No Comments

6 Key Characteristics That Lead to Investor Success

There’s no single, uniform image of what a real estate investor looks like.

Though some people might imagine a wealthy, besuited urbanite operating out of a high-rise office in downtown Manhattan or LA, that’s an outdated notion. It may have been true once, for the most part, but we’re now in a new era for the industry, and real estate investors now come from all financial backgrounds, investment experiences, and locations.

Similarly, there’s no single, uniform image of what a successful real estate investor looks like. Or an investor of any type, for that matter. 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 a nation-wide investment platform, 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.

This is especially true for private market real estate, now that it’s accessible through online platforms like Fundrise, which has made the investment type more available and affordable for many people — more like other investment types they may be more familiar with. The experience of investing in private real estate online is now similar to what investors are accustomed to with traditional public offerings, both in wide accessibility and affordability. That means that many of the same principles that lead to investor success in traditional investment types can now contribute to success in private real estate, too.

Importantly, the first step toward developing many of these key attributes is just being aware of them. In that spirit, here are 6 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 shouldn’t affect your big picture outlook — potentially a disastrous mistake in real estate, an investment that often thrives in the long term. And, on the subject of time…

2. Patience.

Patience is one of the most frequently championed traits in successful investors — one of the simplest, too. But it’s 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 can’t 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.

Unlike other assets, commercial real estate hedges inflation and usually has the capability to generate consistent income. That means that even if a property isn’t appreciating, it can still produce revenue. Most investor success stories are rooted in knowing when to sit still — not in when to capitulate with a last-second decision.

For evidence of the power of patience in investing, look no farther than the Oracle of Omaha himself, Warren Buffett. What does one Berkshire-Hathaway investor say about Buffett’s team? “Everybody’s always patient.”

3. Keeping your eyes on a big-picture view of history.

When considering the validity of an investment, it’s 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 or miscalibrating 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 as a result of abuses like subprime loans and increased housing speculation. Real estate’s losses and contextual risks were widely publicized. On its own, that’s enough to scare reasonable, responsible investors away.

A USA Today article helps paint a more nuanced picture, however. With more time and distance from last decade’s Great Recession, the article shows that real estate’s performance during the 07-08 period was actually highly unusual when compared to other bear markets over the past 60+ years. The crisis actually represents an exception, not a rule.

In truth, as USA Today goes on to point out, real estate has consistently shownincreases in the Case-Shiller index during 18 out of the other 19 bear markets during that multi-decade sample period — and in the one exception where it declined, its dip amounted to only 0.4% overall.

This larger collection of data doesn’t 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 don’t just choose a single level of risk that they’re 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).

Different kinds of investment properties are more likely to correspond to a particular risk-return profile. Real estate is often categorized as one of the following, from lowest to highest risk: core, core-plus, value-add, and opportunistic.

A property in each of these categories involves a certain amount of development required to produce a return and generate income — such as performing renovations or securing paying tenants — with the higher-risk/higher-return, opportunistic properties usually being the most development-intensive.

When Fundrise considers which properties to add to our portfolios, 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 vary, 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.

The full value of diversification can have many layers (such as helping to balance risk and reward, as discussed in item 5 of this article), but the basic risk mitigation that diversification is most famous for is usually a compelling reason on its own.

Many successful investors understand that real estate isn’t an investment option to be pursued instead of stocks and bonds, but rather best used to complement those more traditional investment types.

6. Being content with a passive investing style.

It’s not unusual to find new investors who feel that an investment is growing only when they’re personally tweaking and interacting with it. Alternatively, a person might come to their investment portfolio looking for excitement — the opportunity to shuffle money between accounts, make decisions everyday, take risks, witness gambles payoff.

There are, of course, highly active investment strategies in both real estate and other asset types that can be substantially rewarding, but these usually require deeper resources, especially in terms of the investor’s time and their financial acumen. Active investors frequently take on much more responsibility for their real estate, both legally and fiscally.

For more accessible investment models, a person with expectations for action might find themselves less successful, when a truly passive investing style can often be the more rewarding strategy. This is often the case for real estate. Investors with the desire to tinker or chase action may not fare particularly well in investment models designed to be passive, as that kind of propensity can lead to knee-jerk decisions and under-baked investments. Instead, many real estate investments involve dedicating money to a property with full knowledge of what the money will do over the course of many years — the fewer the suprises, the better.

Or, in other words, successful investors often value consistency over pyrotechnics. Notably, embracing a passive style isn’t quite the same as having the capacity for patience, as discussed in item 2 above, though they’re interlinked. Patience indicates the willingness to let an investment develop over a long term, but it might not mean a person is fully content being detached from that investment. Often times, you’ll want to be both.

For many proven real estate investors, passivity isn’t just something they’re capable of, but something they’re glad to practice. And after all, it’s easier to accomplish your goals when the path toward success is enjoyable in itself.

Beyond Theory — to Practice

One of the most powerful aspects of these fundamental ideas is that just understanding them puts an investor well on track toward practicing them. Sometimes that recognition and embodiment of the fundamentals of investing is the biggest difference between a successful investor and everyone else.