First, let me fully disclose I’m an OldSchool guy down to my DNA. My mentors were so old they used to tell me they never called it OldSchool. It was just ‘School’. The youngest among them in the late 1970s and 1980’s was over 60. It puts a smile on my face just pondering their reaction to learning a few of the super high risk approaches some modern day real estate investors use to acquire property. They warned me back then what was gonna happen. I listened. I learned. But I didn’t apply their lessons. I lost. I relearned. Been applying their wisdom ever since. No more losses. When the risk is overcome while flyin’ against fundamental investment principles, and the acquisition turns into a win, all is well. However, most of the time it simply doesn’t work. High risk is high risk is high risk. Who knew?
Sure, the purveyors of these high risk strategies tell us that their superior experience, skill, and knowledge is what converts high risk to more acceptable levels. OK, I’ll buy that — for less than 5% of the real estate investor population, probably WAY less. The rest? They lose whatever they had invested, many times still owing money. To add insult to injury, more times than not they trash their credit, which puts them on the investment sidelines. ‘Course, at that point the high risk approach to real estate investing becomes their only option.
I’ve seen too many families broken up due to this approach and the financial chaos that almost inevitably results. Those promoting these often financially suicidal approaches don’t wanna talk about that much.
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This Isn’t About Right and Wrong
This is about regular folk reading the various success stories of field tested veteran investors and deciding they can produce the same results. For every investor successfully using some formulaic, ultra high risk approach to buying investment real estate, there are, in my experience, dozens who crash ‘n burn unceremoniously. How did I come to that view? I’ve been talkin’ to ’em for over 35 years. In fact, since the mother of all bubbles burst I estimate their numbers have exploded.
The Ultimate Consequence is the Forfeiture of Time — Present AND Future.
The ultimate penalty these people suffer isn’t always the loss of what little money they may’ve had or the hit their credit takes, sometimes a knockout punch. Whether the risk was in lack of skin in the game, or something else, the loss can be devastating. It’s about time.
Meanwhile, back at Birthday Ranch, the pages on that relentless calendar keep turnin’. If you’re young you can be foolish a few times and still recover. That’s what the DIY crowd talks about all the time. I know, cuz I’ve see me do it. Thing is, most of these strategies aren’t just foolish for the vast majority of regular folk who only wanna get started in real estate investing. They’re often the last nail in the coffin of what might of been a pretty decent retirement.
Talk to a 54 year old woman I spoke with a several years ago who bought one of those eBooks about how to bootstrap herself into wealth buying real estate. The devastating sense of defeat in her voice will break your heart. It broke mine. What made it worse was that there was no advice I could give her that was gonna change her new reality. And what’s that gonna be? Here’s what she said, closely paraphrased to the best of my memory:
“I guess I’ll work into my 70s so my Social Security check will be as much as possible. I just know I’m gonna end up living with my daughter and her husband. Never thought that would be me.”
Please, Allow Me to Speak Some Captain Obvious Truths.
Look around you. See any real estate you can buy for nothin’ down that is in even only a slightly below average quality? No, ya don’t. Why is that? Cuz troubled properties in decent areas are bought by investors with horsepower. They’re generally not acquired by zero down buyers using so-called ‘creative’ financing. And pullleeaase don’t label me old fashioned for that statement. Back in the day, when truly creative financing was the only avenue to survival, we in SoCal and a few other densely populated markets showed the rest of the country how to do it. We weren’t super smart by any stretch. I know I wasn’t. We were desperate though, and that’s the truth of it. We brought the wraparound mortgage into the real estate investment vernacular.
The ‘subject to‘ transaction became almost a default strategy not only for investors, but for homebuyers too. Boy, did they get slaughtered. Aside from the few exceptions out there today who’re openly advising those taking title to property subject to existing loans to be straightforward with lenders up front, the subject to approach is now considered by many to be safe. A fantasy if ever there was one. Again, I’m not gonna belabor it, but this latest generation of subject to buyers will be systematically decimated by lenders when the interest rates rise to a point that provides enough incentive to do so. I know, cuz I’ve seen ’em do it. They’ll show the same emotion as a surgeon does when makin’ the initial incision on a patient. God bless those who counsel transparency with the lenders. I respect and admire you tremendously.
Knowledge gaps + flaunting fundamental investment principles – time, almost always equals a sad ending.
We can learn from our mistakes. I’ve lost three properties, the last one in about 1982 or so. All three were lost cuz I thought I was smarter than the market, and worse, smarter than investment principles. I call these principles the physics of investing. Fortunately for me, my mistakes ended at 31. But what if I’d been 61? I shudder to think of it.
At some point there’s not enough time to make up for our lack of knowledge, wishful thinking, or just plain stubbornness. My third property loss at 31 was due to combining all three, the triple crown. Fundamental principles and time, when combined, are undefeated. Use them for your benefit, or go against them and pay the price. Here’s the sneaky thing about investment fundamentals, at least a few of ’em. Sometimes we can go against ’em and still not lose, even win. But over time — their most powerful weapon — they’ll win the war, regardless of losing a battle or two here ‘n there.
Time can be your best friend, a fond acquaintance, or your fiercest enemy. But for middle aged and older folks, though it might not be as good a friend as it once was, it needn’t be your enemy. We can’t make up time when it comes to retiring. There are too many outside factors for which we harbor little or no control.
Stop buyin’ into the myth of no risk, no skin in the game, or end runs around contractual realities. You have a better chance of coming out a winner at the roulette table. Way better.
Avoid making time your enemy at all costs.
Photo: János Balázs