Many promising real estate investing careers start with great promise and intentions, and end in disaster. I know many ex-investors who lost tens of thousands of dollars on poor real estate investments in the last crash.
However, I also know several investors who have always done very well with their properties. Those experienced investors have wisely avoided the disasters that befall so many rookie investors.
Avoid these two train wrecks to maximize your success and profits:
#1 Flying Solo
The majority of new real estate investors jump into the business in a careless fashion, lacking both a plan and expert guidance.
I know a former investor – let’s call him Ralph – who got into the field like this:
- Ralph discovered he had $100,000 of equity in his primary residence, and decided to ‘put that money to work.’ He took out a line of credit back in 2006 at 4%.
- Ralph took that money and bought distressed properties in his town. He bought at full market value with no discount. Then he overpaid on rehab, took longer to rent it out than he thought, and then had to do evictions.
- At the end of year 1, Ralph’s dream of earning passive cash flow for retirement was gone. Instead, he was paying out of his savings to keep his ‘investments’ afloat.
This is what happens to rookies jumping into real estate haphazardly. Instead, you should invest with an exact plan, and execute that plan with an expert guiding you.
In my case, I purchase under market value houses in Texas for approximately $50,000. I then perform ~$5000 in rehab, and resell them at 10% with seller financing. This buy and hold strategy offers approximate returns of 10-12%, with no ongoing maintenance costs. Buying the house 30% under market value is critically important, and protects me in case of a real estate crash.
I invest in this way with a local real estate investing expert who helps me to find the right types of houses in the right areas to make this plan work.
What you should do: Find an expert investor in your market at local real estate meetings. He or she should have a successful investing record for at least 10 years, with several hundred deals under their belt. Ask if they did well in the last crash. You can ask this expert to assist you in getting started – in return for helping them do some ‘grunt’ work, such as posting signs and making calls.
If I had to give just one warning to all aspiring investors, it would be this: Your real estate profit/loss is SEALED the moment you ink the contract. If you pay too much, congratulations! You just signed on to a losing real estate investment.
So many real estate investing careers go off the rails at the start because they pay too much. Remember Ralph in the above example? When Ralph had the inevitable cost overruns on the rehab, as well as more vacancies and evictions than he thought, he had no wiggle room. His mortgage was so high that the only time he could make money was with full occupancy.
There are two lessons here: Buy houses under market value. If you cannot find one that is at least 15% under market value, move on. Second, you MUST do a full financial analysis of your potential property. Calculate:
- Mortgage payment (if any)
- Down payment
- Ratio of price to income
- Ratio of price to rent
- Investment yield
- Cap rate
- Your monthly cash flow after ALL possible expenses, including vacancies
Be certain that your property is going to produce positive cash flow after expenses. Also, I advise seller financing your houses to qualified buyers, instead of renting. This allows you to off load property maintenance costs to your occupant.
I hope that by avoiding these real estate investing train wrecks that your efforts pay off with plenty of long term, passive cash flow.