat race. However, you’re short on a down payment due to some credit issues and past failures, but you‘ve been working on your mindset and are ready to get back in the game.
Entrepreneurial Mindset Action:
1. A person that is in this situation with the entrepreneur mindset is going to get help. They’re not going to try to do this by themselves. It’s risky and takes too long. They will reach out and get a mentor.
2. They will evaluate the deal with expert help.
3. Find the money and a credit partner. If you watch my previous teachings on real estate syndication and raising capital you can learn exactly how to find money for a good investment deal.
4. A person with an entrepreneur mindset is going to get the deal done.
Example Deal #2: A significant deal with a commercial building that could utterly change your life and bring your wealth ratio to a place where you could exit the rat race. You have some savings, perhaps enough for a down payment, and you have good credit. But fear has kept you from taking the plunge.
Entrepreneurial Mindset Action:
- Get expert help.
- Aquire knowledge. The reason why knowledge is so important is because it dispels fear. If you don’t get knowledge the fear will dominate you and you’ll never jump in.
- Assemble a team.
- Jump in and close the deal. An investor with an entrepreneur mindset is a person that jumps in after you have your expert help, your knowledge and your team.
How do you Transition from a Consumer Mindset to an Entrepreneur Mindset?
You must focus on building an entrepreneur mindset. You can do this by watching my YouTube channel. My videos teach you how to think with this new mentality. I can almost guarantee that your mindset will shift to the entrepreneur mindset because those videos are built for success.
4 Steps to Comeback from Failure
Many entrepreneurs have failures but commercial real estate investors with an entrepreneur mindset makes a comeback and doesn‘t let past failures define their future. Here are 4 tested and proven steps to comeback from failure.
- Leave it in the past: Don’t take your failure personally. It happened now get over it. Leave it in the past and move forward.
- Gain new knowledge: Search out knowledge that you didn’t have before. Get an experienced mentor to help guide and teach you.
- Get back in the game: Once you have gained more knowledge and have a mentor to guide you, you need to jump back in. Only this time, you are going to measure twice and cut once, because you have the knowledge and help to be successful commercial real estate investing.
- Only invest in cash flowing properties: This step is a really important part to making your comeback. You must only invest in long term, cash flowing commercial real estate. Gone are the days of speculating and waiting for the market to turn to invest. The time to invest is now, but only in cash flowing commercial real estate.
This is the winning mindset. If you want to be successful in commercial real estate, you need to have this entrepreneur mindset. Focus on return on investment and the benefits a deal will bring and take action. That’s how to reach your goals and be successful in this business.
