Teach Your Children Well
Kevin J. Daum

This article was originally published in a 2006 edition of Log Homes Illustrated magazine.

A few years ago I was with several friends and we were discussing what advice we would give ourselves when we were kids.  Almost everyone in the group said “Buy more real estate.”  In school they teach many things but for some reason real estate is not one of the mandatory subjects to go along with reading, writing and arithmetic.  Every parent wants their child to be successful.  Many hope their children will be able to support them in the style they would like to be accustomed to.  One way to help them get there is to teach them about Real Estate.  Here are the 10 lessons I recommend.

1. Think Long Term – Much of our society these days is centered on an immediate gratification approach.  There is very little about real estate that lends itself to short term thinking.  Houses are built to last for decades and developments take at least 20 years before they start to mature.   I have personally witnessed rural areas convert into suburban goldmines in less than a decade. 
   
   Investing in real estate with a “quick flip” approach may make some fast money but will usually result in poorer returns with greater risk.  Look to buy properties for at least a few years or at least until you have extracted the bulk of the gain and tax advantages.  Look to sell when the time is right.
   
2. Care For Your Credit – Many young people don’t understand the impact of credit and credit scoring until it is too late.   Many lenders want to see people have several established credit accounts for at least a few years before they will lend to them on their own.   Carelessness in youth with a car loan or credit card can cause damage for several years to come.
   
   Help your young adults establish good credit with joint accounts.  Teach them about credit scoring and the benefits of keeping credit card balances low.  A young person with a few low balance accounts with a 3 year track record can get a credit score well over 700 providing them with excellent opportunities to obtain real estate.
   
3. Hoard Your Cash – Yes, cash is king.  You can have all the real estate equity in the world but still the bank wants to see cash.  The old adage about banks being happier to loan money to people who don’t need it still bears some truth.  It is best to start young people on the path to saving and teach them not to keep all their money in their properties as they appreciate. 
   
   With plenty of cash in the bank they can get more favorable rates and loan programs including those not requiring down payments.  The banks would rather see money in an account than equity in the property any day.  The surest way to avoid any risk in investing in real estate is with a bulging bank account so start saving today.
   
4. Buy! Buy! Buy! – I remember when I was growing up and playing the game of Monopoly.  I learned fairly quickly that the person who bought everything the first few times around almost always ended up as the game winner.  The same is true in the real world.  The more real estate you can acquire the more you have your money working for you.
   
   I have yet to meet a long term investor who complained he had bought too much real estate.  Make sure you can afford to carry what you buy but don’t be shy about making offers.  An 18 year old person buying 1 single family rental house each year for 10 years can have a sustaining income outside of a job before she hits 30.
   
5. Don’t Get Emotionally Attached – It’s easy to associate a house with the concept of home.  This is why many people make costly emotional errors in their real estate practices such as paying off their house or staying in it long after they received the maximum tax benefit.  I have often witnessed people throw away tens of thousands of dollars by letting their emotional fears get the best of them.
   
   Knowledge and education are the best antidotes against emotional decisions in the real estate world.  Encourage your offspring to ask questions and study up.  Learn why single family residences out perform commercial properties and apartment buildings.  Understand why some areas appreciate better than others.  The more they learn the more confidence they will have to make the smart decisions that will result in financial independence. 
   
6. Surround Yourself With Experts – Luckily real estate is an industry that has been around since the beginning.  That means there are lots of people out there with smart and experience in the field.  Your prodigy doesn’t need all of the answers in her head.  She simply needs to be bold and ask the questions from those who know.
   
   Seek out real estate agents, loan officers and escrow people who can educate you about the various processes and caveats of the real estate world.  The more conversations you have the more you can separate the phonies from the true sages.  Keep loyal to these real estate wizards and they will help you build wealth for life.
   
7. Do the Math - Real estate is not rocket science but it does have its own complexity.  Most real estate decisions have mathematical implications.  Whether you are deciding what type of loan program or how much to put down there isn’t usually an obvious solution.  Everything needs to be calculated in the proper time frame and context.
   
   Get comfortable with the formulas.  The experts can walk you through the computations and probably even help you set up spreadsheets where you can examine the benefits of a long term 30 year fixed loan versus an interest only 3/1 ARM. Be clear about your intentions and you can make the proper analysis fast and effectively.
   
8. Leverage is Good – Emotionally we are taught early on that debt is bad but in something as complex as real estate this is an oversimplification.  Debt has its purpose in real estate and because it is secured it does not have the same risks associated with credit cards and personal loans.  Additionally real estate debt is different than buying stock on margin since there is no requirement to put in additional funds if the property value drops.
   
   One needs to understand debt as a tool for leveraging real estate to achieve better returns on your investment.  As long you are able to carry the payment with rent or your own monthly cash flow, you will make a lot more money by using loans to buy your properties.  Additionally there are tremendous tax benefits to be had from borrowing that can help make your profits and cash flow much better.
   
9. Don’t Get Greedy – The great thing about real estate is that it makes money without having to stretch the ethical boundaries.  Housing is a market driven industry that will respond to people who believe in fair prices and paying for the services they use.
   
   Taking advantage of buyers, sellers, real estate agents, etc. may gain a few bucks in the short run but I have many times seen disputes and lawsuits devastate relationships and cause physical health issues.  Timing is the biggest issue to concentrate on with your real estate negotiations.  The market will set its own prices and the internet information age has created an equal playing field for most buyers.  Be smart and honest and you will reap great rewards.
   
10. Teach Your Own Children – It’s never too early to instill this lesson in our offspring.  We assume they will pass down education and values but truly who knows unless you actually say something.  Every person reaching adulthood will think about their own home and wonder how they will establish security and financial stability for their own family someday. 
    
    The transition from depending upon you the adult to that of being responsible for one’s own security is hard to navigate in silence.  Help instill the values that talking about money, real estate and investing is a normal conversation for parent and child.  This is the best way to create good financial values in your children and your children’s children.  That’s the conversation I will be having with my fourteen year old son this weekend.

About the Author...
Kevin Daum is the Founder and CEO of Stratford Financial Services, a Real Estate finance and education company, founded in 1989. Stratford specializes in Purchase loans, Refinance loans and Custom Home Construction finance and has successfully financed thousands of clients. He is the author of "Building Your Own Home for Dummies" (Wiley), as well as "What the Banks Won’t Tell You." Mr. Daum was an Underwriter for Plaza Savings and Loan and Key Bank of New York. He is an INC 500 CEO and has been listed as one the 40 Most Influential People Under 40 in the San Francisco Bay Area. He is the Global Chair for the Edison Innovation Program with the Young Entrepreneurs' Organization (YEO) and is a founding Board member of the Bay Area Chapter of YEO.

Mr. Daum is a frequent contributor to numerous business publications on the subjects of Real Estate and Small Business leadership and speaks regularly on both subjects. He can be contacted at kevin@stratfordfinancial.com.