At the ripe old age of 18, I started real estate investing the same way a lot people do: I read a bunch of books by real estate gurus and become convinced I would be able to make millions in just a few short years.
It took my adolescent brain a few years, but I finally wised up to something:
Real estate gurus are full of it.
A real estate guru gets paid when you buy whatever they’re pitching. It doesn’t matter if they’re selling books, tapes, programs, or games: at the end of the day, they get a paycheck when they convince you to buy from them. Their incentive isn’t to give you sound real estate investing advice. Their goal is to make investing lucrative and easy. The more excited they can get you, the more they sell, and the more money they make.
They couldn’t care less if you actually succeed.
Let’s take a glance at some topics gurus love to talk about and see if their logic makes sense.
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
No Money Down
Real Estate Guru Logic – “Don’t have any money? No worries! You can buy a home with no money down!”
A general guideline thrown around on Bigger Pockets is the 2% rule: if the monthly rent is 2% of the all-in cost, it’s a good purchase. Using some typical numbers, here’s what the monthly cash flow on one such home might look like without any financing.
If you can find this ideal property then you’ll be getting $843 a month. That’s over 10% return annually. Not too shabby.
How about with the “no money down” option. Let’s say you get a 80% loan with 6% APR and 20 year amortization. For the remaining 20% you get 6.75% APR, 20 year amortization and 1% PMI. Here’s how the numbers would change:
Wow, a whopping $125 bucks a month. That really doesn’t leave much room for error. Keep in mind most people opting for the “no money down” don’t have any spare cash. A faulty furnace could force them to start buying cardboard.
Some gurus even have the gall to tell you to save your income until you have a reserve equal to six months’ rent. Think about that “logic” for a second. Setting aside $125 until you have $12,000 will take you 8 years!
Real Estate Guru Logic – “When you’re first starting out, manage your own property. You save a lot of money and learn the ins and outs of real estate.”
When you’re first starting out, you probably have a full time job. Here’s some things you’ll have the pleasure of handling yourself:
- A tenant drunkenly locks themselves out at 3 AM – Hope you didn’t want 8 hours of sleep.
- Resident isn’t paying – Do you have personal days saved up? Cause you’ll be using one to go to the courthouse.
- Vacant home – Your resident has moved out and now you need to find a new one. Either you’re taking more personal days to show the property or your evenings and weekends are going to fill up pretty quick.
Buying You First Investment
Real Estate Guru Logic – “Buy your first home today! Save the income and you can buy a second, then a third, until you’re a millionaire.”
Let’s introduce another useful guideline: the rule of 10. If you see 1000 homes online, you’ll want to visit 100. If you visit 100 homes, you’ll make an offer on 10. If you make an offer on 10, you’ll close 1.
Let’s say it takes 10 minutes to check out a property online, 1 hour to see it in person, 5 hours to make an offer and negotiate a price, and 20 hours to close (after financing and inspections). That’s 336 hours to buy your first property. Two months of 40 hour weeks!
Is that actually worth your time? Probably not. If you bought our example house with no money down, you’ve invested 336 hours to make $125 a month. You can get that much income by working one evening a week at a job paying $12 an hour. Plus the joy of job satisfaction.
Where Am I Gong With This Argument?
You might be wondering: Kenny, everything you’ve said seems to be arguing against investing in real estate. What’s gives? Don’t you invest in real estate?
I sincerely believe investing in real estate is one of the best ways to grow wealth and economic independence; however, there’s no reason to do it yourself.
Investing in real estate makes a lot of sense when you’re big. When you’re just starting out, it’s really time consuming and it’s just not worth the hours you have to put into it.
When you’re bigger, a lot of things become easier and more cost effective (economies of scale). Here are some example:
- No full time job. It’s amazing how much more you can focus on real estate without a 9-5 job.
- Dedicated contractors. Having people that solely work with you means you get better rates and prompter service. We currently keep over 30 contractors busy year round.
- Wholesale buying. We purchase almost everything for a fraction of what a hardware store sells it for.
- Easier to find deals. Once you have built a solid reputation in an area, deals just start falling into your lap. Not to mention you know the area and what you’re looking form so analyzing them takes less time.
- In house property managers. When you reach this point you are able to maintain control over the operation without having to pay third party rates.
Real estate gurus make a lot of money convincing you that if you just use their system/network/financing/etc money will magically appear and you’ll be out of the “rat race” in no time.
Don’t buy into what they’re selling (literally in this case). Until you reach a sufficient size, you’ll be pouring blood, sweat, tears, and money into the operation for very little upside. If real estate investing is truly your passion, then go for it! If you’re looking to make a quick buck on the side, you’re going to be disappointed.
Go find someone who has already paid the iron price and find a way to invest along with them. Let them work for you. If you really want to do it yourself, learn everything you can from them and strike out on your own when you have enough momentum.
What do you think?
Photo: Jose Zaragoza