[By guest author, Jeff Rose today. AKA The Rock. AKA new-published-author-who-included-me-in-his-book-so-now-I-can-say-I’m-officially-published-too ;)]
If there is one thing that sucks about being an entrepreneur, it’s the fact that you always want to dabble in new things.
When I was six years into my career of being a financial advisor, things were good. My business was growing and I really had no need to pursue any new ventures.
Unfortunately, I’ve been sucked in by too many Robert Kiyosaki type books and I’m constantly intrigued on how I can start new businesses. Plus, I’m used to hustling and working multiple jobs when I really didn’t have to (weird, I know).
When I was in college I worked two jobs and served in the Army National Guard. So being busy was normal to me. I was busy growing my financial planning business, but after years of growth I finally hit a comfortable spot that allowed me more time in the evenings to pursue new things.
My father-in-law had ordered some DVD and audio CD training by Carlton Sheets that showed you how to make money in real estate with no money down. To this day, I still don’t know why he bought it, but what I do know is that he gave it to me.
After listening to every single CD and watching most of the DVDs, I knew what my next BIG thing was. I was going to be a real estate investor.
There was only one catch.
Besides listening to Carlton while I was driving in my car, I knew nothing about investing in real estate.
Let me emphasize the keyword in the previous sentence: NOTHING. Don’t worry though because my father-in-law was going in with me.
Do you how much experience he had investing in real estate? NONE.
Sounds like the perfect pair, right? (don’t answer that)
My father-in-law is quite the handy guy; we thought because of that we’d be perfect business partners. I would be the numbers guru and he would be the handyman. It was a match made in heaven.
The First Find
The first property we ever made a bid on was a HUD house. The house was an extreme bargain located in a nicely developed neighborhood. We even bid about $5,000 higher than the asking price. If we had got the house, we would have made a killing. Unfortunately, we were outbid and forced to move on to the next money maker.
The next stop was a rental property. It was one side of a duplex that was located relatively close to both of our houses. Because of this we thought maintaining it would be simple (wink, wink), yeah, because we knew what we were doing. Remember, I am the real estate expert. ;)
The list price was approximately $120,000 for a two-bedroom duplex and the rent was around $1,200. At the time, I thought I remembered reading that if the monthly rental income is 1% of the asking price, then it’s a pretty good deal.
Unfortunately, I never really verified that with anyone. I don’t know if Carlton told me that or if I got it off the internet. Anyway, it all sounded good so we made our offer. (Can you see the train wreck getting ready to happen?)
After going back a few times with the owner, we finally agreed on a selling price. The buyer also required that we put down $500 for earnest money (like a deposit), which we happily did, and we finished the contract paperwork at our realtor’s office.
Donald Trump Look Out
I remember how excited I was that I just closed on my first rental property. Donald Trump, eat my dust. What is even more funny is I remember attending a sporting event with a good friend of mine and I was boasting to him that I was confident that within a year I would have at least 10 rental properties.
Go big or go home, right?
Shortly after closing the deal, I thought it would be good to meet with my CPA to tell him about the deal and get his opinion. Why I didn’t meet with him beforehand, I still don’t know. Not only is my CPA quite the tax expert, but he also has dozens of rental properties himself.
When I told him about the property and its details he was kind but deliberate. He politely informed us that we had overpaid.
What I think he wanted to say was,
“What the hell were you thinking? And why didn’t you ask me first?“
He explained that we were cash flow positive now but all it takes is one small thing – a roof repair, the air conditioner going out, fill in the blank with any minor thing, and then we would be out of the money.
He elaborated by sharing that most good rental properties are purchased well above the 1% range. He said that it is a bare minimum, but he would never buy a property at that rate.
He also informed me that most good real estate deals aren’t found by looking through the local newspaper (which is where we found ours). They are found through connections or situations that you just luckily happen upon like a friend or neighbor looking to sell their property.
When I asked him what he thought I should do about the current property that we had just closed on and deposited our $500 earnest money, he told us to do our best to get out of it. He also said that this happens routinely and that you could come up with some valid excuse to get out of it.
It didn’t take me too long to call my realtor to let her know what I needed to do. I had succumbed to the fact that the $500 would be my tuition payment to Real Estate 101, but my realtor said that this happens all the time. While I felt bad for wasting the duplex owner’s time, I’m still happy that we didn’t lose our butts by being tied to this property for eternity.
I learned a ton through that whole experience. Here were my key takeaways:
- Audio Programs Don’t Teach You Squat. Carlton Sheets isn’t the first course I’ve listened to, but it will be the last. These type of programs are a good primer, but you would learn much more doing it on your own or finding a mentor to teach you the ropes.
- Don’t Forget What You are Passionate About. I like numbers. I really don’t like real estate. Jaded by potential BIG profits I let my greed get in the way of what I really care about. Do you know how many real estate properties I own currently? Zero (except for my house). I finally had to succumb to the fact that real estate isn’t my thing. What is my thing is financial planning and investments which is why my “next big thing” became my blog GoodFinancialCents.com.
- If You Have a Resource, Use it For God’s Sake! My CPA is one of the most prolific real estate investors that I know, and would have happily shared his knowledge with me had I asked. Doing so would have saved me hours of time and frustration.
- Don’t Let Your Blunders Ruin You. The whole experience could have wrecked me from exploring new business ventures. The one thing you have to understand about all entrepreneurs is that we all fail. It’s in our DNA. What makes entrepreneurs different is that we don’t consider them failures; rather learning experiences. And trust me, I’ve learned A LOT over the years and this wasn’t the last time I learned from a business venture.
What have you learned? Have you tried any new hustles that didn’t work out the way you thought they did? How did it affect you? What did you learn from it?
I’ll leave you with one of my favorite quotes:
“There are two necessary conditions to become an entrepreneur: absolute confidence and total ignorance.”
Post by Jeff Rose, CFP. Jeff is the catalyst behind some awesome movements such as: The Debt Movement, The Roth IRA Movement and The Life Insurance Movement. He blogs at Goodfinancialcents.com and just released his first book, Soldier of Finance, which intends to help you kick the butt of your financial situation.
[Fail stamp by: Nima Badiey]
Get blog posts automatically emailed to you!
You don’t even want to know the cash flow on my rental… It isn’t negative, but it just scrapes by. It is due to the fact that we couldn’t sell, and it was a fast move. We will re-evaluate in five years. But since it is a well-managed townhouse condo complex, most of those disasters that potentially could knock me under water (roof, windows, big time maintenance, except for furnace) are covered with the condo fees and contingency funds. So it isn’t as bad as it might sound on paper.
The positive thing is that you haven’t lost your butt and also sounds like a good learning experience.
What I didn’t mention in the post is that we found out from someone that the A/C unit went out a few months after we got out of the deal. That would have completely ruined any chance of making money on the deal.
We lose money every month on our rental too! Because we wanted to move and had to rent vs sell (we’re still underwater). This stuff is def. not for the faint of heart.
(Interesting site! Thanks!)
If you bought a home to live in, couldn’t sell it, and then rented it out as an afterthought to stem the money loss, you are not “being a real estate investor”.
You are just some poor SOB who is making the best of a bad situation.
Please do not confuse this activity with real estate investing.
Fore sure – totally different situations, agreed.
Glad you’re enjoying the discussion here – thanks for chiming in and adding to it throughout the comments (just approved all your comments :))
It’s nice to hear people share their non-amazingreal estate storie, not just the “always make 5000%” stories. $500 isn’t too, too bad of a penalty, it’s probably not much more than that course cost!
Agreed! I’m positive if we would have went through on the deal we would have regretted it for many years.
Hahha, this is hilarious I had to chime in. I live in beautiful Vancouver, Canada where real estate prices are astronomical to say the least. Most properties provide investors with a rental return of 2-4%/yr, which barely covers the mortgage let alone all the other costs involved. So 12%/yr by that measure is amazing, I’ve looked across Canada and 12%/yr rates can only be found in northern boom towns.
Anyways, I’ve been into real estate since I was 13, helped my parents/relatives/friends purchase/sell about a dozen properties in North America & Europe. There are 2 ways to make money in real estate, #1 is rental revenue, which is great in a flat market. #2 is y-o-y price growth. What I would have done in your scenario is purchased a multi-unit building – duplex, fourplex, take your pick. Based on the fact that purchasing a 1/2 duplex yields 12%/yr, I would figure you could find a fourplex that yields atleast 18%/yr. This protects you on the income front, while also providing you with great exposure to rising prices. In the event properties prices rise even 10%, you can refinance and look for your next property. A friend of mine did this and he is now sitting on 23 properties last time I checked, in rural Canada, Seattle, & in parts of California. FYI – A true entrepreneur NEVER gives up on a challenge. I was merely good at math from a young age, but I HATED just the idea of what accountants do – count other peoples money, so I went into real estate head first, never looked back. I also found an amazing property, single family home with the potential to rezone into 4 lots, this is great because where I live land is 2/3 of the cost of a typical million dollar property.
So in the face of low rental yields, I have found other methods of making money & I do this all while diversifying my holdings between a number of cities. You don’t realize how lucky you are to be in a market like that, if I was down there with a good credit history and even as little as $10,000, within 5 years I would be sitting on atleast a dozen properties. I’ve researched markets like yours in the states – with +12% yields, the problem is as a Canadian I would have to put down an uneconomical downpayment.
Anyways, good luck with your situation.
Capital appreciation and refinancing seems great in a bull market. Could end up in disaster when housing prices fall – the whole empire built on leverage will fall like a pack of cards
I agree with Anne. There are far too many “easy money” stories in the real estate world and it is good to come back down to earth every once in a while.
That said, I am still interested in real estate. I am in your boat of not knowing the first thing about it, which begs the question: how do I GET to be an expert? How do I learn? I don’t plan on getting into the game until I can answer and execute on that question.
@ Dave Great question. I know that just working with the realtor I learned a lot. I also learned who in our area was “in the know” of real estate deals. Call them up and offer them a cup of coffee. I’ve made some good connections this way.
Since you have a blog, you could always try the angle of interviewing them. Feed their ego and they might show you some of their tricks.
Dave, check out the forum at bigger pockets:
There are a lot of knowledgeable members and you should be able to learn enough and get any specific questions answered as well! Good luck :)
I second this. Those guys know their stuff.
This is great info! (and great tactics!)
Being out $500 sounds like a win to me! I’m sure there’s real estate courses out there that cost a lot more than that.
Have you gotten back into the real estate game since this first blunder?
I really love the idea of real estate investing but we A) don’t have the capital and B) aren’t sure where we’re going to end up geographically until my wife is done with school.
Thanks for sharing your story Jeff. This is one of the main reasons why we’ve not gotten into real estate – I don’t like it, nor do I have a clue what to do with it. I know you CAN make good money at it, but it’s just not me. I love that Sullivan quote as well as I think it’s so true. Thankfully my fails haven’t been too messy but have been good learning experiences.
I love that quote, I’m going to steal it Jeff.
That’s funny because we’re the opposite. I hate numbers, but love real estate. I just sold my rental property for a handsome property and have another one being built.
As for failures — I have always failed at these damn eBook launches. I just want to help my readers. But I also want to make a few bucks in the process. Each failure is just humbling. It also makes me angry to be honest. And it hurts my confidence.
I’ve been impressed with your real estate experience thus far; especially for a kid! :)
Maybe real estate is your calling and you can show young people how to get started?
Might be your golden ticket. :)
(Or, how to pick up chicks. I’ve never met anyone who’s so good at it!! (Seriously – I bet you could make a ton with that, Martin ;))
You guys read my mind! I hope you don’t mind me posting links, but I started rough sites for both topics :)
I just need to spread the word now.
HAH! Now do you TELL the ladies you have that blog? Or do you just scurry back to the computer afterwards to kiss and tell? ;)
Sounds like a great $500 lesson. Would have cost you much more if you went ahead with the deal.
Yeah, rental properties are tricky!
We’ve got two rental homes. We bought one for that purpose and the other was our first “starter” home. We’ve definitely had a few challenges but I cannot wait until those babies are paid off in 12 years. They bring in around $2,000 per month now but we reinvest it all into mortgage payoff and repairs. Once they’re paid off, it will just be income! =)
@ Holly That’s right! Once those puppies are paid off it’s for some nice cash flow. #easymoney
Yeah, I am actually really glad we bought them when we did 7 or 8 years ago. We were too ignorant to be afraid. I think I would be a lot more hesitant to get involved at this point in my life just because it can be a hassle and so much can go wrong.
I have a rental property right now (four units). I was lucky enough to have entered into the world of real estate with a Virgil of sorts: a professional real estate investor, as a partner. My building isn’t cheap (we are in Boston), but is a steal for the area. If all pans out, this property will essentially pay off the personal mortgage I plan on taking on sometime in the next three years (so the pers. mortgage will be taken on, and about 3-5 years later the investment property will be sold paying off the personal mortgage = 100% debt free in the Northeast… no easy task.)
That’s the way you do it buddy! What you’re describing is where I thought I would be by now. Instead my cash flow has been my blog. I guess I’ll take it for now! haha…
That sounds solid though. Good job!
I’m sure your CPA looked at much more than just the rent and purchase price, but that you’re just at 1.0% shouldn’t necessarily be a dealbreaker
Obviously, higher is better, but he should have walked through how much you’d likely pay in property taxes and insurance, occupancy rates, age of the appliances (for maintenance costs), what sort of rate you’d get, and so forth. Perhaps more than that, as a CPA, he should have walked you through the tax implications…which can be pretty huge given the U.S.’s property owner-friendly system.
We are renting out our old house and that works very well. We know everything about the place and the mortgage is low.
Our 4 plex on the other hand is just scraping by. I am seriously thinking about selling it and taking the profit from the equity increase.
That is the nice thing about renting out your own old place – you’ve got all the details covered from day 1 :) (Though you can also spot all the new trouble areas the tenants then bring too! haha… for better, or for worse)
I had a 10-year battle with rental property I shouldn’t have bought. Then we got a way-too-high offer for it (like an almost exact place around the corner sold for over $100,000 less than ours two months later) and pounced on it to get out with a decent gain.
I love the idea of rental property, but I too did it wrong. Interest-only variable, bought it with “a buddy,” didn’t do proper tenant screening, and the list goes on.
The one major financial mistake in my life revolves around real estate and it still haunts me to this day as I’m still paying monthly…
In 2005 we bought a few plots of land in this golf course retirement community in NC and we were able to sell a few for a nice profit. So of course we bought more and then the world economy collapsed and we’re still stuck with these things!
If it wasn’t for them, I probably could have retired already (by 34), but alas that was not to be.
I know a few other people who bought there who have just let them go to foreclosure, and amazingly the bank didn’t come after their assets. I don’t particularly like the thought of foreclosing on them when I can pay and I also know it would be my luck that the bank would come after me if I did! So we keep dutifully paying on these things every month…
Anybody have a good real estate lawyer they trust?? :)
It’s a good thing you got a few wins in there before hand to help balance it out ;) I don’t like the idea of going bankrupt either when you can clearly pay and realize it was a mistake on your behalf. There’s def. times where I find it acceptable to declare, but it takes a lot for me as I too easily mix it up with morality – whether I should, or not. (Lots of people say it’s “just business” but to each their own)
Brad, I can recommend the lawyer I have used for all my sales. He’s in Chesterfield VA if you are interested.
I’m happy enough with just buying my own house to live in. It’s a never-ending project and I can’t imagine having more than one house to fix up and repair all the time! I’ll just tinker away and experiment with my own house haha.
Sounds like you got out of something that could’ve been really bad! You’ve got some good luck and good people around you helping you and giving you advice.
I think the start up costs are the main reason why I haven’t ventured into many side hustles. I know there is money to be made in real estate, flipping things on craigslist, etc. There is also a great deal of knowledge needed to be successful and I know I don’t have that yet. The only way to get good at it is by doing it but I don’t want to lose a bunch through the start up costs and it wind up taking me a long time to recoup it back.
Good stuff, Jeff! I took a real estate class my last semester in college, but the whole time when you were saying stuff like “Can you see the train wreck ready to happen?”, I’m thinking, ummm no…I’m probably even more ignorant than you were haha.
I do appreciate that you wrote about sticking to your passion. I have no interest in real estate, but I’ve definitely been tempted by the potential. And those Robert Kiyosaki type books/classes can be intoxicating, but it definitely lacks a lot of the tools you actually need to do any of it.
Thanks, Ben! I have plenty of good friends around me that do really well with real estate but it’ s just not my thing. Not yet at least.
Maybe one day! But for now, I’ll stick to blogging. :)
Real estate and rental properties are something that intrigues me as well. In our ‘hood (Northern Colorado), >=1% is unobtanium. Homes that cost $200,000 rent for $1250 at best.
However, I don’t think the 1% should be the end-all to the game. Some things that I think about are:
–> If you feel strongly that prices will go up and the rent covers the mortgage, it could be a solid long term investment. So what if you only make $3000/year from the home. In 15 or 30 years, it will be yours and someone else will have bought it for you.
–> Mortgages are much harder to get than they were in the past. Also, most people expect rates to go up from their historic lows. These factors will make home ownership more difficult, pushing more people into the rental market. Monthly rents have nowhere to go but up.
–> If the home is run down and you can do some basic improvements, don’t discount the value of sweat equity.
I like real estate as a compliment to the stock market. Stocks will go up and down, but people need a place to live always.
That reminds me, I need to invest in some toilet paper stock… ;)
Deserve a like!
I would like to reiterate what Holly@ClubThrifty said.
I was reading this article and it sounded like it was deemed a bad idea because it wasn’t immediately profitable. I bought an investment property earlier this year that I don’t expect to make money… for 15 years until the mortgage is paid off. We’ll probably lose money if you count repairs.
However, after that, it’s likely to bring in the equivalent of $10,000 a year in today’s dollars. This diversification of income should be a core retirement asset for us.
As long as you indeed hold onto the property for that long :) That’s the hardest thing for me to latch onto. I’d love to confident that we’ll still have ours years from now when it starts making profit, but chances are I’ll get rid of ‘er long before since it’s strains my head…
How much head-strain is a 10K annuity worth? For me, it’s a fair amount. If it gets too be too much, it’s time to get a management company.
If you buy a property to rent out and it is not profitable each month when rented out – AFTER setting aside money for principal, interest, taxes, insurance, property management, repairs, vacancy, and any other costs – then you very likely did it wrong.
There are 4 ways to make money:
1) Profitable cash flow.
2) Value appreciation on the property
They are not mutually exclusive but for most people – especially starting out with limited resources – a profitable cash flow should be a requirement in order to invest in the property. Otherwise, find a better deal.
The only substitute for accurate number crunching when working up whether a deal will be profitable or not is dumb luck. Counting on dumb luck is a fool’s game.
I’m familiar with Carleton Sheet’s material. The course I viewed was good stuff. Successful real estate investors I know speak highly of him and his work. Frankly, it did not appear that the author of this piece actually paid close attention and properly calculated the deal’s numbers.
This is an excellent book on how to work the numbers. If you aren’t willing to do the math, real estate investing probably won’t work for you.
The forums attached to the http://www.MrMoneyMustache.com website have some very savvy real estate investors on them. I learned a lot from them.
Another place to get good information is your regional Real Estate Investor’s Association. My own local group has been invaluable.
I’ve been doing real estate investing for the last 2 1/2 years. We’re rehabbing our 3rd property. The first two are already profitable. Rental #1 is renting at 1.66% of the purchase/rehab cost per month and #2 is renting at 1.64%. That’s good money. About 1/2 of that will end up as cash flow profit. Depreciation will shelter a bit of that, too.
Don’t let a single slipshod attempt at doing real estate convince you that you can’t make good money doing this!
And, remember, renting out a personal home that wouldn’t sell isn’t real estate investing. It’s just a band-aid on a money wound. Don’t expect a purchased luxury race car to make good money when you try to rent it out as a school bus.
It seems like everyone has their own interpenetration of success and failure when it comes to real estate. (the major factor is cash flow) it has been wonderful for me!
I purchased my first property in 2008 when the market was down in Vegas. bought a $250k town home for 95k and paid it off, In 2010 I purchased another town home in the same development for 46k. now I have two sources of passive income receiving $1300 a month between them both after HOA and Property management fees.
Its not bad for a single international contractor with no debt, who has plans of living abroad after I retire in 5-7 years. the only mistake I might have made was buying town homes, cause those HOA fees are pretty expensive. I’m looking to purchase my next property in the next 2 months, which will be a much larger single family home.
I’m well diversified with other sources of passive income. I just figure all cents add up and if its positive cash flow you can’t lose. sorry for those who had bad experiences.
Damn son, good for you! You’re on fire!
Buy a REIT,less hassle,better return,leave it to the Pros.
Renters can be nightmares and all the rules are against the owner.
@ Howard I”m sure there are good REIT’s but I’ve seen to many people lose their shirt in these investments. Especially the private REIT’s.
Being successful at real estate investing requires finding the right property at the right price and terms. Picking the right property requires local real estate knowledge. This is something that an attentive and methodical individual can pick up over the course of a year or three.
A REIT has a bunch of money to invest and they will pick a target market. Unless they have people with local knowledge picking the right properties for them, they are unlikely to get the right properties at the right terms and conditions.
They can’t just hire a realtor to find them properties because the realtor will make just as much money selling them a bad property as a good one. Actually, they’ll make more because it takes less effort to find the wrong property. :)
Until I find a REIT that has figured out how to align local real estate knowledge with their out-of-town money pockets I’m not interested in national level REITs.
Howard, I did some analysis on a REIT vs. real estate itself. Looks like a lot worse of a return. See: http://www.lazymanandmoney.com/real-estate-vs-reits/
Jeff, I am not at all a fan of those RE books, CDs, seminars or network groups. I do have a small portfolio of rental properties ranging from high rise condos to detached homes. Some managed by property management but most by me and my business partner. My opinion purely based on my experience so far: the cost of owning rental property is mainly divided (not equally though) into 3 components – interest, taxes and maintenance. Average cost of borrowing is around 3%, property tax is just over 1% and maintenance well under 1%. All combined, say total cost of carrying a property is around 5%. If proper research is done before buying, it is not hard to find property that appreciates 4% y-o-y which more or less gives it a wash to the cost of carrying property over a window of 3 to 5 years. Most markets where gains are over 4% y-o-y, have a yearly cap rate (for rental income) 6% compared to the 12% in your case. Considering that cost of property manager, commission / finder fees and vacancy the net rental return averages around 5% per year. Assuming a down payment of 20% to avoid CMHC premium and financing 80%, the ROE (20% down payment) is 25%. Any rental property with an annual cap rate of 6% will always have a positive monthly cash flow as well.
In your illustration, 12% cap rate gives a 6% cushion for unexpected repairs. Air conditioning, roof, furnace, etc. would not have cost over $7,000 each. If proper inspection is done before buying a $120,000 property, there’s no way you would be spending $35,000 over 5 years for repairs. I think, you had a good investment opportunity but the good thing is – it is not very difficult to find another one!
@ DC I could have had a decent investment property but I can quickly tell by the calculations you made I was definitely in over my head.
Plus in our area, properties don’t appreciate that much. In fact, I would be surprised if that exact same duplex couldn’t be bought for the same price today.
But you are definitely right in “not very difficult to find another one”.
Cash flow is definitely king when investing in real estate…
It was a hard lesson I learned in my own investments.
I put together a vlog about my biggest mistake and how I turned it around..
here it is, so you don’t make the same mistake I made:
Reading all the comments. Some Great ideas being passed around.
In my personal experience with owning several rental properties I’v learned some valuable lessons.
Take advice from people who have what you want!
Before I started in the RE game when I was 25( I’m 33 now) I knew nothing about Real Estate and reflecting back on my sphere of influence at the time I didn’t really know anybody that had rentals or were millionaires. I focused my time and energy on surrounding myself with positive like minded people that had what I wanted. I learned about Passive income and some basic rules about the real estate game. I was fortunate enough to spend some time with a very humble and modest Financial advisor who turns out owns 170+ doors worth millions. One of the first things he told me was the tip about taking advice from people who had want I wanted…He also encouraged me to surround myself with strong team of professionals that matched the first piece of advice. He connected me with his accountant who only takes clients based on referrals. Funny thing…he’s a millionaire also who owns rental properties including commercial and multi-Family buildings. The accountant agreed to take me under his wing and basically mentored me for free because I asked. Normally his fees are $200+/hr(I still pay him for doing my taxes. He taught me how to prepare my taxes so that I don’t have to pay him to much). He connected me with his RE agent who has become a great friend. No surprise he owns a bunch of rental properties and works with an awesome contractor/handyman that does basically does all of our repairs or renos on all of our properties. It’s mutually beneficial, which is always a focus for me when structuring deals. I’ve set up referrals deals with all these people so everytime I refer them someone that generates them new business they pay me a small referral fee. Its a win/win/win.
I built two properties through a custom builder that was small at the time and family ran. I built a great relationship with them and the gentleman that does the sales for the company connected me with his daughter who is a mortgage broker who !!Surprise!! owns a bunch of rentals as well.
I think you get the point :)
I buy or build my properties based on Cashflow, not growth in equity through appreciated. Although it has turned out very well for me from this standpoint as a bonus.
The only way to every become an expert IMO is do it. You can read 1000 books,articles, attend seminars. Experience will always be the best Teacher.
Before I start any business or project I always ask myself…”What’s the absolute Worst case scenerio & and can I live with that?”
The way I looked at getting into rentals from a worst case scenerio would be if all of my tenants all didn’t pay rent, vacated the premises after causing major damage, I lost my job at the same time and we were in a market recession. That seemed like a pretty aweful situation to find myself in. It would basically mean I lose everything.
Could I handle that? My answer was YES. Why because in the end it’s only money. I still have my health, my relationships with family and friends and all the experience I’d gained up to that point.
I could do it all again I’m certain in a shorter period of time, more efficiently and whats the difference between giving 1 set of keys back to the bank or 10? Also the likelihood of that happening is very low. On the other hand from a risk vs. reward standpoint if it pays off in 8 years from now i’ll have $3M+ in property paid off and $15,000+/mth in positive cashflow. Thats without doing anything different from today on.
Onwards & Upwards
So many great points in here, and super inspirational.
Good for you for jumping in and *asking* for what you want. I agree the pay off is much better than the risk. It would be worse to just sit in place and wonder all day long while wasting away doing doing nothing.
Thanks for stopping by and sharing with us, even though this article is pretty old. It’s motivating!
I enjoyed the article and have a personal connection to it. I too, was a hungry and eager man, looking to get out there and DO SOMETHING. It was 2005 and I had just returned home from Iraq and had a small chunk of change, no bills, and an appetite to start something. I read Rich Dad Poor Dad and from there I read literally over 100 books on Real Estate investing. I was doing my “homework”. Property prices were going through the roof. I talked to a few people about buying a property and their advice was to just go out there and do it. They said that too many people talk about it but they never get out there and actually do it. I used my Dad’s neighbor as my Real Estate agent, and she was not as experienced as I would have wanted if I were to do it all over again today. She was a good agent but had no clue about cash flow and investment properties. I didn’t understand cash flow and how to properly value an investment property home. I purchased a 3 unit home for $280K in Providence, RI. All three units could be rented for a total of $2400/month. I was going to live in one unit, thus I would be receiving about $1600/month. The mortgage, including taxes and insurance would be $1950. I thought this was great. I’ll be paying $300/month to live in an apartment, while my tenants are paying off my mortgage. Suckers! Fast forward to today, the property is now worth $85K. In my mind, when I first purchased the property, I was going to renovate the units myself, and that would allow me to charge more rent and it would help the value of my home. However, a decent 2 bedroom apartment in my area is around $800. Just because you have stainless steel appliances vs. plain white, does not mean that you’ll be able to get much more rent. Also, I was treating my rental property as if it were on a TV show meant for Flipping houses. I spent credit cards to get new countertops, new dishwashers, etc., because in my mind, it would only help increase the value of my home and once I had some equity I was going to buy another one. Had I known then, what I know now, I would’ve not paid over $150K for the home. A few years ago, I had a leak in the roof, which has now turned into a small hole. It would cost me $10K for a new roof. It was the last straw. Thus, if you analyze a deal and you see that you’ll be getting $300 in “profit” each month, think about these types of repairs that WILL need to happen one day. That $300 profit will disappear in a second, once a major repair is needed, and it’ll take YEARS to overcome that. I will be losing this property, but I still love real estate and love the energy and passion that I had when I first purchased it. I can’t wait to buy another multi-family, with the firsthand knowledge and experience that I have today, versus what I had then. The point to my story is, the books and real estate courses that are taught by celebrities are great motivational tools, and the information is real, however you need someone who has been there and done that to help you truly analyze a deal. If I had bought my property 10 years earlier, I would be a millionaire right now, as it would have tripled in value, and I would’ve purchased more and more properties. However, perhaps my ego would’ve taken over, and when the market tanked, I could’ve ended up losing everything. This is not a race. It’s all about taking one step at a time, and learning from each decision you make in your life. Thank you for the comments and stories, I enjoyed reading them.
Great story man, thanks for sharing! Harsh to read of course, but you’re totally right – it’s all about learning and pushing forward to do bigger things with what we now know. Def. not a race at all, at least if you want to do things the *right* way.
Thx for taking the time to share man.
I still don’t understand how it’s possible for monthly rent to be over 1% of the purchase price.
I know someone who recently purchased a house for $390k, rental income is $3,095 per month so well under 1%. He put down 20% and mortgaged $340k. Taxes are 2.3%. His mortgage payment is around $2,600 per month so he is still making some $ on it. I just don’t see how it’s possible for rent to be over 1%.
In some real estate markets it simply isn’t possible to do. In that case, one should invest in a different market!
However, the process of buying a house retail versus buying one to invest in as a rental property or a flip is quite different. If you try to buy a house at retail you’ll have a lot more difficulty making money renting it out.
There are many ways to solve that problem. Lots of books and instructional courses that teach this to choose from!
I buy houses at 35 to 45% of after repair retail value and rehab them to get them ready to rent. By the time I’m done rehabbing, I’ve invested a total of 55% to 60% of the home’s after repair retail value. I’m renting them out at a monthly rate that’s about 1.66% of the total cost. I would love to get to 2% but I still have more to learn and practice before I get deals that good.
I could buy another 10 to 20 houses like the 3 I already have if I had the money in hand and the time to fix them all up in a quick manner. (I don’t!) So I’ll have to content myself with acquiring them at a slower rate.
Good honest post. These pitfalls are rarely mentioned by many real estate investors. Imagine if 12% gross rental yield per year (1% per month) is not so good, what would 4.4% be? Yet, it was considered a no-brainer investment in an unshakeable market. See here: http://tenfactorialrocks.com/buying-vs-renting-a-capital-tale/
Ive made millions and steady cash flow with rental houses. U must use same common biz sense of any other business. If your upside down on cash flow invest some money into your equity then refinance to get it cash flow positive. People go wrong not reinvesting in thier business. Airlines, cab companies etc have to buy new planes, new cabs etc u at times need to reinvest in your business. A house can pay cash flow for generations. But u must invest back into your business that my mean putting enough money in to cash flow. U will get your money back over time. My 21 houses increase in value by4-5% yr, rents increase 4-5% yr (more cash flow) loans decrease monthly equity increase each month. Networth increase of 100k yr if i dont save a penny. Where else can this happen? I make more then my cpa and lawyer i work few hours a wk on houses.
I guess my experience is different because I have had great success with rental properties, a little background on me…I grew up in a rough neighborhood where personal finance is not generally the topic of discussion. I actually accidently stumbled on to real estate investing, and even though a lot of people tried to talk me out of it, I realized that it was ultimately a large step in creating my passive income stream! I would like to share with you, my post on how I accidentally started building passive income http://affordeverything.com/how-i-accidentally-started-building-passive-income/
But what if your accountant was wrong? What if the houses value today is 50k more? What if today you would have 10 rentals but never started because of him. Just something to think about.
REIT’s (Real Estate Investment Trusts) are pretty good to start out. Richuncles.com is a good established company. It’s like how RobinHood automates their stock platform.