Make Smart Real Estate Investments By Avoiding These Myths
We have all seen the late-night TV infomercials with the big houses, expensive watches, and fancy cars. Oh yeah, and you can do it part-time with very little effort, and you are guaranteed to succeed if you hire the advertiser to coach you.
The truth is real estate can make you rich – many people have proven that, but it can also make you go bankrupt if you listen to the hype and follow unsound advice. Here are six myths you should understand to keep you safe while using real estate to build your wealth.
Foreclosures Are Good Deals
It is true. Although you can find good deals with foreclosures, not all foreclosures are good deals. When we think about foreclosures, we normally think about desperate situations and depressed properties. Although both may be true, real estate investors overpay for foreclosures all the time. Real estate investors, and any buyer in general, look for bargains. They are willing to do some work if they believe they are getting a deal. When I got into this business, I remember the joke was; “If you are having trouble selling your house, throw a rock through the window and call it a handyman special.” The joke is funny because for many new investors, perception is reality. They perceive a good deal, maybe because of a broken window, so they buy it, even though they are paying full retail price.
Real estate investment decisions should be made based on several factors, but none of those factors include the perception of a good deal. Numbers are numbers and the math is the math. Buy properties based on risk and profitability, not on the hope it is a good deal because it is a foreclosure.
You Can Retire With Rentals
I met Julie my second year in business. She was a single mom with an autistic son. The medical bills were through the roof and she needed income without being locked to a 9-5 job. Her plan was to become a real estate investor and live on the rental income. What she found after buying 13 houses, was that it is very hard to grow your rental income. Especially in a short period of time. One tenant turnover can chew through your cash flow for the entire year. I love real estate and I love rental properties, but I am buying and holding for long term results. It is the combination of your cash flow, your debt paydown, your tax benefits and your appreciation over time that make real estate such an attractive investment. To retire on cash flow alone, you will need a lot of properties or properties that are free and clear or have very small loans with small monthly payments. Even the most successful real estate investors that I work with sell a property now and then to generate the much-needed cash flow.
I was able to help Julie by buying a few of her properties and relieving some pressure. She was ecstatic and I still remember the hug she gave me. I lost touch with her, but I believe she ended up losing most of the other properties to foreclosure.
Get Rich Quick
Although Julie was not trying to get rich quick, she was trying to solve a problem quickly. You can definitely generate quick cash and real estate will make you rich, but it is not a get rich quick business. I would suggest inventing something and starting a tech company if that is what you are looking for.
True wealth in real estate is generated over time with a plan. That plan should probably involve holding on to some property, but could involve selling, like a fix and flip, occasionally as well. I like leverage as it can accelerate results, but your plan should include using leverage safely and eventually paying it off. This plan could include selling off a piece of your portfolio to payoff off other properties as you get closer to retirement, or it could be to focus on reducing debt as you go.
The ultimate goal is to have your passive income exceed your needs. When this occurs you never have to work again! This is possible, I know many people who have done it, and I would even say likely with real estate, but it does not happen overnight.
You Will Get More For Your Flip If You List High
Correctly pricing your property when you sell it is one of the most important decisions in real estate that you will make. Price it too low and you may not get all it is worth, but what could be worse, is pricing it too high. Pricing a property too high will first make your property not appear in some searches. For example, if your home’s most likely sell price is $400,000 and you list at $425,000 or $450,000 your buyer may not even see your listing. They may cut off their search at $400,000, making your property invisible.
If you are lucky enough to get showings, you may never get an offer to negotiate over. The longer the property sits on the market, the less valuable it gets. Buyers will start to assume there is a problem and be cautious with your listing. When you do finally get it priced correctly, the buyers will be offering much lower than they would have if the listing were fresh.
A good real estate agent will understand this and help you price the home correctly. In today’s market, it is probably better to price a little under value, which will promote multiple offers and ultimately a higher price. If you find that you are not getting the offers you want and believe it could be the price, lower the price quickly before too much damage is done.
Open Houses Sell Houses
We recently had a client that was past the maturity on their loan. The house was complete, and it looked great. The problem, however, is they were not getting offers. Each time we spoke he told me about the open house he had coming up. He believed that he would get the house sold with the open house because he believed that more people would see it. Although the latter may be true, the true buyers find houses in the MLS, not looking in the Sunday paper or driving around looking for open houses. The open house will not sell the house, the open house sells the agent.
The best way to sell a house is to offer a good product at a good price. Even that is not necessary, however. Price fixes everything and all real estate can be sold at the right price. You can do things like remodel the home and make the curb appeal more appealing to add value, but ultimately with the exposure an agent can bring through the MLS, the price sells the house.
You Need Money To Get Started
I was 21 years old, and I already owned one house when I really started to understand this business. As a hard money lender, I know there are ways to use other people’s money to buy homes with no down payments. The money does not always need to come from a private or hard money lender, however. I got very good at using the owner’s money to buy houses without down payments. You can use creative strategies, like lease options and owner carry deals, to operate on a shoestring budget. I have purchased well over 50 homes with owner financing and without a single dime invested into them, so I know this works.
Another no money down strategy we have been helping our clients with over the years is the BRRR strategy. Buy, rehab, rent, and refinance. Check out this special report that goes into great detail on how to use this strategy to build a massive real estate portfolio without down payments.