Real Estate Investing Basics

The 5 Most Annoying Misconceptions that Newbies Love

Expertise: Business Management, Personal Development, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Mortgages & Creative Financing, Landlording & Rental Properties, Real Estate News & Commentary
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The items below are all things I hear repeatedly by investors; they aren’t necessarily misconceptions for every investor, though. In particular, investors just starting out need to be aware of the following:

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1. Wholesaling.

Everyone hears how easy wholesaling is and how you can make soooo much money doing it. Yes you can make a lot of money, but it’s not easy. It takes mega amounts of work. Additionally, wholesaling isn’t even investing.

It’s working.

Unless you count getting a return on your time (not money) investing, but in reality that is called “working”. If you are good at wholesaling and you really enjoy it, do it. It really is a great job and can pay a lot. You will also learn tremendous amounts of amazing information about the real estate investing world and the ins and outs of investment properties.

But if you are new, don’t just jump on the bandwagon with everyone else because ‘everyone starts with wholesaling’. Be yourself and do what you really feel a passion for. If you get on a BP forum and tell the BP community how excited you are about getting started with wholesaling, make sure it’s because you have already started the basics of wholesaling and you are looking forward to pursuing it further. Don’t just say it because it sounds fancy and you hope to make thousands overnight.

2. The 2% and 50% Rules.

The days of the 2% rule are nearly gone. There are still 2% deals out there but most likely they are war zones. Every now and then you will still find some (I guarantee someone is going to comment saying their whole town is full of 2% deals), but if you are shopping for properties and requiring that you find one that meets the 2% rule, you are seriously off-base.

For one, you’re unlikely to find good properties that meet it. Two, if you are so focused on something that is meant to be a guideline, you’re inevitably not looking at other aspects of a property and what makes for a good investment. I feel confident in saying that with real estate prices and cap rates where they are now, if you actually do find a 2% deal, you could be setting yourself up for a rough investment. The 50% rule is a good guideline but it should never be the end-all. It doesn’t even hold up in some markets and can give you a false sense of security.

3. Cap rates.

Speaking of days being gone, before you start telling everyone what cap rate you are going to require on a property to buy, make sure you know what the going rates actually are. If you say you want a minimum of a 15% cap rate on a property, you are likely not going to be getting a property. Unless you are that war zone investor, as with the 2% rule. Same with my 2% rule rant, if the cap rate is the only thing you are focused on, you are likely to be overlooking other critical factors that make a solid investment property. Don’t get tunnel vision. The reality is that a stated cap rate is only that- stated. It is no guarantee you will actually ever get it, so if you aren’t looking at other factors (tenant quality, property quality, etc.), you just may never see that number. You may not even see half of it. Don’t think I’m exaggerating. It’s happened to me.

4. Landlording.

You don’t have to be a landlord to be a “good” investor. In fact, I think you are a better investor if you aren’t landlording your own properties because you understand the value of your time. I do think investors who truly like to tinker with their own properties, maybe because you are handy or enjoy the work, should be a landlord, only because you enjoy it. But landlording to save $100/month or because you think you should learn the ins and outs of managing a property are ridiculous. If I don’t have future plans of being handy or being a property manager, why do I care if I know the ins and outs? I want passive income, that’s all. And passive does not equate to landlording, because landlording equates to work, which is the furthest thing from passive.

5. Emerging Markets.

There is a list of “emerging markets” that continues to pop up in the forums lately by investors who apparently really like this list. I don’t doubt the validity of the list, but the only thing that list is good for in terms of investing is to know where appreciation is likely to happen. This is ironic, because any investor banking solely on appreciation has lost his mind. Banking on appreciation is the same thing as predicting the future with a crystal ball. What exactly do you plan to do if that appreciation doesn’t happen like you anticipated? Then what?

Buy for cash flow first, then hope for appreciation second.

The other major problem with that emerging markets list is that several markets on there are some of the worst markets in the nation for cash flow. Hello misleading for buy and hold investors! The only good (smart) use for that list? If you pick a good cash flowing market and then it happens to be on that list, awesome! That means you will have a nice potential for appreciation on top of your good cash flow. That’s it. Don’t use it for anything else.

Be smart enough as a new investor to formulate your own opinions, based on solid advice and research! Be an individualist, don’t be afraid to go against the crowd! Have you ever noticed how unsuccessful the actual crowd is? With wholesaling for example, there are some very successful wholesalers, many of which write on this site and have amazing sites of their own. I’m not referring to those folks, I’m referring to that group of newbies who go on and on about how they are planning to become a wholesaler. How many actually do? Not many. Make your own path. You’re more likely to succeed.

Photo Credit: nathangibbs

Ali Boone is a lifestyle entrepreneur, business consultant, and real estate investor. Ali left her corporate job as an Aerospace Engineer to follow her passion for being her own boss and creating true lifestyle design. She did this through real estate investing, using primarily creative financing to purchase five properties in her first 18 months of investing. Ali’s real estate portfolio started with pre-construction investments in Nicaragua and then moved towards turnkey rental properties in various markets throughout the U.S. With this success, she went on to create her company Hipster Investments, which focuses on turnkey rental properties and offers hands-on support for new investors and those going through the investing process. She’s written nearly 200 articles for BiggerPockets and has been featured in Fox Business, The Motley Fool, and Personal Real Estate Investor Magazine. She still owns her first turnkey rental properties and is a co-owner and the landlord of property local to her in Venice Beach.

    Taylor Jennings
    Replied about 6 years ago
    “If you get on a BP forum and tell the BP community how excited you are about getting started with wholesaling, make sure it’s because you have already started the basics of wholesaling and you are looking forward to pursuing it further. Don’t just say it because it sounds fancy and you hope to make thousands overnight.” That’s hilarious. I’d like to say officially that today is my first day of wholesaling! I’m putting out fifty signs =) I made the signs myself… Took two hours to cut the stencil and an hour and a half to spray paint everything. “I think you are a better investor if you aren’t landlording your own properties because you understand the value of your time.” I’m never going to paint these signs again… I think I’m on my way to becoming the ‘better wholesaler’ since I’m not actually an investor yet. You had several good points. Thanks for taking the time to write out this article! Makes me feel like I’m on the right track =)
    Rita Phillips
    Replied about 6 years ago
    Taylor – best of luck to you in your new adventure! With over 20 yrs. in RE investing, it’s been a fun & profitable experience for me. You’re welcome to contact me if I can help… Reply Report comment
    Rita Phillips
    Replied about 6 years ago
    Taylor – best of luck to you in your new adventure! With over 20 yrs. in RE investing, it’s been a fun & profitable experience for me. You’re welcome to contact me if I can help…
    Ali
    Replied about 6 years ago
    Haha Taylor… I love the “never going to paint these signs again”. Although if I were wholesaling, I think making the signs would be my favorite part. Maybe we can tag-team… I’ll paint your signs and you do the rest of the work 🙂 Congrats on getting started!
    Dawn A.
    Replied about 6 years ago
    Can you put hyperlinks to definitions of the 2% rule, 50% rule, and cap rates? I think a newbie reading this article wouldn’t know what you were talking about and this would help them. (Especially since this is an article for newbies.) Reply Report comment
    Dawn A.
    Replied about 6 years ago
    Can you put hyperlinks to definitions of the 2% rule, 50% rule, and cap rates? I think a newbie reading this article wouldn’t know what you were talking about and this would help them. (Especially since this is an article for newbies.)
    Ali
    Replied about 6 years ago
    Good call, Dawn. Didn’t even think about that 🙂 Cap rate = Annual net income (less the mortgage) / Total purchase price *Cap rate does not include financing costs! 2% Rule: “The rent collected should be equivalent of at least 2% of the purchase price” Also has a 1% variation. 50% Rule: “You can assume the expenses (all of them) will equal about 50% of the collected rent)” That 50% does not include the mortgage payment. Emphasis on the quotations around the 2% and 50% explanations.
    Rita Phillips
    Replied about 6 years ago
    Ali – TERRIFIC read. If I had a dollar for every time I’ve tried to explain to an investor that the market has changed from a couple of years ago, I’d probably be planning a day around the pool with a tasty margarita! Bottom line is real estate & especially investing is in a constant state of change. Kind of like life in general….duh. Go with the flow or get out.
    Ali
    Replied about 6 years ago
    I love margaritas! Lol. I love it Rita. Great comment. And yes, so true. It gets so old having to ‘clue someone in’ to the fact it is not 2 years ago. Welcome to 2013, get on it.
    Jan Whitney
    Replied about 6 years ago
    Ali – thank you for this post. I’m a new investor specifically focusing on buy and hold multi-family properties. I’m looking at lots and lots of listings and none of them even come close to the 2% rule so hearing so many talk about it on here makes me wonder whether what I’m looking at is even worth a second look. We have a contract on our first multi-family property and it doesn’t meet the 2% rule but does meet the 50% rule, and then some. I know there’s no guarantees but it helps to hear that our first effort might be ok. Jan
    Joshua Dorkin
    Replied about 6 years ago
    Jan – These “rules / guidelines” are designed as nothing more than screening tools. They are also educational tools to help people better understand what cash flow is and how it works. Unfortunately, most new investors think that you take your rent, subtract mortgage, interest and taxes and you’ve got your profits. That simply isn’t the case. Management, vacancies, CapEx, repairs, can’t be ignored, because over time they ALWAYS come into play. You don’t need to meet these rules to find good investments. That said, if an investment meets these rules, the odds of it being a bad deal is pretty slim.
    Ali
    Replied about 6 years ago
    Congrats on the contract Jan. Definitely don’t fret about not hitting the 2% rule! It rarely happens these days. Focus more on the quality of the property and the overall return. Much safer that way. Just make sure that bad boy cash flows.
    Rita Phillips
    Replied about 6 years ago
    This might help some beginners as well. When I started I put funds aside just for investing. My partner and I agreed that if we weren’t making a go of it in one year, and enjoying it (we worked full time 70 + hr. a week jobs also so investing was our “fun”), we’d pull the plug. Twenty years later, we’ve never looked back. And that bank account? It’s a nice portion of my retirement plan now. And we have plenty of great memories to boot!
    Ali
    Replied about 6 years ago
    Woot!
    Joseph Weisenbloom
    Replied about 6 years ago
    I hate to be that guy that says “my whole town is full of 2% deals” but I will say that real estate prices and rents vary drastically from market to market so its hard to say that there are no 2% deals anywhere. I used to live in Cleveland, Ohio that market definitly comes to mind as a place that you could find a non warzone property following the 2% rule. I agree that its not everything that a property has to offer and other things should be considered. It really depends on what you are trying to do but if buy and hold cashflow is the goal the rent to purchase price ratio or 2% rule is important.
    Ali
    Replied about 6 years ago
    Which town/market are you in Joseph?
    Ali
    Replied about 6 years ago
    Which town/market are you in Joseph?
    Mike McKinzie
    Replied about 6 years ago
    Once again Ali, you are SPOT ON with your blog. While there are “war zone” type investors/landlords who can get 2%, that is a very special “breed” of investor. Any time I get 1%+ on a new investment, I am very pleased. The 50% rule is a great GUIDELINE but it assumes a 10% PM fee and since I average 7% on my rentals, I am already at 47%. Plus, in some states, one months rent pays the Property Tax and in other states, it takes nearly three months rent to pay the property tax, ie. Texas. The one part I may disagree just a little on is the value in knowing what to expect from your property manager. Ali, have you ever “fired” a PM? I have fired four in the last five years. If you think a bad tenant will cause you to lose money, try a bad PM! I have easily lost over $100,000 in the past five years to bad PMs. And that is with swift firing and hiring them. You need to know what to DEMAND of your PMs, and the best way is to either manage your own property for a year or work for a PM for a year. Ali, I also want to commend you on your style of writing. It is easy to read and understand. I wish I could write like that, then I would blog once in a while. But my brain goes faster than my pen and my writing gets all jumbled. Therefore I enjoy well written blogs, like yours.
    Ali
    Replied about 6 years ago
    Thanks, Mike! I wrote this one with a concussion, so glad to hear it even makes sense. Lol. I was really struggling to formulate sentences and get them on paper! I have most definitely fired a PM before. I’m the biggest PM snob you’ll ever meet, and I hold my PMs to high expectations. Unfortunately good ones are very hard to find. But I agree, bad PMs are the easiest way to lose a ton of money. My bank account can vouch for that. I don’t agree that you have to landlord or work for a PM to figure out what makes a good one, but if you do either of those you will definitely learn it!
    Rita Phillips
    Replied about 6 years ago
    Mike & Ali – Yep, again you are spot on. In a world where reputation should be everything, I am surprised by the lack of good PM’s. We manage our own 9 homes, plus about 20 more for clients. As you can imagine, we’re all over our clients issues, but I tend to let my own go when busy (always). Now there’s a good attitude to keep the bank account flowing….NOT! I’ve been too easy with late payments, and if I like the tenant otherwise (home is kept clean, etc.) I have allowed them to stay too long after in my heart I knew we had a problem. In our many years of PM, 2012 was the worst by far for my personal investments. Two evictions, one that just skipped town (after going postal and leaving the house disgusting), and two more empties for 2-3 months. My homse usually rent quickly, as they are clean & well kept. And as you know, it wasn’t so much the loss of rent on the evictions/skipper, but the surprisingly poor condition the homes were left in the few short months since my last visit. And the time for repairs after. Yes, I hear you; I should be there every month checking in. Again….wrong practices on my part. Soooo, we have a new attitude this year. “There is no nice in property management!” We’re doing pretty good with it so far. Every time I start to soften, what to I say? You got it. I can’t blame anyone except myself for my losses. I’ll just have to use my “nice” self other places from now on. 🙂 Really enjoying the conversation!
    Ali
    Replied about 6 years ago
    Great comment Rita! Educational for those exploring everything. I’m like you, I know I’d be way too nice (or gullible, in my case). I’d rather someone else do the dirty work. One of the biggest things I heard at a Rich Dad seminar one time was don’t ever know your tenants. As soon as you know them, you’ll have a heart for them and let them get away with way too much.
    Alison
    Replied about 6 years ago
    Hi Ali, thanks so much for telling it like it is! I have been a mixed-approach full time investor for 5 years, but wholesaling is my mainstay. IT IS NOT EASY! It’s a simple concept and easy to get started, but d**n hard to 1. find good deals, and 2. get them over the finish line. I enjoy it and have found some niches in DC that allow me to do decent volume, but it’s never easy. As I often say to my friends and colleagues, if it was an easy deal there’d be a Realtor sign in front. It really sets my teeth on edge at meetings to hear speakers pitch their “cash in 30 days” ideas. Not!
    Ali
    Replied about 6 years ago
    Haha. Not! Love it Alison. I’m glad you are sticking with it and making it work! Sounds like you’d be a great help to anyone starting.
    David Morrow
    Replied about 6 years ago
    Ali – thank you so much for an informative and entertaining article! I am active in a market where 2% is readily attainable, but I’ve recently begun shopping in another and was distressed that very few properties seem to meet the 2% rule. Your insights have helped me to realign my expectations.
    Ali
    Replied about 6 years ago
    Cool David. Which market are you in now? How come you are shopping in another (and where?).
    Steve Johnson
    Replied about 6 years ago
    I can say I totally fell for the wholesaling is easy idea. I started out and found out how much time and money, something they said I didn’t need, it would take to get my marketing going. It’s been a frustrating learning experience, but I’ve picked up quite a bit from it.
    Ali
    Replied about 6 years ago
    Glad you are sticking with it Steve! It’s definitely an intensive job. Hopefully you get rewarded for your perseverance!
    john milliken
    Replied about 6 years ago
    good stuff ali. never heard about the 2% rule or 50% until i signed up for bp a couple months ago. the 2% rule went in-n-out of my brain fast because that isn’t happening where I’m from. heck! love the 50% rule as a starting point on multi-family investments. if it’s can cash flow just a penny with the rule, the property is worth checking out.
    Ali
    Replied about 6 years ago
    Always John. The 2% and 50% rule are excellent for being the trigger to have you check out a deal. They should never be the reason you buy something, or the reason you don’t buy something, but great starting points to know where to be looking. Reply Report comment
    Ali
    Replied about 6 years ago
    Always John. The 2% and 50% rule are excellent for being the trigger to have you check out a deal. They should never be the reason you buy something, or the reason you don’t buy something, but great starting points to know where to be looking.
    Mark Ferguson
    Replied about 6 years ago
    Great article Ali, in fact you will see how much I agree with your 2% rule tomorrow. Reply Report comment
    Mark Ferguson
    Replied about 6 years ago
    Great article Ali, in fact you will see how much I agree with your 2% rule tomorrow.
    Ali
    Replied about 6 years ago
    Awesome Mark!
    ken lavoie
    Replied about 6 years ago
    great post. I’m actually a little excited to hear of the 2% rule being harder to obtain (due to increases in prices) – I’m a buy and hold investor who bought much of his property at the 2% rule level (most of it blue collar vs. low income even) and i’m looking forward to possibly cashing out sometime but I don’t want to do it at the 2% level! Here in Central Maine though, we’re still seeing a lot of MF’s in the 30k range on MLS, and a few auctions here and there but we don’t “fully participate” in the economy anyway (ups or downs!)
    ken lavoie
    Replied about 6 years ago
    great post. I’m actually a little excited to hear of the 2% rule being harder to obtain (due to increases in prices) – I’m a buy and hold investor who bought much of his property at the 2% rule level (most of it blue collar vs. low income even) and i’m looking forward to possibly cashing out sometime but I don’t want to do it at the 2% level! Here in Central Maine though, we’re still seeing a lot of MF’s in the 30k range on MLS, and a few auctions here and there but we don’t “fully participate” in the economy anyway (ups or downs!)
    Ali
    Replied about 6 years ago
    Ha Ken. Good news, you don’t have to do it at the 2% level! Unless the market they are in is hitting it, then you’re kind of stuck.
    ken lavoie
    Replied about 6 years ago
    great post. I’m actually a little excited to hear of the 2% rule being harder to obtain (due to increases in prices) – I’m a buy and hold investor who bought much of his property at the 2% rule level (most of it blue collar vs. low income even) and i’m looking forward to possibly cashing out sometime but I don’t want to do it at the 2% level! Here in Central Maine though, we’re still seeing a lot of MF’s in the 30k range on MLS, and a few auctions here and there but we don’t “fully participate” in the economy anyway (ups or downs!) Reply Report comment
    Alison
    Replied about 6 years ago
    Can you help with a definition for “War Zone” properties? My initial thought was big city areas with high crime but I’m starting to think there are additional criteria. Thanks Alison Great article!
    Melinda Allen
    Replied about 6 years ago
    I picture a “warzone” as a high-crime, drug-infested area. Anywhere I am scared to walk down the street, drive my car through, or take my kids with me. I consider a “warzone”.
    Joshua Dorkin
    Replied about 6 years ago
    That’s probably a good assessment.
    Ali
    Replied about 6 years ago
    Yep, Melinda, you got it. That is really what a war zone is. But Alison, understand too, “war zones” can be less drastic too. Melinda hit the definition exactly, but even if a property isn’t in an actual war zone, it can be in a low enough income area where you will see very similar problems as you would with an actual war zone. Tenant quality is KEY to a solid investment, and as soon as you are dealing with cheap dumpy properties, you are automatically putting yourself at a higher risk for lower quality tenants. They can cost you an absolute fortune. So just remember, even if something is a total war zone, quality plays a major role so try to keep it a little higher. Unless you enjoy headaches.
    Alison
    Replied about 6 years ago
    Can you help with a definition for “War Zone” properties? My initial thought was big city areas with high crime but I’m starting to think there are additional criteria. Thanks Alison Great article! Reply Report comment
    Junior
    Replied about 6 years ago
    Great article Ali! I love reading your work! I’m currently wholesaling to build capital to acquire rental properties to creat more passive income. I’m enjoying it so far and learning alot, but like you said iI’m essentially working two jobs between fielding calls and talking to sellers! Work = not what I want for the rest of my life. Here’s to working in wholesaling to one day be a real “investor” some day! 🙂
    Ali Boone
    Replied about 6 years ago
    You’ve got it, Junior! Perfect mindset.
    Edwin
    Replied about 6 years ago
    ! But landlording to save $100/month or because you think you should learn the ins and outs of managing a property are ridiculous. ” I think investors should be able to be landlords if they want to without their reasons being called ” ridiculous “
    Ali Boone
    Replied about 6 years ago
    You quoted my exact words, Edwin. I didn’t say landlording if someone wants to is ridiculous. If someone wants to landlord, rock on and do it. More power to you. I said if your reason for doing it is to save $100/month or because you think you have to know the ins and outs of it is ridiculous.
    Michelle
    Replied about 6 years ago
    Enjoyed the article, Ali! I can’t meet the 2% rule in my area (closer to 1%) but I am positive cash flow using the 50% rule (including PM fee) so I’m satisfied with that. I bought in a good neighborhood and have a quality property that attracts quality tenants and I think that makes a huge difference.
    Ali
    Replied about 6 years ago
    Can’t get better than that Michelle! Those exact investments are my preference, way over some stupid guideline number.
    Lucas Pfaff
    Replied about 6 years ago
    I love this article! Particularly the frankness of it. “Additionally, wholesaling isn’t even investing. It’s working” So true, and very applicable to many other facets of what we generally consider as RE investing. You hit the nail on the head as far as I’m concerned. Land lording is work too, which is why I’m in the process of minimizing how much of it I do. I do love tinkering, but in the future, I’ll be following your lead and going straight to turn-key purchases 🙂 Keep it up the great writing!
    Ali
    Replied about 6 years ago
    Lol, Lucas. Glad you liked my frankness. Can you tell I’m tired of reading certain things on the forums? 🙂 I’m seriously flabbergasted (if anyone even uses that word anymore) at how many people don’t realize the difference between investing their money and WORK. Tinker because it’s fun, not because you have to. Life will be way more fun.
    Michael Williams
    Replied about 6 years ago
    This article has been very helpful for me as a young guy getting involved in wholesaling. Thanks so much! There is so much information available, and it’s articles like yours that sort out the sound advice from the misleading information.
    Ali
    Replied about 6 years ago
    Thanks Michael! Glad to hear 🙂
    Josh B. from Chicago, Illinois
    Replied over 4 years ago
    Number 4 really hit home. Property mgmt is worth its weight in gold!
    Ali Boone Business Owner & Investor from Venice Beach, CA
    Replied over 4 years ago
    Sure is Josh!