Main things to avoid or look out for when investing
Member since 2020 · 56 posts · 38 votes
Main things to avoid or look out for when investing
Most Popular Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesNegative cash flow, too high of a down payment,...and negative cash flow...and did I mention too high of a down payment?
130 Replies
- 5yDave KapsackPro MemberMember since 2020 · 46 posts · 16 votes
Know your numbers.
Location.
Keep emotion out of it, it is business.
- Utica NY · Member since 2020 · 7 posts · 4 votes5y
@Joe Villeneuve, I'm also a new investor who's just starting out. I'm learning a lot but I still have fog around many areas that I need to clear up.
What is *your* strategy on timeframes that you expect to have your capital back in your hands? What is reasonable for your situation? And if you would say, what types of properties do you involve with?
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Anthony Roach:
@Joe Villeneuve, I'm also a new investor who's just starting out. I'm learning a lot but I still have fog around many areas that I need to clear up.
What is *your* strategy on timeframes that you expect to have your capital back in your hands? What is reasonable for your situation? And if you would say, what types of properties do you involve with?
It doesn't matter. What I do has nothing to do with what you should do. What you need to do is learn what your options are, inside and out, establish your own plan based on your specific priorities/goals, then decide what, how and where you need to invest to deliver the goals established in your specific plan.
- Investor · Huntsville Al · Member since 2020 · 1 post · 0 votes5y
@Johnson Ochea
Whats the best way to build a team? And what kind of people do I meed on my team?
- Lee’s Summit, MO · Member since 2020 · 7 posts · 1 vote5y
@Antony Charlier I told someone this one today. “Love the deal, not the property”.
- Member since 2020 · 24 posts · 11 votes5y
@Joe Villeneuve how much is too high? Is 25 to 35% reasonable?
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Arby Gharibian:
@Joe Villeneuve how much is too high? Is 25 to 35% reasonable?
The question isn't how high but how low can you do. Too high is $1 higher than what you have to come up with based on the lender requirements. Now if the property won't cash flow positive unless you increase the DP over the minimum required, then don't buy the property (most likely). The higher the DP, the more the property cost you, and the longer it would take before you started to make a profit.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
@Todd Pultz that is a fair point that C class or even D class will return higher cash flow due to risk. I have had those types of properties and they did make more money. For me I prefer assets with less problems, more appreciation and that are easy to sell.
No problem with your strategy as long as the person following this strategy fully understands the asset class and how to manage it. Most people do not and people new to the business often get way more than they bargained for.
- Realtor · York, PA · Member since 2020 · 140 posts · 28 votes5y
@Joe Villeneuve what do you mean by you dont need credit to invest?
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Nathan Barshinger:
@Joe Villeneuve what do you mean by you dont need credit to invest?
Just what that says. "You don't need credit to invest".
Not every deal involves a loan. Seller financed deals don't have to involve credit. Using Lease Options doesn't involve credit. Deals can include credit partners, and use their credit. There are at least 10 more strategies I've used/developed that don't involve me having to have credit (and no I'm not going to start listing them here).
- 5yWale LawalBusiness MemberReal Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
@Antony Charlier
Educate yourself and seek for help when needed.
Know what you want and go for it.
Be creative with your investment and never stop learning.
Goodluck
NETWORTH BUILDERS5236 Reviews - Rental Property Investor · Dayton, OH · Member since 2019 · 293 posts · 440 votes5y
@Nathan Barshinger Joe @Joe Villeneuve hit the nail on the head. When you start with shaky credit, low capital or low experience, you have to be creative in how you compensate for the deficiency! Owner finance, lease option, capital partners, etc. are all ways to do it. Way more options but you could trade a goat for down payment if you talked the right owner into it.
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Todd Pultz:
@Nathan Barshinger Joe @Joe Villeneuve hit the nail on the head. When you start with shaky credit, low capital or low experience, you have to be creative in how you compensate for the deficiency! Owner finance, lease option, capital partners, etc. are all ways to do it. Way more options but you could trade a goat for down payment if you talked the right owner into it.
...except I think the going rate for chickens would be higher than a goat...at least the last time I checked.
- Realtor · York, PA · Member since 2020 · 140 posts · 28 votes5y
Originally posted by @Joe Villeneuve:
Originally posted by @Nathan Barshinger:
@Joe Villeneuve what do you mean by you dont need credit to invest?
Just what that says. "You don't need credit to invest".
Not every deal involves a loan. Seller financed deals don't have to involve credit. Using Lease Options doesn't involve credit. Deals can include credit partners, and use their credit. There are at least 10 more strategies I've used/developed that don't involve me having to have credit (and no I'm not going to start listing them here).
Ok, I just never heard of buying a property without credit unless you buy it outright.
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Nathan Barshinger:
Originally posted by @Joe Villeneuve:
Originally posted by @Nathan Barshinger:
@Joe Villeneuve what do you mean by you dont need credit to invest?
Just what that says. "You don't need credit to invest".
Not every deal involves a loan. Seller financed deals don't have to involve credit. Using Lease Options doesn't involve credit. Deals can include credit partners, and use their credit. There are at least 10 more strategies I've used/developed that don't involve me having to have credit (and no I'm not going to start listing them here).
Ok, I just never heard of buying a property without credit unless you buy it outright.
You're not alone in that belief. Most REI don't understand some of the most basic factors of how money works, and especially how it can be applied to REI. That's not a criticism, that's just the way REI has been passed on to them. It goes way back too.
It's very common, and understandable, for REI to take what they are familiar with in their personal life, and apply it to REI. The two biggest examples would be the Stock Market for general investment analysis, and their own home for property ownership. Neither applies to REI. They can, but then the vast advantages and options that are available in REI are lost.
For example:
1 - Stock Market Analysis uses percentages to analyze. When you use percentages to analyze REI you lose...because those percentages lie. A return of 15%/year in the SM is not even close to a 5% return/year in REI...if both investors start with the same amount of cash, and reinvest all the returns back in. 5% here is greater, by far than 15%.
2 - Your own home, the cost of buying and upkeep, is the financial responsibility of the Homeowner. The only cost the REI is responsible for is the Down Payment (as long as the property cash flow positive). There is a difference between the total cost of the property and the actual cost of the property when you are talking about REI. They should NEVER be equal. The actual cost should be substantially less. - Realtor · York, PA · Member since 2020 · 140 posts · 28 votes5y
@Joe Villeneuve so the actual cost is what you pay out of pocket and the total cost factors in the principle and interest and the utilities that are in the tenants name?
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Nathan Barshinger:
@Joe Villeneuve so the actual cost is what you pay out of pocket and the total cost factors in the principle and interest and the utilities that are in the tenants name?
Correct. This is important because you don't start making a profit until you recover all of your actual cost (as in cash) in cash. So if you put down a higher DP thinking you are getting a higher CF, you would be correct on the surface, but actually losing money since the higher CF is generally minimal compared to the higher DP you are paying out of pocket. This means it will take you longer to recover your actual cost too.
Keep in mind the DP is "buying" you equity. This cost of equity isn't a gain...it's just a bank transfer of your cash from liquid (usable) form from the bank, to dead form in equity. The face value is the same in both places. Equity increases that you pay for, just increase your cost, and lose you money since you have to recover it in cash before you start making a profit. Equity increases from principal paydown from rent money is paid by the tenant as is free to you...as are the equity increases gained from appreciation.
- Investor · USA · Member since 2015 · 325 posts · 447 votes5y
@Joe Villeneuve
Aren’t there a tons “cash flows” (positive and negative) that are missing with the examples you are giving? What about;
Refinances
LOC's
Cap Ex
Repairs
Selling gains
Selling costs
Legal fees
Your examples are really over simplified and I fear are leading new investors to look at deals from a linear lens. Investing in real estate is competitive and strategic. Sometimes I buy in cash, put down the minimum, refinance no matter what the rate, refinance because of rates, or make any other choice based on market conditions.
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Kai Van Leuven:
@Joe Villeneuve
Aren’t there a tons “cash flows” (positive and negative) that are missing with the examples you are giving? What about;
Refinances
LOC's
Cap Ex
Repairs
Selling gains
Selling costs
Legal fees
Your examples are really over simplified and I fear are leading new investors to look at deals from a linear lens. Investing in real estate is competitive and strategic. Sometimes I buy in cash, put down the minimum, refinance no matter what the rate, refinance because of rates, or make any other choice based on market conditions.
I could answer this easily...if I knew what the question/problem was you are addressing here. You need to make a connection between what you wrote here and a specific statement/example I made, or everything you mentioned here is taken out of context and...????
As I re-read your list, I see that none of them can be applied to any one scenario, so give me scenarios that I have responded to, and apply which items in your list you think apply.
- Investor · USA · Member since 2015 · 325 posts · 447 votes5y
@Joe Villeneuve
My overall thought is that the purchase price is the only thing that matters. Your “cashflow vs down payment model” to me, is a terrible strategy. My example;
Little Yellow House
Purchase: 127k
Fix up: 25k
Down Payment: Cash
Rent 1475-1800
I let this house be paid off in cash for a couple of years until I needed the money for another investment. I could have BRRR'd it after the seasoning period and taken the money (Value around 350k) but I didn't have a need at the time for the money.
My point is that if I would have just been into it for the least amount, or refinanced it when I didn’t need the money, or any other dogma that is pushed. It would have not made as much sense.
Getting a good deal is what matters.
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Kai Van Leuven:
@Joe Villeneuve
My overall thought is that the purchase price is the only thing that matters. Your “cashflow vs down payment model” to me, is a terrible strategy. My example;
Little Yellow House
Purchase: 127k
Fix up: 25k
Down Payment: Cash
Rent 1475-1800
I let this house be paid off in cash for a couple of years until I needed the money for another investment. I could have BRRR'd it after the seasoning period and taken the money (Value around 350k) but I didn't have a need at the time for the money.
My point is that if I would have just been into it for the least amount, or refinanced it when I didn’t need the money, or any other dogma that is pushed. It would have not made as much sense.
Getting a good deal is what matters.
I can't follow this because there are so many parts missing. I'll mention just a few:
1 - If you think my comments are "cash flow vs. Down Payment", then you don't understand what I'm saying...at all.
2 - When I give examples my numbers are specific to an actual property...not some arbitrary "Little Yellow House"
3 - Again, specific numbers...not "Rent 1475 - 1800"...and the rent isn't what the analysis is based on. It's based on the CF...which you make no mention of at all.
4 - In your previous criticism, you say I left out a number of things, and yet you mention rent...but no monthly expenses. Why?
5 - How many years is "...a couple of years..." payoff?
There's a huge difference between total cost and actual cost...which I don't think you are grasping.You're right when you say, "Getting a good deal is what matters". What are you basing your "good deal" on though? I know what I'm basing mine on...profit.
- Los Angeles, CA · Member since 2018 · 86 posts · 86 votes5y
Originally posted by @Joe Villeneuve:
Originally posted by @Nathan Barshinger:
@Joe Villeneuve so the actual cost is what you pay out of pocket and the total cost factors in the principle and interest and the utilities that are in the tenants name?
Correct. This is important because you don't start making a profit until you recover all of your actual cost (as in cash) in cash. So if you put down a higher DP thinking you are getting a higher CF, you would be correct on the surface, but actually losing money since the higher CF is generally minimal compared to the higher DP you are paying out of pocket. This means it will take you longer to recover your actual cost too.
Keep in mind the DP is "buying" you equity. This cost of equity isn't a gain...it's just a bank transfer of your cash from liquid (usable) form from the bank, to dead form in equity. The face value is the same in both places. Equity increases that you pay for, just increase your cost, and lose you money since you have to recover it in cash before you start making a profit. Equity increases from principal paydown from rent money is paid by the tenant as is free to you...as are the equity increases gained from appreciation.
Why do you say you don't make a profit until you recover your actual investment? You may not REALIZE a profit until you sell or monetize a profit until you pull out the cash but that doesn't mean you don't make a profit until you recover your investment through cash flow or a liquidity event.
I looked through this thread and I have to ask, what does this mean?
"1 - Stock Market Analysis uses percentages to analyze. When you use percentages to analyze REI you lose...because those percentages lie. A return of 15%/year in the SM is not even close to a 5% return/year in REI...if both investors start with the same amount of cash, and reinvest all the returns back in. 5% here is greater, by far than 15%."
I think you are conflating the returns from leverage with unlevered returns. Yes you can put less money down and recover your investment quicker, grow quicker, recycle your cash, etc. but you are taking on more risk due to the leverage you are employing, it's not a free lunch.
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Matthew M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Nathan Barshinger:
@Joe Villeneuve so the actual cost is what you pay out of pocket and the total cost factors in the principle and interest and the utilities that are in the tenants name?
Correct. This is important because you don't start making a profit until you recover all of your actual cost (as in cash) in cash. So if you put down a higher DP thinking you are getting a higher CF, you would be correct on the surface, but actually losing money since the higher CF is generally minimal compared to the higher DP you are paying out of pocket. This means it will take you longer to recover your actual cost too.
Keep in mind the DP is "buying" you equity. This cost of equity isn't a gain...it's just a bank transfer of your cash from liquid (usable) form from the bank, to dead form in equity. The face value is the same in both places. Equity increases that you pay for, just increase your cost, and lose you money since you have to recover it in cash before you start making a profit. Equity increases from principal paydown from rent money is paid by the tenant as is free to you...as are the equity increases gained from appreciation.
Why do you say you don't make a profit until you recover your actual investment? You may not REALIZE a profit until you sell or monetize a profit until you pull out the cash but that doesn't mean you don't make a profit until you recover your investment through cash flow or a liquidity event.
I looked through this thread and I have to ask, what does this mean?
"1 - Stock Market Analysis uses percentages to analyze. When you use percentages to analyze REI you lose...because those percentages lie. A return of 15%/year in the SM is not even close to a 5% return/year in REI...if both investors start with the same amount of cash, and reinvest all the returns back in. 5% here is greater, by far than 15%."
I think you are conflating the returns from leverage with unlevered returns. Yes you can put less money down and recover your investment quicker, grow quicker, recycle your cash, etc. but you are taking on more risk due to the leverage you are employing, it's not a free lunch.
No on all points, but I will address the last one here. If you put 100k on one property or 100k on 5 properties, you are risking 100k in all cases. If you put it all on one property, you risk it all if that property fails you. If you put it on 5 properties, then each property only has 20% of your cash at risk. When you are spreading out your cash you are also spreading out your risk. Yes, you have 5 potential risk locations...but that's a good thing, not a bad thing since all 5 would need to fail you to equal the loss at risk if you put all your cash here in one property.
What's at risk is your cash. Just ask the bank.
- Los Angeles, CA · Member since 2018 · 86 posts · 86 votes5y
Originally posted by @Joe Villeneuve:
Originally posted by @Matthew M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Nathan Barshinger:
@Joe Villeneuve so the actual cost is what you pay out of pocket and the total cost factors in the principle and interest and the utilities that are in the tenants name?
Correct. This is important because you don't start making a profit until you recover all of your actual cost (as in cash) in cash. So if you put down a higher DP thinking you are getting a higher CF, you would be correct on the surface, but actually losing money since the higher CF is generally minimal compared to the higher DP you are paying out of pocket. This means it will take you longer to recover your actual cost too.
Keep in mind the DP is "buying" you equity. This cost of equity isn't a gain...it's just a bank transfer of your cash from liquid (usable) form from the bank, to dead form in equity. The face value is the same in both places. Equity increases that you pay for, just increase your cost, and lose you money since you have to recover it in cash before you start making a profit. Equity increases from principal paydown from rent money is paid by the tenant as is free to you...as are the equity increases gained from appreciation.
Why do you say you don't make a profit until you recover your actual investment? You may not REALIZE a profit until you sell or monetize a profit until you pull out the cash but that doesn't mean you don't make a profit until you recover your investment through cash flow or a liquidity event.
I looked through this thread and I have to ask, what does this mean?
"1 - Stock Market Analysis uses percentages to analyze. When you use percentages to analyze REI you lose...because those percentages lie. A return of 15%/year in the SM is not even close to a 5% return/year in REI...if both investors start with the same amount of cash, and reinvest all the returns back in. 5% here is greater, by far than 15%."
I think you are conflating the returns from leverage with unlevered returns. Yes you can put less money down and recover your investment quicker, grow quicker, recycle your cash, etc. but you are taking on more risk due to the leverage you are employing, it's not a free lunch.
No on all points, but I will address the last one here. If you put 100k on one property or 100k on 5 properties, you are risking 100k in all cases. If you put it all on one property, you risk it all if that property fails you. If you put it on 5 properties, then each property only has 20% of your cash at risk. When you are spreading out your cash you are also spreading out your risk. Yes, you have 5 potential risk locations...but that's a good thing, not a bad thing since all 5 would need to fail you to equal the loss at risk if you put all your cash here in one property.
What's at risk is your cash. Just ask the bank.
You put 100k into 500k of value and the price drops 10% you lose 50k genius. If you put 100k into 1 property and it loses 10% you lose 10k. There are benefits of diversification so lets abstract away from "1" vs "5" for a minute, how about 10 vs 50, or 100 vs 500? You are diversified either way, the only difference is the leverage employed.
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