The No. 1 Reason Newbies Go Broke in Real Estate (& How to Avoid It!)
The TV real estate gurus advertise that you can get started in real estate with no money.
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I guess technically this is true. I stayed at a timeshare resort in Breckenridge once, and one “owner” was so desperate to get out of his timeshare commitment that he was offering his rights for $1.
There are properties in Detroit for around that much, too. So technically, you can get started with no money, but you certainly can’t continue without any.
In both examples above, the money out of your pocket doesn’t stop at $1. At the timeshare resort, there are annual maintenance fees that average $660 a year. In Detroit, $1 properties come with back taxes pretty much guaranteed. The city of Detroit is cash-strapped, so they start foreclosure proceedings as soon as the ink dries on your deed, desperate for any possible funds.
What if you CAN somehow miraculously invest in real estate with no money? What are you going to do when there’s a problem?
That One Rental Where Everything Broke
I have friends, Ruby and Peter, who lived in a small house in my town. When they were pregnant with their fourth child, they decided that a two-bedroom just didn’t serve their needs any longer, so they bought a larger house and decided to make some quick cash renting out the original home.
Ruby and Peter don’t manage their money in the best possible way. They never have any extra cash, and Ruby has confided in me that she has missed a couple mortgage payments on her primary residence.
A few months into being landlords, the hot water heater broke. They didn’t have any reserves set aside for emergencies. Luckily, a hot water heater isn’t a huge expense. Let’s say $1,000.
I live a frugal life. I have adequate reserves for anything that comes up, so $1,000 wouldn’t have me scrambling. Don’t get me wrong, I am not actively looking for ways to spend $1,000. It’s just that sometimes, ways to spend $1,000 come looking for you.
Ruby and Peter absorbed this expense, although it wasn’t easy for them. Their rent was more than their expenses, and they started to recoup their cash for a few more months until…
The furnace broke.
And not just the blower on the furnace, which is easy to replace and runs around $100 or so for the part. Not the $30 igniter, either. Nope, this furnace had reached the end of its life and needed to be completely replaced. Of course, this only happens during the winter. (Who’s running the furnace in the summer?)
Murphy’s Law presides over furnace replacement. It will only need to be replaced when the temperature dips below zero. You can’t really shop around for a furnace guy or a furnace itself when you own a rental and the furnace is broken — you just have to get it replaced as soon as possible.
Not only are you required by law to provide heat to your tenants, your pipes will freeze if left without heat for too long.
Ruby and Peter ended up not renewing the lease for the next year and instead sold the property, not wanting to continue the financial drain.
What a $1,000 “Free” Ski Lesson Taught Me About Reserves
In the state of Colorado, children from Kindergarten through 5th grade get a free ski pass. It comes with four lift tickets for four different resorts, plus a free lesson in January. I am an avid snowboarder and want my two children to love being on the slopes as much as I do, so I signed them up.
We scheduled their lesson for this past weekend, and a few days before we went to the mountains, the weatherman started talking about a huge storm. Snow was supposed to start falling around 3:00 p.m. on Saturday and would be pretty heavy — up to 14 inches. But weathermen are always off when they forecast the start of a storm, right? They are usually several hours off, and the lesson was only supposed to last until 3:30 p.m. PLENTY of time to get out of the mountains.
So we went, and they loved it. Mission accomplished!
Except that weatherman was off about the start of the storm — it started an hour before he said it would.
For our trip back, Google Maps routed us through local mountain roads instead of the highway. We blindly followed, only to discover that the road was closed. By the time we turned around and got back into town to take the highway, the highway was shut down, too.
I started making phone calls to every hotel on Google. “Do you have any vacancy?” “Nope. We’re all sold out.” Times 20 or so. Sometimes accompanied by a laugh.
I was extremely fortunate to get a call back from one of the hotels, telling me they just had a cancellation. I hadn’t brought any blankets or supplies with me, thinking I’d be able to make it back home before the storm. (I know, I know. Next time I’ll be prepared.)
I asked how much the room would be and shouldn’t have been surprised at the answer. I live a pretty frugal life and don’t spend a lot of time in expensive hotels. I like to pay less than $100 per night for my room — I don’t spend a lot of time in it while I’m on vacation; it’s just a bed and a shower. (I know there are some of you who wouldn’t step foot inside these lower priced hotels. That’s OK. Someone has to keep these higher priced hotels in business.)
This day ended up costing us right around $1,000, when we were planning on it being free. Mountain prices are high, and beggars can’t be choosers.
I wasn’t actively looking for a way to spend $1,000, but sometimes ways to spend $1,000 come looking for you. Especially when you don’t plan ahead. Or you ignore blizzard warnings.
Protect Your Investment
The whole reason you’re investing in real estate isn’t for the stress of finding an HVAC technician at 3:00 in the morning. You also probably aren’t itching to experience an eviction.
If you don’t have money to put down on a house, you won’t have money when something goes sideways. That $100 you have left over after you pay your mortgage doesn’t cover very much of that $3,000 new furnace.
Know what you’re getting into. Get a home inspection on the property you are purchasing, so you know that the 12-year-old furnace, with its average lifespan of 20-25 years, is probably going to last a little while longer.
Find someone who does have money to cover those surprise visits from the Furnace Fairy.
You don’t typically find the perfect property your first time searching. Start throwing every extra dollar you have into a saving-for-my-first-property coffee can or bank account.
Learn While You Earn
Find someone to learn from. There is no shortage of really busy investors on our site and in your area. Connect with people and ask them if they need any help. Provide them with value and begin a relationship. Offer to work for free just to get your foot in the door — it will still cost less than those TV gurus’ classes. You’ll probably learn more, too. As you grow your relationship and experiences, opportunities just might come your way. Even if the only thing you walk away with is experience, you’ve still been paid very well.
[Editor’s Note: We are republishing this article to help out our newer members.]
What’s the biggest unexpected expense you have come across through your investing? What advice do you have for new investors who don’t have a lot of money?
Please share your experiences below.